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G.R. No. 97753 August 10, 1992 5.

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date,
1. CALTEX (PHILIPPINES), INC., petitioner, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which
vs. stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondent indicated time deposits from and after date" of the assignment and further authorizes said 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 (TSN, February 9, 1987, pp. 60-62).
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2which dismissed the complaint filed therein 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
by herein petitioner against respondent bank. went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-
The undisputed background of this case, as found by the court a quo and adopted by respondent court, 68).
appears of record:
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited terminate the same.
with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280); 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "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
CTDCTD deposits (Defendant's Exhibit 564).
DatesSerial Nos.QuantityAmount
9. No copy of the requested documents was furnished herein defendant.
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the
4 Mar. 82 90127 to 90146 20 80,000 value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and
5 Mar. 82 70147 to 90150 4 16,000 on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of
8 Mar. 82 90001 to 90020 20 80,000 the matured loan (TSN, February 9, 1987, pp. 130-131).
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
9 Mar. 82 90251 to 90272 22 88,000 ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus
——— ———— accrued interest and compounded interest therein at 16% per annum, moral and exemplary
Total 280 P1,120,000 damages as well as attorney's fees.
===== ========
3
After trial, the court a quo rendered its decision dismissing the instant complaint.
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's provisions of the Code of Commerce relating to lost instruments payable to bearer. 4
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
The instant petition is bereft of merit.
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
the issues involved in this recourse. therein with reasonable certainty.

SECURITY BANK The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone
AND TRUST COMPANY of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
6778 Ayala Ave., Makati No. 90101 Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to
Metro Manila, Philippines in the CTDs is no other than Mr. Angel de la Cruz.
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT xxx xxx xxx
Rate 16%
Atty. Calida: In other words Mr. Witness, you are saying that per books of the bank, the depositor
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ referred (sic) in these certificates states that it was Angel dela Cruz?
witness: Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR cause (sic) the amount.
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Atty. Calida: And no other person or entity or company, Mr. Witness?
Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of witness: None, your Honor. 7
this certificate, with interest at the rate of 16% per cent per annum. xxx xxx xxx
Atty. Calida: Mr. Witness, who is the depositor identified in all of these certificates of time deposit
(Sgd. Illegible) (Sgd. Illegible) insofar as the bank is concerned?
witness: Angel dela Cruz is the depositor. 8
—————————— ———————————
AUTHORIZED SIGNATURES5 xxx xxx xxx

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
follows: determined from the writing, that is, from the face of the instrument itself. 9In the construction of a bill or
note, the intention of the parties is to control, if it can be legally ascertained. 10While the writing may be
read in the light of surrounding circumstances in order to more perfectly understand the intent and
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is meaning of the parties, yet as they have constituted the writing to be the only outward and visible
important to note that after the word "BEARER" stamped on the space provided supposedly for expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of
the name of the depositor, the words "has deposited" a certain amount follows. The document the court in such case is to ascertain, not what the parties may have secretly intended as
further provides that the amount deposited shall be "repayable to said depositor" on the period contradistinguished from what their words express, but what is the meaning of the words they have
indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are used. What the parties meant must be determined by what they said. 11
payable, not to whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz
as the person who made the deposit and further engages itself to pay said depositor the Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
amount indicated thereon at the stipulated date. 6 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
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, presentment.
enumerates the requisites for an instrument to become negotiable, viz:
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have
(a) It must be in writing and signed by the maker or drawer; 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. On the
(b) Must contain an unconditional promise or order to pay a sum certain in money; wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the
(c) Must be payable on demand, or at a fixed or determinable future time; depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what
(d) Must be payable to order or to bearer; and is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls pledge if the debt continues in inexistence and is not discharged by the transfer, and that
for the application of the elementary rule that the interpretation of obscure words or stipulations in a accordingly the use of the terms ordinarily importing conveyance of absolute ownership will
contract shall not favor the party who caused the obscurity. 12 not be given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the the absence of clear and unambiguous language or other circumstances excluding an
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for intent to pledge.
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22In the present case,
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
responsible representative himself. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of
to guarantee his purchases of fuel products" (Emphasis ours.) 13This admission is conclusive upon such security, in the event of non-payment of the principal obligation, must be contractually provided for.
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as The pertinent law on this point is that where the holder has a lien on the instrument arising from
against the person relying thereon. 14 A party may not go back on his own acts and representations to contract, he is deemed a holder for value to the extent of his lien. 23As such holder of collateral security,
the prejudice of the other party who relied upon them. 15In the law of evidence, whenever a party has, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by
by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or incorporeal rights, 24which inceptively provide:
omission, be permitted to falsify it. 16
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, indorsed.
when respondent bank, as defendant in the court below, moved for a bill of particularity therein
17praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to and the date of the pledge do not appear in a public instrument.
plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la
Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion.
18Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
were delivered as payment and not as security. Having opposed the motion, petitioner now labors under respondent court quoted at the start of this opinion show that petitioner failed to produce any document
the presumption that evidence willfully suppressed would be adverse if produced. 19 evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz.
25Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective

against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
Philippine National Bank, et al.20is apropos: contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
The character of the transaction between the parties is to be determined by their intention, was embodied in a public instrument. 27With regard to this other mode of transfer, the Civil Code
regardless of what language was used or what the form of the transfer was. If it was specifically declares:
intended to secure the payment of money, it must be construed as a pledge; but if there
was some other intention, it is not a pledge. However, even though a transfer, if regarded Art. 1625. An assignment of credit, right or action shall produce no effect as against third
by itself, appears to have been absolute, its object and character might still be qualified and persons, unless it appears in a public instrument, or the instrument is recorded in the Registry
explained by contemporaneous writing declaring it to have been a deposit of the property of Property in case the assignment involves real property.
as collateral security. It has been said that a transfer of property by the debtor to a creditor,
even if sufficient on its face to make an absolute conveyance, should be treated as a
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of delimitation of issues a useless exercise. 33
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
right over the CTDs in question. cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
respondent observed the requirements of the law in the case of lost negotiable instruments and the permissive and not mandatory. The very first article cited by petitioner speaks for itself.
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in
the lower court. 28 Art 548. 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
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private to become due, be not paid a third person, as well as in order to prevent the ownership of the
respondent was not included in the stipulation of the parties and in the statement of issues submitted by instrument that a duplicate be issued him. (Emphasis ours.)
them to the trial court. 29The issues agreed upon by them for resolution in this case are:
xxx xxx xxx
1. Whether or not the CTDs as worded are negotiable instruments.
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
2. Whether or not defendant could legally apply the amount covered by the CTDs against the of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a
depositor's loan by virtue of the assignment (Annex "C"). duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35It is an auxiliary
3. Whether or not there was legal compensation or set off involving the amount covered by the verb indicating liberty, opportunity, permission and possibility. 36
CTDs and the depositor's outstanding account with defendant, if any.
Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code of Commerce,
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on
maturity date provided therein. the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so
that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable
thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans compliance with the procedure outlined therein, and none
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses establishes a mandatory precedent requirement therefor.
from each other.
WHEREFORE, on the modified premises above set forth, the petition is DENIEDand the appealed
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the decision is hereby AFFIRMED.
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is SO ORDERED.
barred by estoppel. 30Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
2. Consolidated Plywood vs. IFC Leasing, 149 SCRA 448

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a
conference all issues of law and fact which they intend to raise at the trial, except such as may involve decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the its resolution dated October 17, 1985, denying the motion for reconsideration.
consideration of other questions on appeal. 32
The antecedent facts culled from the petition are as follows:
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be The petitioner is a corporation engaged in the logging business. It had for its program of logging
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent activities for the year 1978 the opening of additional roads, and simultaneous logging operations along
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
be premised on a multitude of other legal reasons and causes of action, of which respondent bank's For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, were to be given to the respondent and the excess, if any, to be divided between the seller-assignor
through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B. No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several
follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, was filed by the respondent against the petitioners, the corporation, Wee, and Vergara.
p. 44) and to determine the capability of the "Used" tractors being offered, petitioner-corporation
requested the seller-assignor to inspect the job site. After conducting said inspection, the seller-assignor The complaint was filed by the respondent against the petitioners for the recovery of the principal sum
assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were fit of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71),
for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
availability of parts. (t.s.n., May 28, 1980, pp. 59-66). (P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner- (P249,081.7 1) and costs of suit.
corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to
purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial
payment of Two Hundred Ten Thousand Pesos (P210,000.00). court to order the respondent to pay the petitioners damages in an amount at the sound discretion of
the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as
At the same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2"). would be just under the premises.

Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the In a decision dated April 20, 1981, the trial court rendered the following judgment:
seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent. WHEREFORE, judgment is hereby rendered:

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the 1. ordering defendants to pay jointly and severally in their official and personal capacities the
petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics to principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY
supervise the operations of the machines. EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY
ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after 15, 1979 and accruing interest thereafter at the rate of 12% per annum;
another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the (10%) of the principal and to pay the costs of the suit.
tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty
(E exh. " 5 "). Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the
the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6- petitioners.
D," and "6-E"), but the tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following
errors:
Because of the breaking down of the tractors, the road building and simultaneous logging operations of
petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would likewise be delayed until the seller- I THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND
assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79). PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor
to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds
II THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN WHEREFORE, finding the decision appealed from according to law and evidence, We find the
DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER appeal without merit and thus affirm the decision in toto. With costs against the appellants. (pp.
THEREOF IN DUE COURSE. 50-55, Rollo)

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the
decision of the trial court. The pertinent portions of the decision are as follows: Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was received by
the petitioners on October 21, 1985.
xxx xxx xxx
Hence, this petition was filed on the following grounds:
From the evidence presented by the parties on the issue of warranty, We are of the considered
opinion that aside from the fact that no provision of warranty appears or is provided in the I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS
Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
intention appears, there is an implied warranty, the defense of breach of warranty, if there is
any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee II. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE
who is the assignee of the promissory note and a holder of the same in due course. Warranty OF THE SUBJECT PROMISSORY NOTE.
lies in this case only between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted
financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors. III. SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE
TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE
AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE
xxx xxx xxx SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.

Holding that breach of warranty if any, is not a defense available to appellants either to IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE
withdraw from the contract and/or demand a proportionate reduction of the price with damages BECAUSE:
in either case (Art. 1567, New Civil Code). We now come to the issue as to whether the
plaintiff-appellee is a holder in due course of the promissory note.
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting extending credit facilities to consumers and B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
industrial, commercial or agricultural enterprises by discounting or factoring commercial papers PROMISSORY NOTE.
or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the
Financing Act. V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF
THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A
A study of the questioned promissory note reveals that it is a negotiable instrument which was SALE ON INSTALLMENTS TO A PURE LOAN.
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker; it contains an unconditional VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT
promise to pay a certain sum of money payable at a fixed or determinable future time; it is BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
payable to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred CANCELLED.
and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was
taken in the conditions that the note was complete and regular upon its face before the same The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as
was overdue and without notice, that it had been previously dishonored and that the note is in well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners'
good faith and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, counterclaims before the court of origin.
NIL); that IFC Leasing and Acceptance Corporation held the instrument free from any defect of
title of prior parties and free from defenses available to prior parties among themselves and
may enforce payment of the instrument for the full amount thereof against all parties liable On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986,
thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its contended that the petition was filed out of time; that the promissory note is a negotiable instrument and
tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL). respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally,
that the promissory note is admissible in evidence.
In view of the essential elements found in the questioned promissory note, We opine that the
same is legally and conclusively enforceable against the defendants-appellants.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as the assignee is a holder in due course of the promissory note in question, assuming the note is
to bar completely all the available defenses of the petitioner against the respondent-assignee. negotiable, in which case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed
on time because the petitioners' motion for reconsideration actually raised new issues. It cannot, Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-
therefore, be considered pro- formal. corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the
seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics.
The petition is impressed with merit. However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were purchased.
First, there is no question that the seller-assignor breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by
the records. The petitioner was clearly a victim of a warranty not honored by the maker. Articles 1191 and 1567 of the Civil Code provide that:

The Civil Code provides that: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the
thing sold may have, should they render it unfit for the use for which it is intended, or should The injured party may choose between the fulfillment and the rescission of the obligation with
they diminish its fitness for such use to such an extent that, had the vendee been aware the payment of damages in either case. He may also seek rescission, even after he has
thereof, he would not have acquired it or would have given a lower price for it; but said vendor chosen fulfillment, if the latter should become impossible.
shall not be answerable for patent defects or those which may be visible, or for those which
are not visible if the vendee is an expert who, by reason of his trade or profession, should have xxx xxx xxx
known them.
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or between withdrawing from the contract and demanding a proportionate reduction of the price,
fitness of the goods, as follows: with damages in either case. (Emphasis supplied)

(1) Where the buyer, expressly or by implication makes known to the seller the particular Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
purpose for which the goods are acquired, and it appears that the buyer relies on the sellers necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor
skill or judge judgment (whether he be the grower or manufacturer or not), there is an implied sues it because of the rescission.
warranty that the goods shall be reasonably fit for such purpose;
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
xxx xxx xxx
In other words, the party who deems the contract violated may consider it resolved or
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
may be annexed by the usage of trade. For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. But the law definitely does not
xxx xxx xxx require that the contracting party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the injured by the other's breach will have to passively sit and watch its damages accumulate
thing sold even though he was not aware thereof. during the pendency of the suit until the final judgment of rescission is rendered when the law
itself requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)
This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold. (Emphasis supplied).
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This
liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless
The pertinent portion of the note is as follows: ATTY. PALACA: Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by the witness was
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions on
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE cross,
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 COURT: You confirm his manifestation? You are nodding your head? Do you confirm that?
monthly installments starting July 15, 1978 and every 15th of the month thereafter
until fully paid. ... ATTY. ILAGAN: The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the mortgagee were assigned
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory to the IFC Leasing & Acceptance Corporation.
note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is
not a negotiable instrument. COURT: He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; .
. . you want to make a distinction, one is an assignment of mortgage right and the other one is
The instrument in order to be considered negotiablility-i.e. must contain the so-called indorsement of the promissory note. What counsel for defendants wants is that you stipulate
'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an that it is contained in one single transaction?
expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument than ATTY. ILAGAN: We stipulate it is one single transaction. (pp. 27-29, TSN., February 13,
under a non-negotiable one. ... 1980).

xxx xxx xxx Secondly, even conceding for purposes of discussion that the promissory note in question is a
negotiable instrument, the respondent cannot be a holder in due course for a more significant reason.
When instrument is payable to order.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors,
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it there was an arrangement between the seller-assignor, Industrial Products Marketing, and the
is drawn payable to the order of a specified person or to him or his order. . . . respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price
xxx xxx xxx from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

These are the only two ways by which an instrument may be made payable to order. A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
There must always be a specified person named in the instrument. It means that the Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the
bill or note is to be paid to the person designated in the instrument or to any person to sale on installment of the tractors were all executed on the same day by and among the buyer, which is
whom he has indorsed and delivered the same. Without the words "or order" or"to the herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
order of, "the instrument is payable only to the person designated therein and is Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price
advantages of being a holder of a negotiable instrument but will merely "step into the was not unconditional, and that it was subject to the condition that the tractors -sold were not defective.
shoes" of the person designated in the instrument and will thus be open to all The respondent knew that when the tractors turned out to be defective, it would be subject to the
defenses available against the latter." (Campos and Campos, Notes and Selected defense of failure of consideration and cannot recover the purchase price from the petitioners. Even
Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied) assuming for the sake of argument that the promissory note is negotiable, the respondent, which took
the same with actual knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the which the petitioners may raise against the seller-assignor. Any other interpretation would be most
respondent can never be a holder in due course but remains a mere assignee of the note in question. inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face
Thus, the petitioner may raise against the respondent all defenses available to it as against the seller- a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise
assignor Industrial Products Marketing. valid defenses available as against the assignor.

This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact,
the respondent-assignee because the petitioner's defenses apply to both or either of either of them. which would justify its act of taking the promissory note as not amounting to bad faith.
Actually, the records show that even the respondent itself admitted to being a mere assignee of the
promissory note in question, to wit:
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent,
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a a financing company which actively participated in the sale on installment of the subject two Allis
holder who has taken the instrument under the following conditions: Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the
xxx xxx xxx respondent's rights under the promissory note involved in this case are subject to all defenses that the
xxx xxx xxx petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the
(c) That he took it in good faith and for value Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... "
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and
respondent appellate court erred in holding the promissory note in question to be negotiable. Such a
xxx xxx xxx ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity assignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and
in the instrument or defect in the title of the person negotiating the same, the person to whom it litigate its claims against the seller- assignor in the rather unlikely possibility that it so desires,
is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17,
1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith complaint against the petitioner before the trial court is DISMISSED. SO ORDERED.
as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to cover the purchase 3. Garcia vs. Llamas, 417 SCRA 292
price. Many times, in pursuance of a previous arrangement with the seller, a finance company
pays the full price and the note is indorsed to it, subrogating it to the right to collect the price
from the buyer, with interest. With the increasing frequency of installment buying in this Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by
country, it is most probable that the tendency of the courts in the United States to protect the the complete incompatibility between the old and the new agreements. Petitioner herein fails to show
buyer against the finance company will , the finance company will be subject to the defense of either requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary
failure of consideration and cannot recover the purchase price from the buyer. As against the debtor stands.
argument that such a rule would seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated: The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the November
It may be that our holding here will require some changes in business methods and will impose 26, 2001 Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in CA-GR CV No.
a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public- 60521. The appellate court disposed as follows:
should have some protection somewhere along the line. We believe the finance company is
better able to bear the risk of the dealer's insolvency than the buyer and in a far better position UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains
to protect his interests against unscrupulous and insolvent dealers. . . . to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the
award for attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x
If this opinion imposes great burdens on finance companies it is a potent argument in favor of Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus
a rule which win afford public protection to the general buying public against unscrupulous is REMANDED to the court of origin for purposes of receiving ex parte [Respondent] Dionisio Llamas
dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 evidence against x x x Eduardo de Jesus.
[1953]) (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128). The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) The Antecedents
involving similar facts, it was held that in a very real sense, the finance company was a moving force in
the transaction from its very inception and acted as a party to it. When a finance company actively
The antecedents of the case are narrated by the CA as follows:
participates in a transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio
Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No.
Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
P400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they [respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest severally, the [respondent] the following sums, to wit:
per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent] 1) P400,000.00 representing the principal amount plus 5% interest thereon per month from
was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00
recovered from [petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the representing interests already paid by x x x de Jesus;
complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt
appearance, and;
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under
the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been 3) Cost of this suit.
paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of
the check and [respondents] acceptance thereof novated or superseded the note. Ruling of the Court of Appeals

[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he
Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the
reply were the face of the check and the reverse side thereof. RTC judgment, even though De Jesus had been declared in default.The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the formers evidence.
For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed
P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of P120,000.00 raise even a single genuine issue regarding any material fact.
by way of interests; that this was made when [respondents] daughter, one Nits Llamas-Quijencio,
received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de The appellate court ruled that no novation -- express or implied -- had taken place when respondent
Jesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated leave accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the
credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the months loan that was covered by the promissory note jointly and severally undertaken by petitioner and De
of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for an Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor because,
extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which
to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed had been intended to extinguish the obligation -- bounced upon its presentment.
the instant case while his retirement was being processed; and that, in defense of his rights, he agreed
to pay his counsel P20,000.00 [as] attorneys fees, plus P1,000.00 for every court appearance.
Hence, this Petition.
During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-
trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he Issues
would no [longer] present evidence. Given this development, the trial court gave [respondent]
permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, Petitioner submits the following issues for our consideration:
the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner]
Garcia to file his comment or opposition thereto.
I. Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in
the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of
case for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he
P400,000.00 in favor of Respondent Llamas, although the check subsequently
asserted that [petitioners and de Jesus] solidary liability under the promissory note cannot be any
bounced[;]
clearer, and that the check issued by de Jesus did not discharge the loan since the check bounced.

b) Acceptance of the check by the x x x respondent x x x which resulted in [the]


On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as
substitution by x x x de Jesus or [the superseding of] the promissory note;
follows:
c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00; In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from -- and may even be made
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation.
financial difficulties, he be given an extension of time to pay his loan obligation and that As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
his retirement benefits from the Philippine National Police will answer for said obligation. offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the
debtor require the consent of the creditor.
II. Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given weight and credence considering that Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as the creation of a new one that takes the place of the former. It is merely modificatory when the old
evidenced by the foregoing circumstances showing his assumption of sole liability over the loan obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
obligation. extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For novation
III. Whether or not judgment on the pleadings or summary judgment was properly availed of by to take place, the following requisites must concur:
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of
Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-blown trial.
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the 3) The old contract must be extinguished.
defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment 4) There must be a valid new contract.
against him -- be it a judgment on the pleadings or a summary judgment -- was proper.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal
The Courts Ruling terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two obligations can stand together,
The Petition has no merit. each one with its own independent existence.

First Issue: Applying the foregoing to the instant case, we hold that no novation took place.
Novation
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that and the acceptance of the check, or that the check would take the place of the note. There is no
novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the incompatibility between the promissory note and the check. As the CA correctly observed, the check
promissory note by the check. Alternatively, the former argues that the original obligation was had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan
extinguished when the latter, who was his co-obligor, paid the loan with the check. obligation; and on the other, the check answers for it. Verily, the two can stand together.

The fallacy of the second (alternative) argument is all too apparent. The check could not have Neither could the payment of interests -- which, in petitioners view, also constitutes novation-- change
extinguished the obligation, because it bounced upon presentment. By law, the delivery of a check the terms and conditions of the obligation. Such payment was already provided for in the promissory
produces the effect of payment only when it is encashed. note and, like the check, was totally in accord with the terms thereof.

We now come to the main issue of whether novation took place. Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by obligation, and the third person or new debtor must assume the formers place in the relation. Well-
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the settled is the rule that novation is never presumed. Consequently, that which arises from a purported
creditor. Article 1293 of the Civil Code defines novation as follows: change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show
clearly and unequivocally that novation has indeed taken place.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the In the present case, petitioner has not shown that he was expressly released from the obligation, that a
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237. third person was substituted in his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature rights as may have been created by the assent of the parties. The promissory note is thus covered by
of the obligation being solidary due to the fact that the promissory note expressly declared that the the general provisions of the Civil Code, not by the NIL.
liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand
payment or performance from one of the solidary debtors or some or all of them simultaneously, and Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
payment made by one of them extinguishes the obligation. It therefore follows that in case the creditor note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for
fails to collect from one of the solidary debtors, he may still proceed against the other or others. x x x value even if, at the time of its taking, the latter knew the former to be only an accommodation party.
The relation between an accommodation party and the party accommodated is, in effect, one of
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor principal and surety -- the accommodation party being the surety. It is a settled rule that a surety is
expressly consent to the substitution of a new debtor.] Since novation implies a waiver of the right the bound equally and absolutely with the principal and is deemed an original promissor and debtor from
creditor had before the novation, such waiver must be express. It cannot be supposed, without clear the beginning. The liability is immediate and direct.
proof, that the present respondent has done away with his right to exact fulfillment from either of the
solidary debtors. Third Issue:
Propriety of Summary Judgment
More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint or Judgment on the Pleadings
and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment.
Respondents acceptance of his check did not change the person of the debtor, because a joint and The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
solidary obligor is required to pay the entirety of the obligation. judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the that (1) except as to the amount of damages, there is no genuine issue regarding any material fact; and
whole obligation from any or all of the debtors. It is up to the former to determine against whom to (2) the moving party is entitled to a judgment as a matter of law.
enforce collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore
liable for the entire obligation. A summary judgment is a procedural device designed for the prompt disposition of actions in which the
pleadings raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are
Second Issue: asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or
Accommodation Party specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown
by the pleadings, depositions or admissions. A summary judgment may be applied for by either a
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as claimant or a defending party.
such, he was released as obligor when respondent agreed to extend the term of the obligation.
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads: proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse partys pleading. The essential question is whether there are issues generated by the
pleadings. A judgment on the pleadings may be sought only by a claimant, who is the party seeking to
PROMISSORY NOTE recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief.

P400,000.00 Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Answer apparently raised several issues -- that he signed the promissory note allegedly as a mere
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, accommodation party, and that the obligation was extinguished by either payment or novation.
with interest at the rate of 5% per month or fraction thereof. However, these are not factual issues requiring trial. We quote with approval the CAs observations:

It is understood that our liability under this loan is jointly and severally [sic]. Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid
Done at Quezon City, Metro Manila this 23rd day of December, 1996. issues. Firstly, Garcias claim that he was merely an accommodation party is belied by the promissory
note that he signed. Nothing in the note indicates that he was only an accommodation party as he
claimed to be. Quite the contrary, the promissory note bears the statement: It is understood that our
By its terms, the note was made payable to a specific person rather than to bearer or to order -- a liability under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de Jesus
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the
cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation party. dorsal side of said check.
Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangible
From the records, it also appears that petitioner himself moved to submit the case for judgment on the
basis of the pleadings and documents. In a written Manifestation, he stated that judgment on the
pleadings may now be rendered without further evidence, considering the allegations and admissions of
the parties.

In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court
had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.
-DIGESTS NEGOTIN-  The documents provide that the amounts deposited shall be repayable to the depositor
o depositor = bearer
1. CALTEX (PHILS.), INC. VS. CA  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
Lessons Applicable: Requisites of negotiability to antedated and postdated instruments (Negotiable
documents, instead of having the word "BEARER" stamped on the space provided for the
Instrument Law)
name of the depositor in each CTD
FACTS:
 negotiability or non-negotiability of an instrument is determined from the writing, that is,
 Security Bank and Trust Company (Security Bank), a commercial banking institution, through
from the face of the instrument itself
its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who
deposited with Security Bank the total amount of P1,120,000
2. NO.
 Angel delivered the CTDs to Caltex for his purchase of fuel products
 although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and
 March 18, 1982: Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost all CTDs, agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and
submitted the required Affidavit of Loss and received the replacement indorsement
 March 25, 1982: Angel dela Cruz negotiated and obtained a loan from Security Bank in the
amount of P875,000 and executed a notarized Deed of Assignment of Time Deposit o CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
 November, 1982: Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to verify the products
CTDs declared lost by Angel o There was no negotiation in the sense of a transfer of the legal title to the CTDs in
 November 26, 1982: Security Bank received a letter from Caltex formally informing it of its favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer
possession of the CTDs in question and of its decision to pre-terminate the same. CTDs would have sufficed.
 December 8, 1982: Caltex was requested by Security Bank to furnish:
o a copy of the document evidencing the guarantee agreement with Mr. Angel dela  Where the holder has a lien on the instrument arising from contract, he is deemed a holder for
Cruz value to the extent of his lien.
o the details of Mr. Angel's obligation against which Caltex proposed to apply the time
deposits o As such holder of collateral security, he would be a pledgee but the requirements
therefor and the effects thereof, not being provided for by the Negotiable Instruments
 Security Bank rejected Caltex demand for payment bec. it failed to furnish a copy of its Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights:
agreement w/ Angel
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
 April 1983, the loan of Angel dela Cruz with Security Bank matured
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
 August 5, 1983: CTD were set-off w/ the matured loan indorsed.
 Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
 CA affirmed RTC to dismiss complaint the date of the pledge do not appear in a public instrument.
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
ISSUE: unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case
W/N the CTDs are negotiable the assignment involves real property.

W/N Caltex as holder in due course can rightfully recover on the CTDs
2. CONSOLIDATED PLYWOOD VS. IFC LEASING
Lessons Applicable: Requisites of negotiability to antedated and postdated instruments (Negotiable
HELD: Petition is Denied and appealed decision is affirmed. Instruments Law)

1. YES. FACTS: Consolidated (buyer pays promossor note) > IPM (seller-assignor who violated warranty) > IFC
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites (holder in due course or merely an assignee?)
for an instrument to become negotiable, viz:  Consolidated Plywood Industries, Inc (Consolidated) is a corporation engaged in the logging
(a) It must be in writing and signed by the maker or drawer; business
(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; o For the purpose of opening of additional roads and simultaneous logging operations
(d) Must be payable to order or to bearer; and -check along the route of roads, it needed 2 additional units of tractors
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
 Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the
Industrial Products Marketing (IPM) (seller-assignor) offered to sell 2 "Used" Allis Crawler goods, as follows:
Tractors (1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment
o IPM inspected the job site and assured that the tractors were fit for the job and gave a (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be
90-days performance warranty of the machines and availability of parts. reasonably fit for such purpose;
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 Consolidated purchased on installment. ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be
o It paid the down payment of P210,000 annexed by the usage of trade.chanroblesvirtualawlibrary chanrobles virtual law library
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ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold
 April 5, 1978: IPM issued the sales invoice and the deed of sale with chattel mortgage with
even though he was not aware thereof.
promissory note was executed
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
o IPM, by means of a deed of assignment, assigned its rights and interest in the chattel
hidden faults or defects in the thing sold. (Emphasis supplied).
mortgage in favor of IFC Leasing and Acceptance Corp. (IFC)
 GR: extends to the corporation to whom it assigned its rights and interests
 After 14 days, one of the tractors broke down and after another 9 days, the other tractor too
 EX: assignee is a holder in due course of the promissory note
 Because of the breaking down of the tractors, the road building and simultaneous logging
o assuming the note is negotiable
operations were delayed  Consolidated's defenses may not prevail against
it.chanroblesvirtualawlibrary chanrobles virtual law library
 Consolidated unilaterally rescinded the contract w/ IPM
 Articles 1191 and 1567 of the Civil Code provide that:
 April 7, 1979: Wee of Consolidated asked IPM to pull out the units and have them ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
reconditioned, and thereafter to offer them for sale. should not comply with what is incumbent upon him.
o The proceeds were to be given to IFC and the excess will be divided between: The injured party may choose between the fulfillment and the rescission of the obligation with the
 IPM payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
 Consolidated which offered to bear one-half 1/2 of the reconditioning cost if the latter should become impossible.chanroblesvirtualawlibrary chanrobles virtual law library
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 IPM didn't do anything ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
 IFC filed against Consolidated for the recovery of the principal sum P1,093,789.71, interest withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
and attorney's fees either case. (Emphasis supplied)
 RTC and CA: favored IFC
 breach of warranty if any, is not a defense available to Consolidated either to withdraw from  Consolidated, having unilaterally and extrajudicially rescinded its contract with the seller-
the contract and/or demand a proportionate reduction of the price with damages in either case assignor, can no longer sue IPM except by way of counterclaim if IPM sues it because of the
rescission
ISSUE: W/N IFC is a holder in due course of the negotiable promissory note so as to bar completely all
the available defenses of the Consolidated against IPM  Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer" - in this case it is non-negotiable
HELD: CA reversed and set aside
 Consolidated is a victim of warranrty o = expression of consent that the instrument may be transferred
o The Civil Code provides that:  consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they diminish its  When instrument is payable to order
fitness for such use to such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent SEC. 8. WHEN PAYABLE TO ORDER. - The instrument is payable to order where it is drawn payable
defects or those which may be visible, or for those which are not visible if the vendee is an expert who, to the order of a specified person or to him or his order. . . .
by reason of his trade or profession, should have known them.chanroblesvirtualawlibrary chanrobles
virtual law library
 Without the words "or order" or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Held: For novation to take place, the following requisites must concur: (1) There must be a previous
valid obligation; (2) the parties concerned must agree to a new contract; (3) the old contract must be
 Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a extinguished; and (4) there must be a valid new contract.
negotiable instrument but will merely "step into the shoes" of the person designated in the The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
instrument and will thus be open to all defenses available against the latter and the acceptance of the check or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check.
 Even conceding for purposes of discussion that the promissory note in question is a negotiable Neither could the payment of interests, which in petitioner’s view also constitutes novation, change the
instrument, the IFC cannot be a holder in due course due to absence of GF for knowing that terms and conditions of the obligation. Such payment was already provided for in the promissory note
the tractors were defective and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. - A holder in due course is a holder debtors. In order to change the person of the debtor, the old must be expressly released from the
who has taken the instrument under the following conditions:
obligation, and the third person or new debtor must assume the former’s place in the relation. Well-
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in settled is the rule that novation is never presumed. Consequently, that which arises from a purported
the title of the person negotiating it change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show
clearly and unequivocally that novation has indeed taken place. Note also that for novation to be valid
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - To constitute notice of an infirmity in the and legal, the law requires that the creditor expressly consent to the substitution of a new debtor.
instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated In a solidary obligation, the creditor is entitled to demand the satisfaction of the whole obligation from
must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in any or all of the debtors. It is up to the former to determine against whom to enforce collection. Having
taking the instrument amounts to bad faith. (Emphasis supplied) made himself jointly and severally liable with de Jesus, petitioner is therefore liable for the entire
 We believe the finance company is better able to bear the risk of the dealer's insolvency than obligation.
the buyer and in a far better position to protect his interests against unscrupulous and insolvent
dealers. . . (2) By its terms, the note was made payable to a specific person rather than bearer to or order—a
requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities
3. ROMEO GARCIA VS. DIONISIO LLAMAS and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in
G.R. No. 154127. December 8, 2003 writing and evidence of such intangible rights as may have been created by the assent of the parties.
The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
Facts: A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner Romeo Even granting that the NIL was applicable, still petitioner would be liable for the note. An
Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him. They bound accommodation party is liable for the instrument to a holder for value even if, at the time of its taking,
themselves jointly and severally to pay the loan on or before January 23, 1997 with a 15% interest per the latter knew the former to be only an accommodation party. The relation between an accommodation
month. The loan remained unpaid despite repeated demands by respondent. party and the party accommodated is, in effect, one of principal and surety. It is a settled rule that a
Petitioner resisted the complaint alleging that he signed the promissory note merely as an surety is bound equally and absolutely with the principal and is deemed an original promissory debtor
accommodation party for de Jesus and the latter had already paid the loan by means of a check and from the beginning. The liability is immediate and direct.
that the issuance of the check and acceptance thereof novated or superseded the note.
The trial court rendered a judgment on the pleadings in favor of the respondent and directed petitioner --END OF FIRST BATCH--
to pay jointly and severally respondent the amounts of Php 400, 000 representing the principal amount
plus interest at 15% per month from January 23, 1997 until the same shall have been fully paid, less the
amount of Php 120,000 representing interests already paid.
The Court of Appeals ruled that no novation, express or implied, had taken place when respondent
accepted the check from de Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and de
Jesus. Respondent’s acceptance of the check did not serve to make de Jesus the sole debtor because
first, the obligation incurred by him and petitioner was joint and several; and second, the check which
had been intended to extinguish the obligation bounced upon its presentment.

Issues: (1) Whether or not there was novation of the obligation

(2) Whether or not the defense that petitioner was only an accommodation party had any basis.