Caltex (Philippines), Inc. vs. Court of Appeals

The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself, and where the word "BEARER" is stamped on the space provided for the name of the depositor, the instrument is payable to bearer notwithstanding the bank's internal records identifying a specific depositor. However, a holder who receives bearer instruments merely as security for an obligation is only a holder for value to the extent of his lien, and the pledge of incorporeal rights evidenced by negotiable instruments requires both delivery and indorsement, and takes effect against third persons only if described in a public instrument.

Caltex (Philippines), Inc. was a corporation engaged in the sale of fuel products, while Security Bank and Trust Company was a commercial banking institution. Angel dela Cruz was a depositor who maintained time deposits with Security Bank's Sucat Branch and also purchased fuel products from Caltex on credit. The dispute concerned the priority of claims over 280 certificates of time deposit amounting to P1,120,000.00, which dela Cruz had delivered to Caltex as security for his fuel purchases, and which dela Cruz subsequently assigned to Security Bank to secure a loan. The Negotiable Instruments Law (Act No. 2031) and the Civil Code provisions on pledge of incorporeal rights and assignment of credits governed the competing claims.

On various dates in February and March 1982, Security Bank and Trust Company, through its Sucat Branch, issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz, who deposited the aggregate amount of P1,120,000.00. The CTDs bore the word "BEARER" stamped on the space provided for the name of the depositor, and the text provided that the amount deposited shall be "repayable to said depositor" on the period indicated. Dela Cruz delivered the CTDs to Caltex (Philippines), Inc. in connection with his purchases of fuel products from the latter.

Sometime in March 1982, dela Cruz informed Timoteo Tiangco, the Sucat Branch Manager, that he had lost all the CTDs in dispute. Tiangco advised him to execute and submit a notarized Affidavit of Loss, as required by the bank's procedure, if he desired replacement of the lost CTDs. On March 18, 1982, dela Cruz executed and delivered the required Affidavit of Loss, and on the basis thereof, 280 replacement CTDs were issued in his favor.

On March 25, 1982, dela Cruz negotiated and obtained a loan from Security Bank in the amount of P875,000.00. On the same date, he executed a notarized Deed of Assignment of Time Deposit, which stated that he surrendered to the bank "full control of the indicated time deposits from and after date" of the assignment and authorized the bank to pre-terminate, set-off, and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity.

Sometime in November 1982, Mr. Aranas, Credit Manager of Caltex, went to the bank's Sucat branch and presented for verification the CTDs declared lost by dela Cruz, alleging that the same were delivered to Caltex "as security for purchases made with Caltex Philippines, Inc." by dela Cruz. On November 26, 1982, the bank received a letter from Caltex formally informing it of its possession of the CTDs and of its decision to pre-terminate the same. On December 8, 1982, the bank requested Caltex to furnish "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz' obligation against which plaintiff proposed to apply the time deposits." No copy of the requested documents was furnished. Accordingly, the bank rejected Caltex's demand and claim for payment in a letter dated February 7, 1983.

In April 1983, dela Cruz's loan with the bank matured and fell due, and on August 5, 1983, the bank set-off and applied the time deposits to the payment of the matured loan. Caltex then filed the instant complaint, praying that the bank be ordered to pay it the aggregate value of the CTDs plus accrued interest and compounded interest at 16% per annum, moral and exemplary damages, as well as attorney's fees.

The trial court dismissed the complaint, and the Court of Appeals affirmed with modifications. The Court of Appeals ruled that the CTDs were non-negotiable instruments, reasoning that although the word "bearer" appeared boldly in the CTDs, the text manifesting that the amount deposited shall be "repayable to said depositor" showed that they were payable only to the specified person indicated therein, the depositor. The trial court had also found that Caltex failed to produce any document evidencing any contract of pledge or guarantee agreement between it and dela Cruz.

• Negotiability of the CTDs: Petitioner faulted respondent court in ruling that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments.
• Holder in Due Course: Petitioner argued that it became a holder in due course of the said certificates of deposit.
• Lost Instruments: Petitioner faulted respondent court in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer, and argued that the bank's supposed negligence in issuing replacement CTDs should bar its claim.

• Non-Negotiability: Respondent bank argued that the CTDs were non-negotiable because the text of the instruments showed they were payable to the specified depositor, Angel dela Cruz, and not to whoever purports to be the bearer.
• Delivery as Security: Respondent bank pointed to Caltex's own letter dated November 26, 1982, wherein Caltex's Credit Manager wrote that the CTDs "were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products," arguing that the delivery was as security, not as payment.
• Lack of Public Instrument: Respondent bank argued that Caltex failed to produce any document evidencing any contract of pledge or guarantee agreement, and that the assignment in favor of the bank was embodied in a public instrument, giving the bank a better right.
• Issue Not Raised Below: Respondent bank argued that the issue of its alleged negligence was not included in the stipulation of facts and statement of issues submitted to the trial court, and thus could not be raised for the first time on appeal.

• Negotiability of the CTDs: Whether the certificates of time deposit are negotiable instruments.
• Recovery on the CTDs: Whether petitioner can rightfully recover on the CTDs as a holder in due course or otherwise.
• Lost Instruments Procedure: Whether respondent bank's failure to observe the Code of Commerce procedure for lost instruments payable to bearer bars its claim over the CTDs.

• Negotiability of the CTDs: Yes. The CTDs are negotiable instruments, meeting all the requisites under Section 1 of Act No. 2031, the Negotiable Instruments Law. The word "BEARER" stamped on the space provided for the name of the depositor makes the instruments payable to bearer, and the amounts deposited are repayable to whoever may be the bearer at the time of presentment.
• Recovery on the CTDs: No. Although the CTDs are bearer instruments, a valid negotiation for the true purpose of security requires both delivery and indorsement. The delivery of the CTDs only as security for dela Cruz's purchases could at most constitute Caltex as a holder for value by reason of its lien, but the pledge was not perfected against the bank for lack of indorsement and absence of a public instrument as required by Articles 2095 and 2096 of the Civil Code.
• Lost Instruments Procedure: No. The issue of the bank's alleged negligence was not raised in the lower court and is barred by estoppel. Even assuming it was raised, Articles 548 to 558 of the Code of Commerce are merely permissive and not mandatory, and none of the provisions categorically restricts or prohibits the issuance of a duplicate or replacement instrument without compliance with the procedure outlined therein.

• Negotiability of the CTDs: The Court disagreed with the Court of Appeals' finding that the CTDs were non-negotiable. Under Section 1 of Act No. 2031, an instrument to be negotiable must: (a) be in writing and signed by the maker or drawer; (b) contain an unconditional promise or order to pay a sum certain in money; (c) be payable on demand, or at a fixed or determinable future time; (d) be payable to order or to bearer; and (e) where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The CTDs met all these requirements. The accepted rule is that negotiability is determined from the face of the instrument itself. While the writing may be read in light of surrounding circumstances, no other words are to be added to it or substituted in its stead. The documents provide that the amounts deposited shall be repayable to the depositor, and who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel dela Cruz and that the amounts are repayable specifically to him. If the bank intended to pay only dela Cruz, it could have so expressed that fact in clear and categorical terms, instead of having the word "BEARER" stamped on the space provided for the name of the depositor. The need for resort to extrinsic evidence is what the Negotiable Instruments Law seeks to avoid, and the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity (Article 1377, Civil Code).

• Recovery on the CTDs: The Court held that Caltex could not recover on the CTDs. The records revealed that dela Cruz delivered the CTDs to Caltex without informing the bank, and the CTDs were in reality delivered as security for dela Cruz's purchases of fuel products. Caltex's own Credit Manager, J.Q. Aranas, Jr., wrote in a letter dated November 26, 1982: "These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products." This admission was conclusive upon Caltex under the doctrine of estoppel. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof (Section 30, Act No. 2031). In this case, there was no negotiation in the sense of a transfer of legal title; the delivery only as security could at most constitute Caltex as a holder for value by reason of its lien (Section 27, Act No. 2031). As a holder of collateral security, Caltex would be a pledgee, but the requirements therefor are governed by the Civil Code provisions on pledge of incorporeal rights. Article 2095 provides that incorporeal rights evidenced by negotiable instruments may be pledged, and the instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Article 2096 provides that a pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Aside from the fact that the CTDs were only delivered but not indorsed, Caltex failed to produce any document evidencing any contract of pledge or guarantee agreement. The requirement under Article 2096 is a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. On the other hand, the assignment of the CTDs made by dela Cruz in favor of the bank was embodied in a public instrument, complying with Article 1625 of the Civil Code, which provides that an assignment of credit, right or action shall produce no effect as against third persons unless it appears in a public instrument. Necessarily, as between Caltex and the bank, the latter has the better right over the CTDs.

• Lost Instruments Procedure: The Court upheld the Court of Appeals' finding that the aspect of alleged negligence of the bank was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. The issues agreed upon were: (1) whether the CTDs as worded are negotiable instruments; (2) whether the bank could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment; (3) whether there was legal compensation or set-off; (4) whether Caltex could compel the bank to pre-terminate the CTDs before maturity; (5) whether Caltex is entitled to the proceeds of the CTDs; and (6) whether the parties can recover damages, attorney's fees and litigation expenses. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised, and the determination of issues at a pre-trial conference bars the consideration of other questions on appeal. Even assuming the issue was raised, the provisions of the Code of Commerce on lost instruments payable to bearer are merely permissive and not mandatory. Article 548 uses the word "may," which is permissive, not mandatory, indicating liberty, opportunity, permission and possibility. Articles 548 to 558 merely established a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate, and an option in favor of the party liable thereon who may elect to refuse to issue a replacement. None of the provisions categorically restricts or prohibits the issuance of a duplicate or replacement instrument without compliance with the procedure outlined therein.

• Negotiability determined from the face of the instrument — The negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in light of surrounding circumstances, no other words are to be added to it or substituted in its stead. The Court applied this rule to hold that the CTDs were negotiable bearer instruments because the word "BEARER" was stamped on the space provided for the name of the depositor, and the documents did not state that the depositor was Angel dela Cruz specifically.

• Estoppel by admission — An admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. The Court applied this doctrine to Caltex's letter stating that the CTDs were delivered "to guarantee" dela Cruz's purchases, holding that this admission was conclusive and prevented Caltex from claiming the CTDs were delivered as payment.

• Pledge of incorporeal rights — Under Article 2095 of the Civil Code, incorporeal rights evidenced by negotiable instruments may be pledged, and the instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Under Article 2096, a pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. The Court held that the requirement under Article 2096 is not a mere rule of adjective law but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely.

• Assignment of credit against third persons — Under Article 1625 of the Civil Code, an assignment of credit, right or action shall produce no effect as against third persons unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. The Court applied this provision to hold that the bank's notarized Deed of Assignment gave it a better right over the CTDs than Caltex's unperfected pledge.

• Issues barred on appeal — An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed by the parties, and issues not raised in the trial court cannot be raised for the first time on appeal. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal.

• Permissive nature of Code of Commerce provisions on lost instruments — The word "may" in Article 548 of the Code of Commerce shows that the procedure for obtaining a duplicate of a lost instrument is not mandatory but discretionary on the part of the "dispossessed owner." Articles 548 to 558 merely established a right of recourse in favor of a dispossessed owner and an option in favor of the party liable thereon, and none of the provisions categorically restricts or prohibits the issuance of a duplicate or replacement instrument without compliance with the procedure outlined therein.

• "Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the 'bearer.' The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment." — This passage states the ratio decidendi on the negotiability issue, holding that the face of the instrument controls and that the word "BEARER" makes the CTDs payable to bearer.

• "If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word 'BEARER' stamped on the space provided for the name of the depositor in each CTD." — This passage articulates the rule that obscure words in a contract shall not favor the party who caused the obscurity, applying Article 1377 of the Civil Code.

• "Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank." — This passage states the ratio decidendi on the recovery issue, holding that the pledge was not perfected for lack of indorsement and absence of a public instrument.

• "The use of the word 'may' in said provision shows that it is not mandatory but discretionary on the part of the 'dispossessed owner' to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument." — This passage articulates the rule that the Code of Commerce provisions on lost instruments are permissive, not mandatory.

• Integrated Realty Corporation, et al. vs. Philippine National Bank, et al., 174 SCRA 295 (1989) — Cited for the proposition that the character of a transaction between parties is determined by their intention, and a transfer of property by a debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer.

• Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989) — Cited for the doctrine of estoppel, that an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon.

• Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990) — Cited for the rule that a party may not go back on his own acts and representations to the prejudice of the other party who relied upon them.

• Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916) — Cited for the proposition that the requirement under Article 2096 of the Civil Code is a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely.

• Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631 (1918) — Cited in support of the same proposition regarding the substantive nature of the public instrument requirement for pledges.

• Te Pate vs. Ingersoll, 43 Phil. 394 (1922) — Cited in support of the same proposition regarding the substantive nature of the public instrument requirement for pledges.

• Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973) — Cited for the rule that an issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel.

• Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989) — Cited for the rule that the determination of issues at a pre-trial conference bars the consideration of other questions on appeal.

• U.S. vs. Sanchez, 13 Phil. 336 (1909) — Cited for the proposition that where a provision reads "may," it is not mandatory but discretionary.

• Luna vs. Abaya, 86 Phil. 472 (1950) — Cited for the same proposition that the word "may" is permissive, not mandatory.

• Section 1, Act No. 2031 (Negotiable Instruments Law) — Enumerates the requisites for an instrument to be negotiable: (a) in writing and signed by the maker or drawer; (b) unconditional promise or order to pay a sum certain in money; (c) payable on demand or at a fixed or determinable future time; (d) payable to order or to bearer; and (e) where addressed to a drawee, he must be named or otherwise indicated with reasonable certainty. The Court applied this provision to hold that the CTDs met all the requisites for negotiability.

• Section 27, Act No. 2031 (Negotiable Instruments Law) — Provides that where the holder has a lien on an instrument arising from contract, he is deemed a holder for value to the extent of his lien. The Court applied this to hold that Caltex, having received the CTDs as security, was at most a holder for value by reason of its lien.

• Section 30, Act No. 2031 (Negotiable Instruments Law) — Defines negotiation as the transfer of an instrument from one person to another in such a manner as to constitute the transferee the holder thereof. The Court applied this to hold that there was no negotiation in the sense of a transfer of legal title to the CTDs in favor of Caltex.

• Article 1377, Civil Code — Provides that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. The Court applied this to hold that the bank, having stamped "BEARER" on the CTDs, could not now claim the instruments were payable only to dela Cruz.

• Article 2095, Civil Code — Provides that incorporeal rights evidenced by negotiable instruments may be pledged, and the instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. The Court applied this to hold that the CTDs, being negotiable, required indorsement for a valid pledge.

• Article 2096, Civil Code — Provides that a pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. The Court applied this to hold that Caltex's pledge was ineffective against the bank for lack of a public instrument.

• Article 1625, Civil Code — Provides that an assignment of credit, right or action shall produce no effect as against third persons unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. The Court applied this to hold that the bank's notarized Deed of Assignment gave it a better right over the CTDs.

• Article 548, Code of Commerce — Provides that the dispossessed owner of a lost instrument may apply to the judge or court of competent jurisdiction for the issuance of a duplicate. The Court held that the word "may" makes this provision permissive, not mandatory.

• Section 2(a), Rule 131, Rules of Court — Provides that whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. The Court applied this to Caltex's admission in its letter that the CTDs were delivered "to guarantee" dela Cruz's purchases.

• Section 3(e), Rule 131, Rules of Court — Provides the presumption that evidence willfully suppressed would be adverse if produced. The Court applied this to Caltex's opposition to the bank's motion for a bill of particulars seeking a receipt showing delivery of the CTDs as payment.

Narvasa, C.J., Padilla and Nocon, JJ., concurred.