CALTEX (PHILIPPINES), INC., PETITIONER, VS. COURT OF APPEALS AND SECURITY BANK AND TRUST COMPANY, RESPONDENTS.

Caltex versus Security Bank and Trust Company

The Case

This is a petition for review on certiorari brought by Caltex (Philippines), Incorporated against the Court of Appeals and Security Bank and Trust Company. Caltex sued the bank to recover the value of two hundred eighty certificates of time deposit, totaling one million one hundred twenty thousand pesos, which a depositor named Angel dela Cruz had delivered to Caltex and which the bank later applied to the depositor's own loan. The case matters because it fixes two rules every reviewee must carry: negotiability is judged from the face of the instrument alone, and a bearer certificate delivered merely as security does not transfer legal title unless the requirements of pledge are met.

Procedural History

Caltex filed a complaint in the Regional Trial Court of Manila, Branch Forty-Two, praying that the bank be ordered to pay the aggregate value of the certificates plus interest, moral and exemplary damages, and attorney's fees. After trial, the trial court dismissed the complaint. Caltex appealed to the Court of Appeals, which affirmed the dismissal with modifications. Caltex then came to the Supreme Court by petition for review on certiorari, faulting the appellate court for holding that the certificates are non-negotiable, that Caltex did not become a holder in due course, and for disregarding the Code of Commerce provisions on lost instruments payable to bearer.

Facts

On various dates in February and March 1982, Security Bank, through its Sucat branch, issued two hundred eighty certificates of time deposit in favor of Angel dela Cruz, who deposited an aggregate of one million one hundred twenty thousand pesos. Each certificate bore the word "BEARER" stamped on the space provided for the depositor's name, and stated that the amount was repayable to said depositor upon presentation and surrender of the certificate, with interest at sixteen percent per annum.

Dela Cruz delivered the certificates to Caltex in connection with his purchase of fuel products. In March 1982, he told the branch manager that he had lost all the certificates, and upon submitting a notarized affidavit of loss, the bank issued two hundred eighty replacement certificates in his favor. On March 25, 1982, dela Cruz obtained a loan of eight hundred seventy-five thousand pesos from the bank and executed a notarized deed of assignment of the time deposits, authorizing the bank to pre-terminate and set off the deposits against the loan.

In November 1982, Caltex's credit manager presented the original certificates to the bank for verification, and on November 26, 1982, Caltex formally informed the bank of its possession and its decision to pre-terminate. The bank asked for a copy of the document evidencing the guarantee agreement with dela Cruz and the details of his obligations; Caltex furnished none. The bank rejected the demand in February 1983. In April 1983 the loan matured, and on August 5, 1983 the bank set off the time deposits against it. Caltex then sued.

Issues

• Whether or not the certificates of time deposit are negotiable instruments.
• Whether or not Caltex can rightfully recover the value of the certificates from the bank.
• Whether or not the Court of Appeals erred in refusing to consider the bank's alleged negligence in replacing the lost certificates.

Applicable Provisions

Section 1 of the Negotiable Instruments Law enumerates the requisites of negotiability:

(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must 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 certificates satisfy all five requisites, and the dispute centers on the fourth.

Article 2095 of the Civil Code governs the pledge of incorporeal rights:

Incorporeal rights, evidenced by negotiable instruments, may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

This defeats Caltex's claim, because the certificates were delivered but never indorsed.

Article 2096 of the Civil Code provides:

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.

Caltex produced no public instrument of pledge, so no right bound the bank.

Article 1625 of the Civil Code provides:

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 bank's assignment was in a public instrument, while Caltex's was not.

Article 548 of the Code of Commerce provides:

The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him.

The word "may" shows the remedy is permissive, not mandatory, so the bank was not negligent in issuing replacements.

Ruling

On the first issue, the Court held that the certificates are negotiable instruments. Negotiability is determined from the writing, from the face of the instrument itself. The documents say the amounts are repayable to the depositor, and the depositor named on the face is the bearer. If the bank intended to pay dela Cruz alone, it could easily have said so instead of stamping "BEARER" on each certificate. The Court added that requiring parties to go behind the plain text would defeat the very purpose of the Negotiable Instruments Law, and that obscurity in a contract is not favored against the party who caused it.

On the second issue, the Court held that Caltex cannot recover. Although the certificates are bearer instruments, they were delivered to Caltex as security for dela Cruz's purchases, not as payment. Caltex's own credit manager admitted in his letter that the certificates were negotiated "to guarantee his purchases of fuel products," and that admission is conclusive under the doctrine of estoppel. Mere delivery as security made Caltex at most a holder for value to the extent of his lien, that is, a pledgee. But the certificates were delivered without indorsement, and no public instrument of pledge was executed, so under Articles 2095 and 2096 no right was vested in Caltex as against the bank. The bank, by contrast, held a duly notarized assignment under Article 1625. Between the two, the bank has the better right.

On the third issue, the Court held that the negligence question was never raised below. The pre-trial stipulated issues did not include it, and an issue raised for the first time on appeal is barred by estoppel. Even if considered, Article 548 is permissive, so the bank was not bound to refuse replacement.

Doctrine

First, the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself, and the parties are bound by what they said, not by what they secretly intended. Second, a bearer instrument delivered merely as security does not transfer legal title; the transferee becomes at most a holder for value to the extent of his lien, and to bind third persons the pledge must comply with Article 2095, requiring indorsement if negotiable, and Article 2096, requiring a public instrument. Third, an admission or representation is conclusive upon the person making it and cannot be denied against one who relied on it. Fourth, issues not raised in the trial court and not included in the pre-trial stipulation cannot be raised for the first time on appeal.

Disposition

The petition was denied, and the decision of the Court of Appeals was affirmed; Caltex lost, and the bank kept the right to apply the deposits to the depositor's loan.

Remember This

Memorize this line: negotiability is judged from the face of the instrument alone, and a bearer certificate pledged without indorsement and without a public instrument binds no third person. Examiners use this case to test the requisites of negotiability under Section 1 and the formalities of pledge of incorporeal rights under Articles 2095 and 2096.