Traders Royal Bank vs. Court of Appeals

A Central Bank Certificate of Indebtedness registered in the name of a specific entity is not a negotiable instrument, and any assignment thereof by an unauthorized corporate officer without consideration is void, such that no title passes to subsequent transferees — regardless of the transferee's claimed good faith — when the transferee, as a commercial bank, was on notice of the registered owner's identity and of the regulatory requirements governing transfers of registered certificates.

Filriters Guaranty Assurance Corporation was an insurance company and the registered owner of CBCI No. D891, a certificate with a face value of P500,000.00 that formed part of its legal reserves mandated under Section 213 of the Insurance Code, which requires insurance companies to maintain reserves equivalent to forty percent of gross premiums, preferably invested in government securities. Philippine Underwriters Finance Corporation (Philfinance) was a sister corporation of Filriters, owning approximately ninety percent of Filriters' equity and sharing identical corporate officers. Traders Royal Bank (TRB) was a commercial bank that acquired the CBCI from Philfinance under a repurchase agreement. The CBCI was governed by CB Circular No. 769, series of 1980, promulgated as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness," which has the force and effect of law.

Filriters Guaranty Assurance Corporation was the registered owner of Central Bank Certificate of Indebtedness (CBCI) No. D891, with a face value of P500,000.00. This CBCI formed part of Filriters' legal reserves required under Section 213 of the Insurance Code, which mandates insurance companies to maintain reserves equivalent to forty percent of gross premiums, preferably invested in government securities or government bonds. The CBCI was purchased by Filriters precisely to satisfy this regulatory requirement, as testified by Elias Garcia, Manager-in-Charge of Filriters, who confirmed that the Insurance Commission required this reserve to be invested preferably in government securities.

On November 27, 1979, Alfredo O. Banaria, then Senior Vice-President-Treasury of Filriters, executed a Detached Assignment purporting to transfer CBCI No. D891 from Filriters to Philippine Underwriters Finance Corporation (Philfinance), a sister corporation that owned approximately ninety percent of Filriters' equity and shared identical corporate officers. The deed of assignment stated the transfer was for "value received," but no consideration actually passed between the parties. According to the Court of Appeals' findings, Philfinance merely borrowed the CBCI from Filriters to guarantee its financing operations. Banaria executed the assignment without any board resolution, without the knowledge or consent of the Board of Directors of Filriters, and without any clearance or authorization from the Insurance Commissioner. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller, and Pilar Jacobe, Vice-President-Treasury of Filriters — both of whom held the same positions in Philfinance — executed similar detached assignment forms transferring the CBCI to TRB, again without any consideration or benefit to Filriters.

On February 4, 1981, Philfinance entered into a Repurchase Agreement with Traders Royal Bank (TRB), whereby Philfinance sold, transferred, and delivered CBCI No. D891 to TRB for P500,000.00, with Philfinance retaining the right to repurchase the instrument on or before April 27, 1981, for P519,361.11. When Philfinance failed to repurchase the CBCI on the maturity date — its checks having been dishonored for insufficient funds — Philfinance executed a Detached Assignment on April 27, 1981, conveying to TRB all its rights and title to CBCI No. D891, and irrevocably authorizing the Central Bank to transfer the certificate on the books of its fiscal agent.

Armed with the deed of assignment, TRB presented the CBCI together with the two Detached Assignments to the Securities Servicing Department of the Central Bank and requested registration of the transfer in its name. The Central Bank refused to effect the transfer and registration in view of an adverse claim filed by Filriters. TRB then filed a special civil action for mandamus against the Central Bank in the Regional Trial Court of Manila. The suit was subsequently treated as a case of interpleader when the Central Bank prayed in its amended answer that Filriters be impleaded as a respondent and the court adjudge which party was entitled to ownership of CBCI No. D891. The RTC found the assignments null and void, a ruling affirmed by the Court of Appeals. TRB elevated the case to the Supreme Court, arguing primarily that the veil of corporate entity should be pierced given Philfinance's ninety-percent ownership of Filriters and the identity of corporate officers between the two companies, which would render TRB's payment to Philfinance equivalent to payment to Filriters.

• Negotiability and Holder in Due Course: Petitioner argued that the CBCI was a negotiable instrument and that, having acquired it from Philfinance as a holder in due course, its possession was free from any defect of title of prior parties and from any defense available to prior parties among themselves, entitling it to enforce payment for the full amount against all parties liable thereon.
• Piercing the Veil of Corporate Entity: Petitioner maintained that since Philfinance owned approximately ninety percent of Filriters' equity and the two corporations had identical corporate officers, the doctrine of piercing the veil of corporate fiction should apply, making TRB's payment to Philfinance equivalent to payment to Filriters, thereby validating the transfer and barring Filriters from claiming it never received payment.
• Validity of Transfer for Consideration: Petitioner argued that if the veil of corporate entity were pierced, the Court of Appeals' ruling that the transfer from Filriters to Philfinance was null and void for lack of consideration would be negated, as TRB's payment to Philfinance would be construed as payment to Filriters.

• Lack of Board Authority: Respondent Filriters countered that the Detached Assignment was executed by Alfredo Banaria without any board resolution, knowledge, or consent of the Board of Directors of Filriters, and without clearance or authorization from the Insurance Commissioner, rendering the assignment void and not binding on the corporation.
• Lack of Consideration: Respondent argued that the assignment was executed without any consideration or benefit to Filriters, making it void from the beginning under Article 1409 of the Civil Code.
• Violation of Insurance Code and Public Policy: Respondent maintained that the CBCI constituted part of its reserve investments required under the Insurance Code, and its assignment was expressly prohibited by law, being immoral and against public policy, resulting in capital impairment and solvency deficiency of Filriters.
• Bad Faith of TRB: Respondent contended that TRB acted in bad faith with knowledge of the illegality, as the CBCI on its face stated it was registered in the name of Filriters, and CB Circular No. 769 provided that registered certificates are payable only to the registered owner — sufficient notice that the assignments did not confer the registered owner's rights.
• Non-Regular Transaction: Respondent argued that TRB knew the assignment was not a regular transaction in the usual course of business, as the CBCI constituted part of Filriters' reserve investments, its assignment required Insurance Commissioner clearance, and the substantial amount involved constituted disposition of "all or substantially all" assets requiring stockholder approval under Section 40 of the Corporation Code.

• Negotiability of CBCI: Whether CBCI No. D891 is a negotiable instrument within the meaning of the Negotiable Instruments Law.
• Validity of Assignment: Whether the assignment of CBCI No. D891 from Filriters to Philfinance was valid and effective to transfer title.
• Piercing the Veil of Corporate Entity: Whether the veil of corporate entity should be pierced given Philfinance's ninety-percent ownership of Filriters and the identity of corporate officers, so as to validate the transfer and treat TRB's payment to Philfinance as payment to Filriters.
• Entitlement to Registration: Whether TRB is entitled to have the CBCI registered in its name with the Central Bank.

• Negotiability of CBCI: No. The CBCI is not a negotiable instrument because it is payable to a specifically named registered owner — Filriters — and lacks the words of negotiability that would express consent that the instrument may be transferred by negotiation.
• Validity of Assignment: No. The assignment from Filriters to Philfinance was void for lack of consideration and for non-compliance with CB Circular No. 769, which requires that assignment of registered certificates be made by the registered owner in person or by a representative duly authorized in writing.
• Piercing the Veil of Corporate Entity: No. Mere majority stock ownership and identity of corporate officers are insufficient to disregard separate corporate personalities, and TRB was not defrauded given the notice on the face of the CBCI.
• Entitlement to Registration: No. Philfinance acquired no title or rights under CBCI No. D891 that it could assign or transfer to TRB, and the latter therefore has no registrable interest.

• Negotiability of CBCI: The CBCI on its face states that the Central Bank "promises to pay bearer, or if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS." The instrument is thus payable only to Filriters, the registered owner whose name is inscribed thereon. It lacks the words of negotiability that would serve as an expression of consent that the instrument may be transferred by negotiation. The accepted rule, as held in Caltex (Philippines), Inc. vs. Court of Appeals, is that negotiability or non-negotiability is determined from the face of the instrument itself — what the parties meant must be determined by what they said. The language of negotiability, which characterizes negotiable paper as a credit instrument, is its freedom to circulate as a substitute for money. This freedom is totally absent in a certificate of indebtedness, which merely obligates payment of a sum to a specified person or entity for a period of time. The transfer from Philfinance to TRB was therefore merely an assignment, not governed by the Negotiable Instruments Law.

• Validity of Assignment: The assignment from Filriters to Philfinance was void for two independent reasons. First, there was no consideration — Philfinance merely borrowed the CBCI from Filriters, and the deed's recital of "value received" was fictitious. Under Article 1409 of the Civil Code, contracts without consideration are void from the beginning. Second, Alfredo O. Banaria, who signed the deed of assignment for Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the corporation. This violated Section 3, Article V of CB Circular No. 769, series of 1980, which provides that assignment of registered certificates shall not be valid unless made by the registered owner in person or by a representative duly authorized in writing. The Circular has the force and effect of law. Furthermore, the CBCI formed part of Filriters' legal reserves under Section 213 of the Insurance Code, which cannot be taken out of said funds without violating legal requirements. The unauthorized use or disposition of the CBCI by a corporate officer cannot bind Filriters without board approval. Since Philfinance acquired no valid title, it had nothing to transfer to TRB — nemo potest nisi quod de jure potest.

• Piercing the Veil of Corporate Entity: Piercing the veil of corporate entity is an equitable remedy available only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, or where a corporation is a mere alter ego or business conduit of a person. The court must be sure that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed upon another, disregarding their rights. The doctrine aims to protect the interests of innocent third persons dealing with the corporate entity. Mere ownership by a single stockholder or another corporation of all or nearly all of the capital stock of a corporation is not by itself a sufficient reason for disregarding the fiction of separate corporate personalities, as held in Liddel & Co., Inc. vs. Collector of Internal Revenue. In this case, other than the allegation of ninety-percent ownership and identity of officers, there was nothing else to justify disregarding their corporate personalities. Moreover, TRB was not defrauded: the CBCI on its face stated it was registered in the name of Filriters, which should have put TRB on notice and prompted inquiry as to Philfinance's title or authority to assign. TRB had no dealings with Filriters and made no inquiry as to ownership. The CBCI's transfer provision itself constituted notice to TRB to secure written authorization from Filriters. As a commercial bank, TRB could not feign ignorance of CB Circular No. 769's requirements. An entity dealing with corporate agents within circumstances showing excess of authority may not hold the corporation liable, pursuant to Article 1883 of the Civil Code.

• Entitlement to Registration: Because Philfinance acquired no title or rights under CBCI No. D891, it could assign or transfer nothing to TRB, and TRB could register nothing with the Central Bank. The CBCI formed part of Filriters' legal reserves required by law, and its unauthorized disposition by a corporate officer cannot bind the corporation without board approval and compliance with reserve maintenance requirements. Filriters' title over the subject certificate of indebtedness must therefore be upheld over TRB's claimed interest.

• Piercing the Veil of Corporate Entity — The doctrine of piercing the veil of corporate entity is an equitable remedy that may be awarded only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, or where a corporation is a mere alter ego or business conduit of a person. The court must be sure that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed upon another, disregarding their rights. The protection of innocent third persons dealing with the corporate entity is the law's aim. Mere ownership by a single stockholder or another corporation of all or nearly all of the capital stock of a corporation is not by itself a sufficient reason for disregarding separate corporate personalities. In this case, the Court refused to pierce the veil because TRB was not defrauded — the CBCI's face indicated Filriters as registered owner, putting TRB on notice — and mere ninety-percent ownership and shared officers were insufficient grounds.

• Determination of Negotiability 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. The intention of the parties is controlled by what their words express, not what they may have secretly intended. What the parties meant must be determined by what they said. In this case, the CBCI was held non-negotiable because it was payable to a specifically named registered owner and lacked words of negotiability expressing consent that the instrument may be transferred by negotiation.

• Nemo potest nisi quod de jure potest — No man can do anything except what he can do lawfully. Applied to establish that Philfinance, having acquired no lawful title over the CBCI through a void assignment, could not transfer any title to TRB.

• "Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person." — This passage articulates the ratio decidendi for rejecting the application of the veil-piercing doctrine, defining the limited circumstances under which the remedy is available.

• "The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself." — This states the controlling test for determining negotiability, quoting from Caltex (Philippines), Inc. v. Court of Appeals, and is frequently cited in subsequent jurisprudence on negotiable instruments.

• "In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the Central Bank." — This is the dispositive reasoning on the chain of title, establishing that a void assignment transmits no rights to subsequent transferees.

• Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10, 1992, 212 SCRA 448 — Followed as controlling authority for the rule that negotiability or non-negotiability is determined from the face of the instrument itself; the parties' intention is controlled by the words they used.
• Liddel & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632 — Followed for the proposition that mere ownership by a single stockholder or another corporation of all or nearly all of the capital stock of a corporation is not by itself sufficient to disregard separate corporate personalities.
• People vs. Que Po Lay, 94 Phil. 640 — Cited for the proposition that violation of CB Circular No. 769, which has the force and effect of law, results in the nullity of the transfer.
• 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778 — Cited alongside People vs. Que Po Lay for the same proposition regarding nullity of transfer for violation of CB Circular No. 769.
• Yu vs. National Labor Relations Commission, 245 SCRA 134 — Cited for the definition of the doctrine of piercing the veil of corporate entity as an equitable remedy.

• Section 3, Article V, CB Circular No. 769 (Series of 1980) — Provides that assignment of registered certificates shall not be valid unless made at the office where issued and registered or at the Securities Servicing Department, Central Bank, by the registered owner in person or by a representative duly authorized in writing. Applied to find the assignment void because Banaria lacked the necessary written authorization from Filriters' Board of Directors.
• Section 213, Insurance Code (Presidential Decree No. 612) — Requires every insurance company, other than life, to maintain a reserve for unearned premiums equal to forty percent of gross premiums, less returns and cancellations, preferably invested in government securities. Applied to establish that the CBCI was part of Filriters' legal reserves and could not be disposed of without violating legal requirements.
• Article 1409, Civil Code — Provides that contracts without consideration are void from the beginning. Applied to find the assignment from Filriters to Philfinance void for lack of consideration, as Philfinance merely borrowed the CBCI.
• Article 19, Civil Code — Requires everyone to act with justice, give everyone their due, and observe honesty and good faith in the exercise of rights and performance of duties. Applied to TRB's duty to inquire about Philfinance's authority to assign the CBCI.
• Article 1883, Civil Code — Provides that an entity dealing with corporate agents within circumstances showing that the agents are acting in excess of corporate authority may not hold the corporation liable. Applied to TRB's failure to verify Philfinance's authority despite notice on the face of the CBCI.

Regalado, Romero, and Mendoza, JJ., concurred.