Development Bank of Rizal vs. Sima Wei

A payee acquires no right or interest in a negotiable instrument, and thus has no cause of action against alternative defendants, where the instrument was never delivered to the payee. Delivery is essential to give effect to a negotiable instrument, and without it, the drawer's liability on the instrument does not arise, though the drawer remains liable on the underlying obligation if the checks were never cashed.

Development Bank of Rizal extended a loan to respondent Sima Wei, evidenced by a promissory note. To settle the balance, Sima Wei issued two crossed checks payable to the Bank, but these checks were never delivered to the Bank; instead, they ended up with respondent Lee Kian Huat, who deposited them into the account of Asian Industrial Plastic Corporation at Producers Bank, despite the checks being crossed and lacking the payee's indorsement.

Development Bank of Rizal extended a loan to respondent Sima Wei, who executed a promissory note engaging to pay the Bank P1,820,000.00 on or before June 24, 1983, with interest at 32% per annum. Sima Wei made partial payments, leaving a balance of P1,032,450.02. On November 18, 1983, she issued two crossed checks payable to the Bank, drawn against China Banking Corporation, for P550,000.00 and P500,000.00, allegedly in full settlement of the balance. These checks, however, were not delivered to the Bank or any of its representatives. For reasons not shown, the checks came into the possession of respondent Lee Kian Huat, who deposited them without the Bank's indorsement into the account of respondent Asian Industrial Plastic Corporation at the Balintawak branch of Producers Bank in Caloocan City. Respondent Mary Cheng Uy, the branch manager, relied on the assurance of respondent Samson Tung, the corporation's president, that the transaction was legal and instructed the cashier to accept the checks and credit them to the corporation's account, despite the checks being crossed, payable to the Bank, and bearing no indorsement from the payee.

The Bank filed a complaint for a sum of money against the respondents on two causes of action: enforcing payment of the balance on the promissory note and enforcing payment of the two checks. Except for Lee Kian Huat, the defendants filed Motions to Dismiss, alleging that the complaint states no cause of action. The trial court granted the motions, and the Court of Appeals affirmed the dismissal. On appeal, the Bank argued that its cause of action against the alternative defendants was based not on the negotiable instruments but on quasi-delict, claiming damages for fraudulent acts and bad faith. The Supreme Court found this to be an impermissible change of theory on appeal.

• Cause of Action: Petitioner argued that it had a cause of action against the alternative defendants based on quasi-delict for damages due to their fraudulent acts and evident bad faith in depositing and encashing the checks.
• Alternative Defendants: Petitioner maintained that Section 13, Rule 3 of the Rules of Court on alternative defendants is applicable to the respondents.

• Cause of Action: Whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise, based on the undelivered checks.
• Alternative Defendants: Whether Section 13, Rule 3 of the Rules of Court on alternative defendants is applicable to the respondents.

• Cause of Action: No. The Bank did not acquire any right or interest in the checks due to lack of delivery, and thus has no cause of action against the alternative defendants. However, the Bank has a cause of action against the drawer, Sima Wei, on the promissory note.
• Alternative Defendants: N/A. The Court found it unnecessary to discuss this issue in view of the finding that the Bank did not acquire any right or interest in the checks.

• Cause of Action: A cause of action requires a legal right of the plaintiff, a correlative obligation of the defendant, and an act or omission violating that right. Under the Negotiable Instruments Law, a contract on a negotiable instrument is incomplete and revocable until delivery. Because the two checks were never delivered to the petitioner-payee, it acquired no interest in them and could not assert a cause of action founded on the checks against the drawer or the other respondents. The petitioner's attempt to shift its theory to quasi-delict on appeal was rejected, as parties cannot change their theory on appeal. However, the drawer, Sima Wei, remains liable on the promissory note, as the issuance of checks in payment of an obligation does not constitute payment unless they are cashed, and the checks were never delivered to the creditor.
• Alternative Defendants: Since the Bank never received the checks, it never owned them or acquired any interest therein. Therefore, anything the respondents did with the checks could not have prejudiced the Bank, and it had no right or interest that could have been violated by the respondents. The Court found it unnecessary to discuss the applicability of Section 13, Rule 3 because the Bank had no cause of action against the respondents in the alternative or otherwise.

• Delivery of Negotiable Instruments — Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. The payee acquires no interest in the instrument until its delivery. The Court applied this to hold that the Bank acquired no right or interest in the checks because they were never delivered to it, precluding any cause of action based on the checks against alternative defendants.
• Change of Theory on Appeal — A party cannot change the theory of its case on appeal, as this would deprive the opposing party of its day in court. The Court applied this to reject the Bank's attempt to shift its cause of action against the alternative defendants from collection on the checks to quasi-delict for damages.
• Payment by Check — Under Article 1249 of the Civil Code, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through the fault of the creditor. The Court applied this to hold that the drawer remained liable on the promissory note because the checks were never delivered to the Bank, let alone cashed.

• "Without the delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other respondents." — This passage states the ratio decidendi that lack of delivery of a negotiable instrument to the payee bars any cause of action founded on the instrument.
• "And even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through the fault of the creditor." — This passage applies Article 1249 of the Civil Code to maintain the drawer's liability on the underlying promissory note despite the issuance of checks.

• Caseñas vs. Rosales, et al., 19 SCRA 462 (1967) — Cited for the definition and essential elements of a cause of action.
• Ganzon vs. Court of Appeals, 161 SCRA 646 (1988) — Cited for the rule that a party cannot change the theory of its case on appeal.

• Section 16, Negotiable Instruments Law — Provides that every contract on a negotiable instrument is incomplete and revocable until delivery. Applied to hold that the payee acquired no interest in the checks due to lack of delivery.
• Article 1249, Civil Code — Provides that delivery of checks in payment of an obligation does not constitute payment unless they are cashed. Applied to hold that the drawer remained liable on the promissory note.

Narvasa, C.J., Padilla, Regalado, and Nocon, JJ., concur.