THIRD DIVISION

BANK OF THE PHILIPPINE ISLANDS,

Petitioner,

- versus -

SPOUSES REYNALDO AND VICTORIA ROYECA,

Respondents.

G.R. No. 176664

Present:

QUISUMBING, J.,*

YNARES-SANTIAGO,

Chairperson,
AUSTRIA-MARTINEZ,

NACHURA, and

REYES, JJ.

Promulgated:

July 21, 2008

x-----------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals
(CA) Decision[1] dated July 12, 2006, and Resolution[2] dated February 13, 2007,
which dismissed its complaint for replevin and damages and granted the respondents’
counterclaim for damages.

The case stems from the following undisputed facts:

On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed
and delivered to Toyota Shaw, Inc. a Promissory Note[3] for P577,008.00 payable in
48 equal monthly installments of P12,021.00, with a maturity date of August 18,
1997. The Promissory Note provides for a penalty of 3% for every month or fraction
of a month that an installment remains unpaid.

To secure the payment of said Promissory Note, respondents executed a Chattel

Mortgage[4] in favor of Toyota over a certain motor vehicle, more particularly
described as follows:
 Make and Type 1993 Toyota Corolla 1.3 XL

Motor No. 2E-2649879

Serial No. EE100-9512571

Color D.B. Gray Met.

Toyota, with notice to respondents, executed a Deed of Assignment[5] transferring all

its rights, title, and interest in the Chattel Mortgage to Far East Bank and Trust
Company (FEBTC).

Claiming that the respondents failed to pay four (4) monthly amortizations covering
the period from May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to
respondents on March 14, 2000 asking for the payment thereof, plus penalty.[6] The
respondents refused to pay on the ground that they had already paid their obligation to
FEBTC.

On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the
respondents with the Metropolitan Trial Court (MeTC) of Manila praying for the
delivery of the vehicle, with an alternative prayer for the payment of P48,084.00 plus
interest and/or late payment charges at the rate of 36% per annum from May 18, 1997
until fully paid. The complaint likewise prayed for the payment of P24,462.73 as
attorney’s fees, liquidated damages, bonding fees and other expenses incurred in the
seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
when it merged with and absorbed FEBTC.[7]

In their Answer, respondents alleged that on May 20, 1997, they delivered to
the Auto Financing Department of FEBTC eight (8) postdated checks in different
amounts totaling P97,281.78. The Acknowledgment Receipt,[8] which they attached
to the Answer, showed that FEBTC received the following checks:

DATE

26 May 97
6 June 97

30 May 97

15 June 97

30 June 97

18 June 97

18 July 97

18 August 97

BANK

Landbank

Head Office

FEBTC

Shaw Blvd.

"

Landbank

Head Office

CHECK NO.

#610945

#610946

#17A00-11550P

#17A00-11549P

#17A00-11551P

#610947

#610948

#610949
AMOUNT

P13,824.15

12,381.63

12,021.00

12,021.00

12,021.00

11,671.00

11,671.00

11,671.00

The respondents further averred that they did not receive any notice from the drawee
banks or from FEBTC that these checks were dishonored. They explained that,
considering this and the fact that the checks were issued three years ago, they believed
in good faith that their obligation had already been fully paid. They alleged that the
complaint is frivolous and plainly vexatious. They then prayed that they be awarded
moral and exemplary damages, attorney’s fees and costs of suit.[9]

During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC
since 1994 and had assumed the position of Account Analyst since its merger with
BPI. He admitted that they had, in fact, received the eight checks from the
respondents. However, two of these checks (Landbank Check No. 0610947 and
FEBTC Check No. 17A00-11551P) amounting to P23,692.00 were dishonored. He
recalled that the remaining two checks were not deposited anymore due to the
previous dishonor of the two checks. He said that after deducting these payments, the
total outstanding balance of the obligation was P48,084.00, which represented the last
four monthly installments.

On February 23, 2005, the MeTC dismissed the case and granted the respondents’
counterclaim for damages, thus:

WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of

cause of action, and on the counterclaim, plaintiff is ordered to indemnify the
defendants as follows:

a) The sum of PhP30,000.00 as and by way of moral damages;

b) The sum of PhP30,000.00 as and by way of exemplary damages;

c) The sum of PhP20,000.00 as and by way of attorney’s fees; and

d) To pay the costs of the suit.

SO ORDERED.[10]

On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered
the respondents to pay the amount claimed by the petitioner. The dispositive portion
of its Decision[11] dated August 11, 2005 reads:

WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court,

Branch 9 dated February 23, 2005 is REVERSED and a new one entered directing the
defendants-appellees to pay the plaintiff-appellant, jointly and severally,

1. The sum of P48,084.00 plus interest and/or late payment charges thereon at the
rate of 36% per annum from May 18, 1997 until fully paid;

2. The sum of P10,000.00 as attorney’s fees; and

3. The costs of suit.

SO ORDERED.[12]

The RTC denied the respondents’ motion for reconsideration.[13]

The respondents elevated the case to the Court of Appeals (CA) through a petition for
review. They succeeded in obtaining a favorable judgment when the CA set aside the
RTC’s Decision and reinstated the MeTC’s Decision on July 12, 2006.[14] On
February 13, 2007, the CA denied the petitioner’s motion for reconsideration.[15]

The issues submitted for resolution in this petition for review are as follows:

I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL

PAYMENT OF THEIR OBLIGATION AS ONE OF THEIR AFFIRMATIVE
DEFENSES.

II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.

III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND

EXEMPLARY DAMAGES AND ATTORNEY’S FEES.[16]

The petitioner insists that the respondents did not sufficiently prove the alleged
payment. It avers that, under the law and existing jurisprudence, delivery of checks
does not constitute payment. It points out that this principle stands despite the fact that
there was no notice of dishonor of the two checks and the demand to pay was made
three years after default.

On the other hand, the respondents postulate that they have established payment of
the amount being claimed by the petitioner and, unless the petitioner proves that the
checks have been dishonored, they should not be made liable to pay the obligation
again.[17]

The petition is partly meritorious.

In civil cases, the party having the burden of proof must establish his case by a
preponderance of evidence, or evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto.[18] Thus, the party,
whether plaintiff or defendant, who asserts the affirmative of an issue has the onus to
prove his assertion in order to obtain a favorable judgment. For the plaintiff, the
burden to prove its positive assertions never parts. For the defendant, an affirmative
defense is one which is not a denial of an essential ingredient in the plaintiff’s cause
of action, but one which, if established, will be a good defense – i.e. an “avoidance”
of the claim.[19]

In Jimenez v. NLRC,[20] cited by both the RTC and the CA, the Court elucidated on
who, between the plaintiff and defendant, has the burden to prove the affirmative
defense of payment:

As a general rule, one who pleads payment has the burden of proving it. Even where
the plaintiff must allege non-payment, the general rule is that the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment. The
debtor has the burden of showing with legal certainty that the obligation has been
discharged by payment.

When the existence of a debt is fully established by the evidence contained in the
record, the burden of proving that it has been extinguished by payment devolves upon
the debtor who offers such a defense to the claim of the creditor. Where the debtor
introduces some evidence of payment, the burden of going forward with the evidence
- as distinct from the general burden of proof - shifts to the creditor, who is then under
a duty of producing some evidence to show non-payment.[21]

In applying these principles, the CA and the RTC, however, arrived at different
conclusions. While both agreed that the respondents had the burden of proof to
establish payment, the two courts did not agree on whether the respondents were able
to present sufficient evidence of payment — enough to shift the burden of evidence to
the petitioner. The RTC found that the respondents failed to discharge this burden
because they did not introduce evidence of payment, considering that mere delivery of
checks does not constitute payment.[22] On the other hand, the CA concluded that the
respondents introduced sufficient evidence of payment, as opposed to the petitioner,
which failed to produce evidence that the checks were in fact dishonored. It noted that
the petitioner could have easily presented the dishonored checks or the advice of
dishonor and required respondents to replace the dishonored checks but none was
presented. Further, the CA remarked that it is absurd for a bank, such as petitioner, to
demand payment of a failed amortization only after three years from the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of
whether the Acknowledgment Receipt was sufficient proof of payment. As correctly
observed by the RTC, this is only proof that respondents delivered eight checks in
payment of the amount due. Apparently, this will not suffice to establish actual
payment.

Settled is the rule that payment must be made in legal tender. A check is not legal
tender and, therefore, cannot constitute a valid tender of payment.[23] Since a
negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized.[24]

To establish their defense, the respondents therefore had to present proof, not only
that they delivered the checks to the petitioner, but also that the checks were
encashed. The respondents failed to do so. Had the checks been actually encashed, the
respondents could have easily produced the cancelled checks as evidence to prove the
same. Instead, they merely averred that they believed in good faith that the checks
were encashed because they were not notified of the dishonor of the checks and three
years had already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof of payment, it

was no longer necessary for the petitioner to prove non-payment, particularly proof
that the checks were dishonored. The burden of evidence is shifted only if the party
upon whom it is lodged was able to adduce preponderant evidence to prove its
claim.[25]

To stress, the obligation to prove that the checks were not dishonored, but were in fact
encashed, fell upon the respondents who would benefit from such fact. That payment
was effected through the eight checks was the respondents’ affirmative allegation that
they had to establish with legal certainty. If the petitioner were seeking to enforce
liability upon the check, the burden to prove that a notice of dishonor was properly
given would have devolved upon it.[26] The fact is that the petitioner’s cause of
action was based on the original obligation as evidenced by the Promissory Note and
the Chattel Mortgage, and not on the checks issued in payment thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal obligation
to inform the respondents of the dishonor of the checks. A notice of dishonor is
required only to preserve the right of the payee to recover on the check. It preserves
the liability of the drawer and the indorsers on the check. Otherwise, if the payee fails
to give notice to them, they are discharged from their liability thereon, and the payee
is precluded from enforcing payment on the check. The respondents, therefore, cannot
fault the petitioner for not notifying them of the non-payment of the checks because
whatever rights were transgressed by such omission belonged only to the petitioner.

In all, we find that the evidence at hand preponderates in favor of the petitioner. The
petitioner’s possession of the documents pertaining to the obligation strongly
buttresses its claim that the obligation has not been extinguished. The creditor’s
possession of the evidence of debt is proof that the debt has not been discharged by
payment.[27] A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment.[28] In an action for replevin by a mortgagee, it is prima
facie evidence that the promissory note has not been paid.[29] Likewise, an
uncanceled mortgage in the possession of the mortgagee gives rise to the presumption
that the mortgage debt is unpaid.[30]

Finally, the respondents posit that the petitioner’s claim is barred by laches since it
has been three years since the checks were issued. We do not agree. Laches is a
recourse in equity. Equity, however, is applied only in the absence, never in
contravention, of statutory law. Thus, laches cannot, as a rule, abate a collection suit
filed within the prescriptive period mandated by the New Civil Code.[31] The
petitioner’s action was filed within the ten-year prescriptive period provided under
Article 1144 of the New Civil Code. Hence, there is no room for the application of
laches.

Nonetheless, the Court cannot ignore what the respondents have consistently raised
— that they were not notified of the non-payment of the checks. Reasonable banking
practice and prudence dictates that, when a check given to a creditor bank in payment
of an obligation is dishonored, the bank should immediately return it to the debtor and
demand its replacement or payment lest it causes any prejudice to the drawer. In light
of this and the fact that the obligation has been partially paid, we deem it just and
equitable to reduce the 3% per month penalty charge as stipulated in the Promissory
Note to 12% per annum.[32] Although a court is not at liberty to ignore the freedom
of the parties to agree on such terms and conditions as they see fit, as long as they
contravene no law, morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable, or if the principal obligation has been partly or irregularly complied
with.[33]
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The
Court of Appeals Decision dated July 12, 2006, and Resolution dated February 13,
2007, are REVERSED and SET ASIDE. The Decision of the Regional Trial Court,
dated August 11, 2005, is REINSTATED with the MODIFICATION that respondents
are ordered to deliver the possession of the subject vehicle, or in the alternative, pay
the petitioner P48,084.00 plus late penalty charges/interest thereon at the rate of 12%
per annum from May 18, 1997 until fully paid.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING

Associate Justice

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

RUBEN T. REYES

Associate Justice

ATT E STAT I O N

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court’s
Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

C E RT I F I CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above decision had been
reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

REYNATO S. PUNO

Chief Justice

* In lieu of Associate Justice Minita V. Chico-Nazario, per Special Order No.

508 dated June 25, 2008.

[1] Penned by Associate Justice Eliezer R. de los Santos, with Associate

Justices Fernanda Lampas-Peralta and Myrna Dimaranan Vidal concurring; rollo, pp.
25-31.

[2] Rollo, p. 33.

[3] Id. at 37.

[4] Id. at 42-45.

[5] Id. at 39.

[6] Id. at 58.

[7] Id. at 46-49.

[8] Id. at 56.

[9] Id. at 53.

[10] Id at 62-63.

[11] Id. at 64-73.

[12] Id. at 73.

[13] Id. at 11.

[14] Id. at 31.

[15] Id. at 33.

[16] Id. at 15.

[17] Id. at 124.

[18] Encinas v. National Bookstore, Inc., G.R. No. 162704, November 19,
2004, 443 SCRA 293, 302.

[19] DBP Pool of Accredited Insurance Companies v. Radio Mindanao

Network, Inc., G.R. No. 147039, January 27, 2006, 480 SCRA 314, 322-323.

[20] 326 Phil. 89 (1996).

[21] Id. at 95.

[22] Rollo, p. 72.

[23] Abalos v. Macatangay, Jr., G.R. No. 155043, September 30, 2004, 439
SCRA 649, 659.

[24] Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, January 30,
1990, 181 SCRA 557, 568.

[25] Asian Transmission Corporation v. Canlubang Sugar Estates, 457 Phil.

260, 290 (2003).

[26] See Negotiable Instruments Law, Sec. 89.

[27] Redmond v. Hughes, 135 N.Y.S. 843, 151 App. Div. 99 (1912).

[28] Biala v. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA
50, 59.

[29] Heagney v. J. I. Case Threshing Mach. Co., 99 N.W. 260 (1904).

[30] Guerin v. Cassidy, 38 NJ Super 454, 119 A2d 780 (1956); Beattie v.
Meeker, 149 N.Y.S. 453 (1914).

[31] Agra v. Philippine National Bank, 368 Phil. 829 (1999).

[32] Article 1229 of the Civil Code authorizes the judge to equitably reduce
the penalty when the principal obligation has been partly or irregularly complied with
by the debtor.

[33] Ligutan v. Court of Appeals, 427 Phil. 42, 51 (2002).