G.R. No. 149275 September 27, 2004 93-130461 487709 01 March 1993 ₱30,000.

00

VICKY C. TY, petitioner, 93-130462 487707 30 December 1992 ₱30,000.00

vs.
PEOPLE OF THE PHILIPPINES, respondent. 93-130463 487706 30 November 1992 ₱30,000.00

93-130464 487708 30 January 1993 ₱30,000.00

DECISION
TINGA, J.:
Petitioner Vicky C. Ty ("Ty") filed the instant Petition for Review under Rule 45, seeking to set
aside the Decision1 of the Court of Appeals Eighth Division in CA-G.R. CR No. 20995,
promulgated on 31 July 2001. The Decision affirmed with modification the judgment of the
Regional Trial Court (RTC) of Manila, Branch 19, dated 21 April 1997, finding her guilty of
seven (7) counts of violation of Batas Pambansa Blg. 222 (B.P. 22), otherwise known as the
Bouncing Checks Law.
This case stemmed from the filing of seven (7) Informations for violation of B.P. 22 against Ty
before the RTC of Manila. The Informations were docketed as Criminal Cases No. 93-130459
to No. 93-130465. The accusatory portion of the Information in Criminal Case No. 93-130465
reads as follows:
That on or about May 30, 1993, in the City of Manila, Philippines, the said accused did
then and there willfully, unlawfully and feloniously make or draw and issue to Manila
Doctors’ Hospital to apply on account or for value to Editha L. Vecino Check No.
Metrobank 487712 dated May 30, 1993 payable to Manila Doctors Hospital in the
amount of ₱30,000.00, said accused well knowing that at the time of issue she did not
have sufficient funds in or credit with the drawee bank for payment of such check in full
upon its presentment, which check when presented for payment within ninety (90) days
from the date hereof, was subsequently dishonored by the drawee bank for "Account
Closed" and despite receipt of notice of such dishonor, said accused failed to pay said
Manila Doctors Hospital the amount of the check or to make arrangement for full
payment of the same within five (5) banking days after receiving said notice.
Contrary to law.3
The other Informations are similarly worded except for the number of the checks and dates of
issue. The data are hereunder itemized as follows:
93-130465 487712 30 May 1993 ₱30,000.004
The cases were consolidated and jointly tried. At her arraignment, Ty pleaded not guilty. 5
The evidence for the prosecution shows that Ty’s mother Chua Lao So Un was confined at the
Manila Doctors’ Hospital (hospital) from 30 October 1990 until 4 June 1992. Being the patient’s
daughter, Ty signed the "Acknowledgment of Responsibility for Payment" in the Contract of
Admission dated 30 October 1990.6 As of 4 June 1992, the Statement of Account7 shows the
total liability of the mother in the amount of ₱657,182.40. Ty’s sister, Judy Chua, was also
confined at the hospital from 13 May 1991 until 2 May 1992, incurring hospital bills in the
amount of ₱418,410.55.8 The total hospital bills of the two patients amounted to ₱1,075,592.95.
On 5 June 1992, Ty executed a promissory note wherein she assumed payment of the
obligation in installments.9 To assure payment of the obligation, she drew several postdated
checks against Metrobank payable to the hospital. The seven (7) checks, each covering the
amount of ₱30,000.00, were all deposited on their due dates. But they were all dishonored by
the drawee bank and returned unpaid to the hospital due to insufficiency of funds, with the
"Account Closed" advice. Soon thereafter, the complainant hospital sent demand letters to Ty
by registered mail. As the demand letters were not heeded, complainant filed the seven
(7) Informations subject of the instant case.10
For her defense, Ty claimed that she issued the checks because of "an uncontrollable fear of
a greater injury." She averred that she was forced to issue the checks to obtain release for her
mother whom the hospital inhumanely and harshly treated and would not discharge unless the
hospital bills are paid. She alleged that her mother was deprived of room facilities, such as the
air-condition unit, refrigerator and television set, and subject to inconveniences such as the
cutting off of the telephone line, late delivery of her mother’s food and refusal to change the
latter’s gown and bedsheets. She also bewailed the hospital’s suspending medical treatment
of her mother. The "debasing treatment," she pointed out, so affected her mother’s mental,
psychological and physical health that the latter contemplated suicide if she would not be
discharged from the hospital. Fearing the worst for her mother, and to comply with the demands
of the hospital, Ty was compelled to sign a promissory note, open an account with Metrobank
and issue the checks to effect her mother’s immediate discharge.11

Criminal Case No. Check No. Postdated Amount Giving full faith and credence to the evidence offered by the prosecution, the trial court found
93-130459 487710 30 March 1993 ₱30,000.00 that Ty issued the checks subject of the case in payment of the hospital bills of her mother and
rejected the theory of the defense.12 Thus, on 21 April 1997, the trial court rendered
93-130460 487711 30 April 1993 ₱30,000.00 a Decision finding Ty guilty of seven (7) counts of violation of B.P. 22 and sentencing her to a
prison term. The dispositive part of the Decision reads:
 CONSEQUENTLY, the accused Vicky C. Ty, for her acts of issuing seven (7) checks
in payment of a valid obligation, which turned unfounded on their respective dates of
maturity, is found guilty of seven (7) counts of violations of Batas Pambansa Blg. 22,
and is hereby sentenced to suffer the penalty of imprisonment of SIX MONTHS per
count or a total of forty-two (42) months.
SO ORDERED.13
Ty interposed an appeal from the Decision of the trial court. Before the Court of Appeals, Ty
reiterated her defense that she issued the checks "under the impulse of an uncontrollable fear
of a greater injury or in avoidance of a greater evil or injury." She also argued that the trial court
erred in finding her guilty when evidence showed there was absence of valuable consideration
for the issuance of the checks and the payee had knowledge of the insufficiency of funds in the
account. She protested that the trial court should not have applied the law mechanically, without
due regard to the principles of justice and equity.14
In its Decision dated 31 July 2001, the appellate court affirmed the judgment of the trial court
with modification. It set aside the penalty of imprisonment and instead sentenced Ty "to pay a
fine of sixty thousand pesos (₱60,000.00) equivalent to double the amount of the check, in
each case."15
In its assailed Decision, the Court of Appeals rejected Ty’s defenses of involuntariness in the
issuance of the checks and the hospital’s knowledge of her checking account’s lack of funds.
It held that B.P. 22 makes the mere act of issuing a worthless check punishable as a special
offense, it being a malum prohibitum. What the law punishes is the issuance of a bouncing
check and not the purpose for which it was issued nor the terms and conditions relating to its
issuance.16
Neither was the Court of Appeals convinced that there was no valuable consideration for the
issuance of the checks as they were issued in payment of the hospital bills of Ty’s mother. 17
In sentencing Ty to pay a fine instead of a prison term, the appellate court applied the case
of Vaca v. Court of Appeals18 wherein this Court declared that in determining the penalty
imposed for violation of B.P. 22, the philosophy underlying the Indeterminate Sentence Law
should be observed, i.e., redeeming valuable human material and preventing unnecessary
deprivation of personal liberty and economic usefulness, with due regard to the protection of
the social order.19
Petitioner now comes to this Court basically alleging the same issues raised before the Court
of Appeals. More specifically, she ascribed errors to the appellate court based on the following
grounds:
A. THERE IS CLEAR AND CONVINCING EVIDENCE THAT PETITIONER WAS
FORCED TO OR COMPELLED IN THE OPENING OF THE ACCOUNT AND THE
ISSUANCE OF THE SUBJECT CHECKS.
B. THE CHECKS WERE ISSUED UNDER THE IMPULSE OF
AN UNCONTROLLABLE FEAR OF A GREATER INJURY OR IN AVOIDANCE OF A
GREATER EVIL OR INJURY.
C. THE EVIDENCE ON RECORD PATENTLY SHOW[S] ABSENCE OF VALUABLE
CONSIDERATION IN THE ISSUANCE OF THE SUBJECT CHECKS.
D. IT IS AN UNDISPUTED FACT THAT THE PAYEE OF THE CHECKS WAS FULLY
AWARE OF THE LACK OF FUNDS IN THE ACCOUNT.
E. THE HONORABLE COURT OF APPEALS, AS WELL AS THE HONORABLE TRIAL
COURT [,] SHOULD NOT HAVE APPLIED CRIMINAL LAW MECHANICALLY,
WITHOUT DUE REGARD TO THE PRINCIPLES OF JUSTICE AND EQUITY.
In its Memorandum,20 the Office of the Solicitor General (OSG), citing jurisprudence, contends
that a check issued as an evidence of debt, though not intended to be presented for payment,
has the same effect as an ordinary check; hence, it falls within the ambit of B.P. 22. And when
a check is presented for payment, the drawee bank will generally accept the same, regardless
of whether it was issued in payment of an obligation or merely to guarantee said obligation.
What the law punishes is the issuance of a bouncing check, not the purpose for which it was
issued nor the terms and conditions relating to its issuance. The mere act of issuing a worthless
check is malum prohibitum.21
We find the petition to be without merit and accordingly sustain Ty’s conviction.
Well-settled is the rule that the factual findings and conclusions of the trial court and the Court
of Appeals are entitled to great weight and respect, and will not be disturbed on appeal in the
absence of any clear showing that the trial court overlooked certain facts or circumstances
which would substantially affect the disposition of the case.22 Jurisdiction of this Court over
cases elevated from the Court of Appeals is limited to reviewing or revising errors of law
ascribed to the Court of Appeals whose factual findings are conclusive, and carry even more
weight when said court affirms the findings of the trial court, absent any showing that the
findings are totally devoid of support in the record or that they are so glaringly erroneous as to
constitute serious abuse of discretion.23
In the instant case, the Court discerns no compelling reason to reverse the factual findings
arrived at by the trial court and affirmed by the Court of Appeals.
Ty does not deny having issued the seven (7) checks subject of this case. She, however, claims
that the issuance of the checks was under the impulse of an uncontrollable fear of a greater
injury or in avoidance of a greater evil or injury. She would also have the Court believe that
there was no valuable consideration in the issuance of the checks.
However, except for the defense’s claim of uncontrollable fear of a greater injury or avoidance
of a greater evil or injury, all the grounds raised involve factual issues which are best
determined by the trial court. And, as previously intimated, the trial court had in fact discarded
the theory of the defense and rendered judgment accordingly.
Moreover, these arguments are a mere rehash of arguments unsuccessfully raised before the
trial court and the Court of Appeals. They likewise put to issue factual questions already passed
upon twice below, rather than questions of law appropriate for review under a Rule 45 petition.
The only question of law raised--whether the defense of uncontrollable fear is tenable to
warrant her exemption from criminal liability--has to be resolved in the negative. For this
exempting circumstance to be invoked successfully, the following requisites must concur: (1)
existence of an uncontrollable fear; (2) the fear must be real and imminent; and (3) the fear of
an injury is greater than or at least equal to that committed.24
It must appear that the threat that caused the uncontrollable fear is of such gravity and
imminence that the ordinary man would have succumbed to it. 25 It should be based on a real,
imminent or reasonable fear for one’s life or limb.26 A mere threat of a future injury is not
enough. It should not be speculative, fanciful, or remote.27 A person invoking uncontrollable
fear must show therefore that the compulsion was such that it reduced him to a mere instrument
acting not only without will but against his will as well.28 It must be of such character as to leave
no opportunity to the accused for escape.29
In this case, far from it, the fear, if any, harbored by Ty was not real and imminent. Ty claims
that she was compelled to issue the checks--a condition the hospital allegedly demanded of
her before her mother could be discharged--for fear that her mother’s health might deteriorate
further due to the inhumane treatment of the hospital or worse, her mother might commit
suicide. This is speculative fear; it is not the uncontrollable fear contemplated by law.
To begin with, there was no showing that the mother’s illness was so life-threatening such that
her continued stay in the hospital suffering all its alleged unethical treatment would induce a
well-grounded apprehension of her death. Secondly, it is not the law’s intent to say that any
fear exempts one from criminal liability much less petitioner’s flimsy fear that her mother might
commit suicide. In other words, the fear she invokes was not impending or insuperable as to
deprive her of all volition and to make her a mere instrument without will, moved exclusively by
the hospital’s threats or demands.
Ty has also failed to convince the Court that she was left with no choice but to commit a crime.
She did not take advantage of the many opportunities available to her to avoid committing one.
By her very own words, she admitted that the collateral or security the hospital required prior
to the discharge of her mother may be in the form of postdated checks or jewelry. 30 And if
indeed she was coerced to open an account with the bank and issue the checks, she had all
the opportunity to leave the scene to avoid involvement.
Moreover, petitioner had sufficient knowledge that the issuance of checks without funds may
result in a violation of B.P. 22. She even testified that her counsel advised her not to open a
current account nor issue postdated checks "because the moment I will not have funds it will
be a big problem."31 Besides, apart from petitioner’s bare assertion, the record is bereft of any
evidence to corroborate and bolster her claim that she was compelled or coerced to cooperate
with and give in to the hospital’s demands.
Ty likewise suggests in the prefatory statement of her Petition and Memorandum that the
justifying circumstance of state of necessity under par. 4, Art. 11 of the Revised Penal Code
may find application in this case.
We do not agree. The law prescribes the presence of three requisites to exempt the actor from
liability under this paragraph: (1) that the evil sought to be avoided actually exists; (2) that the
injury feared be greater than the one done to avoid it; (3) that there be no other practical and
less harmful means of preventing it.32
In the instant case, the evil sought to be avoided is merely expected or anticipated. If the evil
sought to be avoided is merely expected or anticipated or may happen in the future, this
defense is not applicable.33 Ty could have taken advantage of an available option to avoid
committing a crime. By her own admission, she had the choice to give jewelry or other forms
of security instead of postdated checks to secure her obligation.
Moreover, for the defense of state of necessity to be availing, the greater injury feared should
not have been brought about by the negligence or imprudence, more so, the willful inaction of
the actor.34 In this case, the issuance of the bounced checks was brought about by Ty’s own
failure to pay her mother’s hospital bills.
The Court also thinks it rather odd that Ty has chosen the exempting circumstance of
uncontrollable fear and the justifying circumstance of state of necessity to absolve her of
liability. It would not have been half as bizarre had Ty been able to prove that the issuance of
the bounced checks was done without her full volition. Under the circumstances, however, it is
quite clear that neither uncontrollable fear nor avoidance of a greater evil or injury prompted
the issuance of the bounced checks.
Parenthetically, the findings of fact in the Decision of the trial court in the Civil Case35 for
damages filed by Ty’s mother against the hospital is wholly irrelevant for purposes of disposing
the case at bench. While the findings therein may establish a claim for damages which, we
may add, need only be supported by a preponderance of evidence, it does not necessarily
engender reasonable doubt as to free Ty from liability.
As to the issue of consideration, it is presumed, upon issuance of the checks, in the absence
of evidence to the contrary, that the same was issued for valuable consideration. 36 Section
2437 of the Negotiable Instruments Law creates a presumption that every party to an instrument
acquired the same for a consideration38 or for value.39 In alleging otherwise, Ty has the onus
to prove that the checks were issued without consideration. She must present convincing
evidence to overthrow the presumption.
A scrutiny of the records reveals that petitioner failed to discharge her burden of proof.
"Valuable consideration may in general terms, be said to consist either in some right, interest,
profit, or benefit accruing to the party who makes the contract, or some forbearance, detriment,
loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the
other aide. Simply defined, valuable consideration means an obligation to give, to do, or not to
do in favor of the party who makes the contract, such as the maker or indorser."40
In this case, Ty’s mother and sister availed of the services and the facilities of the hospital. For
the care given to her kin, Ty had a legitimate obligation to pay the hospital by virtue of her
relationship with them and by force of her signature on her mother’s Contract of Admission
acknowledging responsibility for payment, and on the promissory note she executed in favor of
the hospital.
Anent Ty’s claim that the obligation to pay the hospital bills was not her personal obligation
because she was not the patient, and therefore there was no consideration for the checks, the
case of Bridges v. Vann, et al.41 tells us that "it is no defense to an action on a promissory note
for the maker to say that there was no consideration which was beneficial to him personally; it
is sufficient if the consideration was a benefit conferred upon a third person, or a detriment
suffered by the promisee, at the instance of the promissor. It is enough if the obligee foregoes
some right or privilege or suffers some detriment and the release and extinguishment of the
original obligation of George Vann, Sr., for that of appellants meets the requirement. Appellee
accepted one debtor in place of another and gave up a valid, subsisting obligation for the note
executed by the appellants. This, of itself, is sufficient consideration for the new notes."
At any rate, the law punishes the mere act of issuing a bouncing check, not the purpose for
which it was issued nor the terms and conditions relating to its issuance. 42 B.P. 22 does not
make any distinction as to whether the checks within its contemplation are issued in payment
of an obligation or to merely guarantee the obligation. 43 The thrust of the law is to prohibit the
making of worthless checks and putting them into circulation. 44 As this Court held in Lim v.
People of the Philippines,45 "what is primordial is that such issued checks were worthless and
the fact of its worthlessness is known to the appellant at the time of their issuance, a required
element under B.P. Blg. 22."
The law itself creates a prima facie presumption of knowledge of insufficiency of funds. Section
2 of B.P. 22 provides:
Section 2. Evidence of knowledge of insufficient funds. - The making, drawing and
issuance of a check payment of which is refused by the drawee bank because of
insufficient funds in or credit with such bank, when presented within ninety (90) days
from the date of the check, shall be prima facie evidence of knowledge of such
insufficiency of funds or credit unless such maker or drawer pays the holder thereof
the amount due thereon, or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice that such check has not
been paid by the drawee.
Such knowledge is legally presumed from the dishonor of the checks for insufficiency of
funds.46 If not rebutted, it suffices to sustain a conviction.47
Petitioner likewise opines that the payee was aware of the fact that she did not have sufficient
funds with the drawee bank and such knowledge necessarily exonerates her liability.
The knowledge of the payee of the insufficiency or lack of funds of the drawer with the drawee
bank is immaterial as deceit is not an essential element of an offense penalized by B.P. 22.
The gravamen of the offense is the issuance of a bad check, hence, malice and intent in the
issuance thereof is inconsequential.48
In addition, Ty invokes our ruling in Magno v. Court of Appeals49 wherein this Court inquired
into the true nature of transaction between the drawer and the payee and finally acquitted the
accused, to persuade the Court that the circumstances surrounding her case deserve special
attention and do not warrant a strict and mechanical application of the law.
Petitioner’s reliance on the case is misplaced. The material operative facts therein obtaining
are different from those established in the instant petition. In the 1992 case, the bounced
checks were issued to cover a "warranty deposit" in a lease contract, where the lessor-supplier
was also the financier of the deposit. It was a modus operandi whereby the supplier was able
to sell or lease the goods while privately financing those in desperate need so they may be
accommodated. The maker of the check thus became an unwilling victim of a lease agreement
under the guise of a lease-purchase agreement. The maker did not benefit at all from the
deposit, since the checks were used as collateral for an accommodation and not to cover the
receipt of an actual account or credit for value.
In the case at bar, the checks were issued to cover the receipt of an actual "account or for
value." Substantial evidence, as found by the trial court and Court of Appeals, has established
that the checks were issued in payment of the hospital bills of Ty’s mother.
Finally, we agree with the Court of Appeals in deleting the penalty of imprisonment, absent any
proof that petitioner was not a first-time offender nor that she acted in bad faith. Administrative
Circular 12-2000,50 adopting the rulings in Vaca v. Court of Appeals51 and Lim v.
People,52 authorizes the non-imposition of the penalty of imprisonment in B.P. 22 cases subject
to certain conditions. However, the Court resolves to modify the penalty in view of
Administrative Circular 13-200153 which clarified Administrative 12-2000. It is stated therein:
The clear tenor and intention of Administrative Circular No. 12-2000 is not to remove
imprisonment as an alternative penalty, but to lay down a rule of preference in the
application of the penalties provided for in B.P. Blg. 22.
Thus, Administrative Circular 12-2000 establishes a rule of preference in the
application of the penal provisions of B.P. Blg. 22 such that where the circumstances
of both the offense and the offender clearly indicate good faith or a clear mistake of
fact without taint of negligence, the imposition of a fine alone should be considered as
 the more appropriate penalty. Needless to say, the determination of whether
circumstances warrant the imposition of a fine alone rests solely upon the Judge.
Should the judge decide that imprisonment is the more appropriate penalty,
Administrative Circular No. 12-2000 ought not be deemed a hindrance.

It is therefore understood that: (1) Administrative Circular 12-2000 does not remove
imprisonment as an alternative penalty for violations of B.P. 22; (2) the judges
concerned may, in the exercise of sound discretion, and taking into consideration the
peculiar circumstances of each case, determine whether the imposition of a fine alone
would best serve the interests of justice, or whether forbearing to impose imprisonment
would depreciate the seriousness of the offense, work violence on the social order, or
otherwise be contrary to the imperatives of justice; (3) should only a fine be imposed
and the accused unable to pay the fine, there is no legal obstacle to the application of
the Revised Penal Code provisions on subsidiary imprisonment.54

WHEREFORE, the instant Petition is DENIED and the assailed Decision of the Court of
Appeals, dated 31 July 2001, finding petitioner Vicky C. Ty GUILTY of violating Batas
Pambansa Bilang 22 is AFFIRMED with MODIFICATIONS. Petitioner Vicky C. Ty
is ORDERED to pay a FINE equivalent to double the amount of each dishonored check subject
of the seven cases at bar with subsidiary imprisonment in case of insolvency in accordance
with Article 39 of the Revised Penal Code. She is also ordered to pay private complainant,
Manila Doctors’ Hospital, the amount of Two Hundred Ten Thousand Pesos (₱210,000.00)
representing the total amount of the dishonored checks. Costs against the petitioner.

SO ORDERED.
G.R. No. 97753 August 10, 1992 Total 280 P1,120,000
===== ========
CALTEX (PHILIPPINES), INC., petitioner,
vs. 2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. plaintiff in connection with his purchased of fuel products from the latter
(Original Record, p. 208).
Bito, Lozada, Ortega & Castillo for petitioners.
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco,
Nepomuceno, Hofileña & Guingona for private. the Sucat Branch Manger, that he lost all the certificates of time deposit in
dispute. Mr. Tiangco advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
REGALADO, J.:
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
This petition for review on certiorari impugns and seeks the reversal of the decision said affidavit of loss, 280 replacement CTDs were issued in favor of said
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with depositor (Defendant's Exhibits 282-561).
modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which
dismissed the complaint filed therein by herein petitioner against respondent bank.
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
The undisputed background of this case, as found by the court a quo and adopted by (P875,000.00). On the same date, said depositor executed a notarized Deed
respondent court, appears of record: of Assignment of Time Deposit (Exhibit 562) which stated, among others, that
he (de la Cruz) surrenders to defendant bank "full control of the indicated time
1. On various dates, defendant, a commercial banking institution, through its deposits from and after date" of the assignment and further authorizes said
Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one bank to pre-terminate, set-off and "apply the said time deposits to the payment
Angel dela Cruz who deposited with herein defendant the aggregate amount of whatever amount or amounts may be due" on the loan upon its maturity
of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement (TSN, February 9, 1987, pp. 60-62).
of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex
CTD CTD (Phils.) Inc., went to the defendant bank's Sucat branch and presented for
Dates Serial Nos. Quantity Amount 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
22 Feb. 82 90101 to 90120 20 P80,000 Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000 7. On November 26, 1982, defendant received a letter (Defendant's Exhibit
4 Mar. 82 90127 to 90146 20 80,000 563) from herein plaintiff formally informing it of its possession of the CTDs in
5 Mar. 82 74797 to 94800 4 16,000 question and of its decision to pre-terminate the same.
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish
8 Mar. 82 90001 to 90020 20 80,000 the former "a copy of the document evidencing the guarantee agreement with
9 Mar. 82 90023 to 90050 28 112,000 Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation
9 Mar. 82 89991 to 90000 10 40,000 against which plaintiff proposed to apply the time deposits (Defendant's Exhibit
9 Mar. 82 90251 to 90272 22 88,000 564).
——— ————
9. No copy of the requested documents was furnished herein defendant.
 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured
and fell due and on August 5, 1983, the latter set-off and applied the time
deposits in question to the payment of the matured loan (TSN, February 9,
1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be 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 damages as well as
attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant
complaint. 3
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 deposit are non-negotiable despite being clearly negotiable instruments;
(2) that petitioner did not become a holder in due course of the said certificates of deposit; and
(3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments
payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank
the sum of PESOS: FOUR THOUSAND ONLY, SECURITY
BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with
interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing
as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the
CTDs issued, it is important to note that after the word "BEARER" stamped on
the space provided supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further provides that the
amount deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves manifest with
clarity that they are 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 amount
indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question
are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court
that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
 xxx xxx xxx the meaning of the words they have used. What the parties meant must be determined by what
they said. 11
Atty. Calida:
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
q In other words Mr. Witness, you are saying that per books provide that the amounts deposited shall be repayable to the depositor. And who, according to
of the bank, the depositor referred (sic) in these certificates the document, is the depositor? It is the "bearer." The documents do not say that the depositor
states that it was Angel dela Cruz? is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather,
the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever
may be the bearer at the time of presentment.
witness:

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it
a Yes, your Honor, and we have the record to show that
Angel dela Cruz was the one who cause (sic) the amount. could have 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 wordings of the documents, therefore, the amounts deposited
Atty. Calida: are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but
q And no other person or entity or company, Mr. Witness? 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
witness: any party dealing with the CTDs to go behind the plain import of what is written thereon to
unravel the agreement of the parties thereto through facts aliunde. This need for resort to
a None, your Honor. 7 extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls
for the application of the elementary rule that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity. 12
xxx xxx xxx
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer
Atty. Calida:
is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
q Mr. Witness, who is the depositor identified in all of these petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner,
certificates of time deposit insofar as the bank is concerned? although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and
witness: indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to
a Angel dela Cruz is the depositor. 8 whether the CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own authorized and responsible
xxx xxx xxx representative himself.

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9 In the construction
of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While
the writing may be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other words are to be added to it
or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their words express, but what is
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon 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 against the person relying thereon. 14 A party may not
go back on his own acts and representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted
to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill
of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to 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. 18 Had it produced the receipt prayed for, it could
have proved, if such truly was the fact, that the CTDs were delivered as payment and not as
security. Having opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language
was used or what the form of the transfer was. If it was
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
by itself, appears to have been absolute, its object and
character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit
of the 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 pledge if the debt continues in inexistence and
is not discharged by the transfer, and that accordingly the use
of the terms ordinarily importing conveyance of absolute
ownership will 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 absence of clear and unambiguous
language or other circumstances excluding an intent to
pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of
the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. 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 holder for value by reason
of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of
the instrument since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be contractually provided
for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 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 Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may
also be pledged. The instrument proving the right pledged shall be delivered
to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description
of the thing pledged and the date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de
la Cruz. 25 Consequently, 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 mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other mode of
transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether
as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or
the extent of 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 right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or
not private respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, on the ground that petitioner
failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in
this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the
CTDs against the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant,
if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs
before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities,
the 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 barred by estoppel. 30 Questions 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
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 conference all issues of law and fact which they intend to raise at the trial,
except such as may involve privileged or impeaching matters. The determination of issues at
a pre-trial conference bars the consideration of other questions on appeal. 32
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 tantamount to saying that petitioner could raise on appeal any issue. We
agree with private respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless
exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still 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 that said provisions, even assuming their applicability to the CTDs
in the case at bar, are merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.
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 to become due, be not paid a third
person, as well as in order to prevent the ownership of the instrument that a
duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on
the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for
the issuance of a 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. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence,
merely established, on 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. 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 establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.
G.R. No. 146511 September 5, 2007 Less: Charges paid P500.00 None
Amount Due P334,686.21 P204,952.75
TOMAS ANG, petitioner,
vs. In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan amounting
ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, respondents. to P80,000. He pleaded though that the bank "be ordered to submit a more reasonable
computation" considering that there had been "no correct and reasonable statement of
DECISION account" sent to him by the bank, which was allegedly collecting excessive interest, penalty
charges, and attorney's fees despite knowledge that his business was destroyed by fire, hence,
AZCUNA, J.: he had no source of income for several years.

This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to review the For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim.8 He
October 9, 2000 Decision1 and December 26, 2000 Resolution2 of the Court of Appeals in CA- interposed the affirmative defenses that: the bank is not the real party in interest as it is not the
G.R. CV No. 53413 which reversed and set aside the January 5, 1996 Decision 3 of the Regional holder of the promissory notes, much less a holder for value or a holder in due course; the bank
Trial Court, Branch 16, Davao City, in Civil Case No. 20,299-90, dismissing the complaint filed knew that he did not receive any valuable consideration for affixing his signatures on the notes
by respondents for collection of a sum of money. but merely lent his name as an accommodation party; he accepted the promissory notes in
blank, with only the printed provisions and the signature of Antonio Ang Eng Liong appearing
On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation therein; it was the bank which completed the notes upon the orders, instructions, or
and now known as United Overseas Bank Philippines) filed a collection suit against Antonio representations of his co-defendant; PN-No. DVO-78-382 was completed in excess of or
Ang Eng Liong and petitioner Tomas Ang for the two (2) promissory notes that they executed contrary to the authority given by him to his co-defendant who represented that he would only
as principal debtor and co-maker, respectively. borrow P30,000 from the bank; his signature in PN-No. DVO-78-390 was procured through
fraudulent means when his co-defendant claimed that his first loan did not push through; the
promissory notes did not indicate in what capacity he was intended to be bound; the bank
In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the defendants
granted his co-defendant successive extensions of time within which to pay, without his (Tomas
obtained a loan of P50,000, evidenced by a promissory note bearing PN-No. DVO-78-382,
Ang) knowledge and consent; the bank imposed new and additional stipulations on interest,
and P30,000, evidenced by a promissory note bearing PN-No. DVO-78-390. As agreed, the
penalties, services charges and attorney's fees more onerous than the terms of the notes,
loan would be payable, jointly and severally, on January 31, 1979 and December 8, 1978,
without his knowledge and consent, in the absence of legal and factual basis and in violation
respectively. In addition, subsequent amendments5 to the promissory notes as well as the
of the Usury Law; the bank caused the inclusion in the promissory notes of stipulations such
disclosure statements6 stipulated that the loan would earn 14% interest rate per annum, 2%
as waiver of presentment for payment and notice of dishonor which are against public policy;
service charge per annum, 1% penalty charge per month from due date until fully paid, and
and the notes had been impaired since they were never presented for payment and demands
attorney's fees equivalent to 20% of the outstanding obligation.
were made only several years after they fell due when his co-defendant could no longer pay
them.
Despite repeated demands for payment, the latest of which were on September 13, 1988 and
September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank
Regarding his counterclaim, Tomas Ang argued that by reason of the bank's acts or omissions,
claimed that the defendants failed and refused to settle their obligation, resulting in a total
it should be held liable for the amount of P50,000 for attorney's fees and expenses of litigation.
indebtedness of P539,638.96 as of July 31, 1990, broken down as follows:
Furthermore, on his cross-claim against Antonio Ang Eng Liong, he averred that he should be
reimbursed by his co-defendant any and all sums that he may be adjudged liable to pay,
PN-No. DVO-78-382 PN-No. DVO-78-390 plus P30,000, P20,000 and P50,000 for moral and exemplary damages, and attorney's fees,
Outstanding Balance P50,000.00 P30,000.00 respectively.
Add Past due charges for 4,199 days Past due charges for 4,253 days
(from 01-31-79 to 07-31-90) (from 12-8-78 to 07-31-90) In its Reply,9 respondent Bank countered that it is the real party in interest and is the holder of
14% Interest P203,538.98 P125,334.41 the notes since the Associated Banking Corporation and Associated Citizens Bank are its
2% Service Charge P11,663.89 P7,088.34 predecessors-in-interest. The fact that Tomas Ang never received any moneys in consideration
of the two (2) loans and that such was known to the bank are immaterial because, as an
12% Overdue Charge P69,983.34 P42,530.00
accommodation maker, he is considered as a solidary debtor who is primarily liable for the
Total P285,186.21 P174,952.75 payment of the promissory notes. Citing Section 29 of the Negotiable Instruments Law (NIL),
the bank posited that absence or failure of consideration is not a matter of defense; neither is WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in
the fact that the holder knew him to be only an accommodation party. favor of plaintiff, ordering the former to pay the latter:

Respondent Bank likewise retorted that the promissory notes were completely filled up at the On the first cause of action:
time of their delivery. Assuming that such was not the case, Sec. 14 of the NIL provides that
the bank has the prima facie authority to complete the blank form. Moreover, it is presumed 1) the amount of P50,000.00 representing the principal obligation with 14%
that one who has signed as a maker acted with care and had signed the document with full interest per annum from June 27, 1983 with 2% service charge and 6%
knowledge of its content. The bank noted that Tomas Ang is a prominent businessman in overdue penalty charges per annum until fully paid;
Davao City who has been engaged in the auto parts business for several years, hence, certainly
he is not so naïve as to sign the notes without knowing or bothering to verify the amounts of
2) P11,663.89 as accrued service charge; and
the loans covered by them. Further, he is already in estoppel since despite receipt of several
demand letters there was not a single protest raised by him that he signed for only one note in
the amount of P30,000. 3) P34,991.67 as accrued overdue penalty charge.

It was denied by the bank that there were extensions of time for payment accorded to Antonio On the second cause of action:
Ang Eng Liong. Granting that such were the case, it said that the same would not relieve Tomas
Ang from liability as he would still be liable for the whole obligation less the share of his co- 1) the amount of P50,000.00 (sic) representing the principal account with 14%
debtor who received the extended term. interest from June 27, 1983 with 2% service charge and 6% overdue penalty
charges per annum until fully paid;
The bank also asserted that there were no additional or new stipulations imposed other than
those agreed upon. The penalty charge, service charge, and attorney's fees were reflected in 2) P7,088.34 representing accrued service charge;
the amendments to the promissory notes and disclosure statements. Reference to the Usury
Law was misplaced as usury is legally non-existent; at present, interest can be charged 3) P21,265.00 as accrued overdue penalty charge;
depending on the agreement of the lender and the borrower.
4) the amount of P10,000.00 as attorney's fees; and
Lastly, the bank contended that the provisions on presentment for payment and notice of
dishonor were expressly waived by Tomas Ang and that such waiver is not against public policy 5) the amount of P620.00 as litigation expenses and to pay the costs.
pursuant to Sections 82 (c) and 109 of the NIL. In fact, there is even no necessity therefor since
being a solidary debtor he is absolutely required to pay and primarily liable on both promissory
SO ORDERED.16
notes.

The decision became final and executory as no appeal was taken therefrom. Upon the
On October 19, 1990, the trial court issued a preliminary pre-trial order directing the parties to
bank's ex-parte motion, the court accordingly issued a writ of execution on April 5, 1991.17
submit their respective pre-trial guide.10 When Antonio Ang Eng Liong failed to submit his brief,
the bank filed an ex-parte motion to declare him in default.11 Per Order of November 23, 1990,
the court granted the motion and set the ex-parte hearing for the presentation of the bank's Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas
evidence.12 Despite Tomas Ang's motion13 to modify the Order so as to exclude or cancel Ang,18 who, in turn, filed a Motion to Dismiss19 on the ground of lack of jurisdiction over the
the ex-parte hearing based on then Sec. 4, Rule 18 of the old Rules of Court (now Sec. 3[c.], case in view of the alleged finality of the February 21, 1991 Decision. He contended that Sec.
Rule 9 of the Revised Rules on Civil Procedure), the hearing nonetheless proceeded.14 4, Rule 18 of the old Rules sanctions only one judgment in case of several defendants, one of
whom is declared in default. Moreover, in his Supplemental Motion to Dismiss,20 Tomas Ang
maintained that he is released from his obligation as a solidary guarantor and accommodation
Eventually, a decision15 was rendered by the trial court on February 21, 1991. For his supposed
party because, by the bank's actions, he is now precluded from asserting his cross-claim
bad faith and obstinate refusal despite several demands from the bank, Antonio Ang Eng Liong
against Antonio Ang Eng Liong, upon whom a final and executory judgment had already been
was ordered to pay the principal amount of P80,000 plus 14% interest per annum and 2%
issued.
service charge per annum. The overdue penalty charge and attorney's fees were, however,
reduced for being excessive, thus:
The court denied the motion as well as the motion for reconsideration thereon. 21 Tomas Ang
subsequently filed a petition for certiorari and prohibition before this Court, which, however,
resolved to refer the same to the Court of Appeals.22 In accordance with the prayer of Tomas
Ang, the appellate court promulgated its Decision on January 29, 1992 in CA G.R. SP No.
26332, which annulled and set aside the portion of the Order dated November 23, 1990 setting
the ex-parte presentation of the bank's evidence against Antonio Ang Eng Liong, the Decision
dated February 21, 1991 rendered against him based on such evidence, and the Writ of
Execution issued on April 5, 1991.23
Trial then ensued between the bank and Tomas Ang. Upon the latter's motion during the pre-
trial conference, Antonio Ang Eng Liong was again declared in default for his failure to answer
the cross-claim within the reglementary period.24
When Tomas Ang was about to present evidence in his behalf, he filed a Motion for Production
of Documents,25 reasoning:
xxx
2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a]
need for him to examine original records in the custody and possession of plaintiff, viz:
a. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3,
1978[;]
b. original of Disclosure Statement in reference to PN # DVO-78-382;
c. original of PN # DVO-78-390 dated October 9, 1978;
d. original of Disclosure Statement in reference to PN # DVO-78-390;
e. Statement or Record of Account with the Associated Banking Corporation
or its successor, of Antonio Ang in CA No. 470 (cf. Exh. O) including bank
records, withdrawal slips, notices, other papers and relevant dates relative to
the overdraft of Antonio Eng Liong in CA No. 470;
f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos.
DVO-78-382 and DVO-78-390 (supra);
g. Other supporting papers and documents submitted by Antonio Ang Eng
Liong relative to his loan application vis-à-vis PN. Nos. DVO-78-382 and DVO-
78-390 such as financial statements, income tax returns, etc. as required by
the Central Bank or bank rules and regulations.
3. That the above matters are very material to the defenses of defendant Tomas Ang,
viz:
- the bank is not a holder in due course when it accepted the [PNs] in blank.
- The real borrower is Antonio Ang Eng Liong which fact is known to the bank.
- That the PAYEE not being a holder in due course and knowing that defendant
Tomas Ang is merely an accommodation party, the latter may raise against
such payee or holder or successor-in-interest (of the notes) PERSONAL and
EQUITABLE DEFENSES such as FRAUD in INDUCEMENT, DISCHARGE
ON NOTE, Application of [Articles] 2079, 2080 and 1249 of the Civil Code,
NEGLIGENCE in delaying collection despite Eng Liong's OVERDRAFT in C.A.
No. 470, etc.26
In its Order dated May 16, 1994,27 the court denied the motion stating that the promissory notes
and the disclosure statements have already been shown to and inspected by Tomas Ang during
the trial, as in fact he has already copies of the same; the Statements or Records of Account
of Antonio Ang Eng Liong in CA No. 470, relative to his overdraft, are immaterial since, pursuant
to the previous ruling of the court, he is being sued for the notes and not for the overdraft which
is personal to Antonio Ang Eng Liong; and besides its non-existence in the bank's records,
there would be legal obstacle for the production and inspection of the income tax return of
Antonio Ang Eng Liong if done without his consent.
When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang filed a
petition for certiorari and prohibition with application for preliminary injunction and restraining
order before the Court of Appeals docketed as CA G.R. SP No. 34840.28 On August 17, 1994,
however, the Court of Appeals denied the issuance of a Temporary Restraining Order.29
Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have waived his
right to present evidence for failure to appear during the pendency of his petition before the
Court of Appeals, the trial court decided to continue with the hearing of the case. 30
After the trial, Tomas Ang offered in evidence several documents, which included a copy of the
Trust Agreement between the Republic of the Philippines and the Asset Privatization Trust, as
certified by the notary public, and news clippings from the Manila Bulletin dated May 18, 1994
and May 30, 1994.31 All the documentary exhibits were admitted for failure of the bank to submit
its comment to the formal offer.32 Thereafter, Tomas Ang elected to withdraw his petition in CA
G.R. SP No. 34840 before the Court of Appeals, which was then granted.33
On January 5, 1996, the trial court rendered judgment against the bank, dismissing the
complaint for lack of cause of action.34 It held that:
Exh. "9" and its [sub-markings], the Trust Agreement dated 27 February 1987 for the
defense shows that: the Associated Bank as of June 30, 1986 is one of DBP's or
 Development Bank of the [Philippines'] non-performing accounts for transfer; on
February 27, 1987 through Deeds of Transfer executed by and between the Philippine
National Bank and Development Bank of the Philippines and the National Government,
both financial institutions assigned, transferred and conveyed their non-performing
assets to the National Government; the National Government in turn and as
TRUSTOR, transferred, conveyed and assigned by way of trust unto the Asset
Privatization Trust said non-performing assets, [which] took title to and possession of,
[to] conserve, provisionally manage and dispose[,] of said assets identified for
privatization or disposition; one of the powers and duties of the APT with respect to
trust properties consisting of receivables is to handle the administration, collection and
enforcement of the receivables; to bring suit to enforce payment of the obligations or
any installment thereof or to settle or compromise any of such obligations, or any other
claim or demand which the government may have against any person or persons[.]
The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. "9-A",
"9-B", "9-C", and "9-D", show that the Monetary Board of the Bangko Sentral ng
Pilipinas approved the rehabilitation plan of the Associated Bank. One main feature of
the rehabilitation plan included the financial assistance for the bank by the Philippine
Deposit Insurance Corporation (PDIC) by way of the purchase of AB Assets
worth P1.3945 billion subject to a buy-back arrangement over a 10 year period. The
PDIC had approved of the rehab scheme, which included the purchase of AB's bad
loans worth P1.86 at 25% discount. This will then be paid by AB within a 10-year period
plus a yield comparable to the prevailing market rates x x x.
Based then on the evidence presented by the defendant Tomas Ang, it would readily
appear that at the time this suit for Sum of Money was filed which was on August [28],
1990, the notes were held by the Asset Privatization Trust by virtue of the Deeds of
Transfer and Trust Agreement, which was empowered to bring suit to enforce payment
of the obligations. Consequently, defendant Tomas Ang has sufficiently established
that plaintiff at the time this suit was filed was not the holder of the notes to warrant the
dismissal of the complaint.35
Respondent Bank then elevated the case to the Court of Appeals. In the appellant's brief
captioned, "ASSOCIATED BANK, Plaintiff-Appellant versus ANTONIO ANG ENG LIONG and
TOMAS ANG, Defendants, TOMAS ANG, Defendant-Appellee," the following errors were
alleged:
I.
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG
LIONG AND DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-
APPELLANT ON THEIR UNPAID LOANS DESPITE THE LATTER'S
DOCUMENTARY EXHIBITS PROVING THE SAID OBLIGATIONS.
II.
THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANT'S
COMPLAINT ON THE BASIS OF NEWSPAPER CLIPPINGS WHICH WERE
COMPLETELY HEARSAY IN CHARACTER AND IMPROPER FOR JUDICIAL
NOTICE.36
The bank stressed that it has established the causes of action outlined in its Complaint by a
preponderance of evidence. As regards the Deed of Transfer and Trust Agreement, it
contended that the same were never authenticated by any witness in the course of the trial; the
Agreement, which was not even legible, did not mention the promissory notes subject of the
Complaint; the bank is not a party to the Agreement, which showed that it was between the
Government of the Philippines, acting through the Committee on Privatization represented by
the Secretary of Finance as trustor and the Asset Privatization Trust, which was created by
virtue of Proclamation No. 50; and the Agreement did not reflect the signatures of the
contracting parties. Lastly, the bank averred that the news items appearing in the Manila
Bulletin could not be the subject of judicial notice since they were completely hearsay in
character.37
On October 9, 2000, the Court of Appeals reversed and set aside the trial court's ruling. The
dispositive portion of the Decision38 reads:
WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao
City, Branch 16, in Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE
and another one entered ordering defendant-appellee Tomas Ang to pay plaintiff-
appellant Associated Bank the following:
1. P50,000.00 representing the principal amount of the loan under PN-No. DVO-78-
382 plus 14% interest thereon per annum computed from January 31, 1979 until the
full amount thereof is paid;
2. P30,000.00 representing the principal amount of the loan under PN-No. DVO-78-
390 plus 14% interest thereon per annum computed from December 8, 1978 until the
full amount thereof is paid;
All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis.
Defendant-appellee's counterclaim is likewise DISMISSED for lack of legal and factual
bases.
No pronouncement as to costs.
SO ORDERED.39
The appellate court disregarded the bank's first assigned error for being "irrelevant in the final
determination of the case" and found its second assigned error as "not meritorious." Instead, it
posed for resolution the issue of whether the trial court erred in dismissing the complaint for
collection of sum of money for lack of cause of action as the bank was said to be not the "holder"
of the notes at the time the collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is a "holder" under Sec.
191 of the NIL. It concluded that despite the execution of the Deeds of Transfer and Trust
Agreement, the Asset Privatization Trust cannot be declared as the "holder" of the subject
promissory notes for the reason that it is neither the payee or indorsee of the notes in
possession thereof nor is it the bearer of said notes. The Court of Appeals observed that the
bank, as the payee, did not indorse the notes to the Asset Privatization Trust despite the
execution of the Deeds of Transfer and Trust Agreement and that the notes continued to remain
with the bank until the institution of the collection suit.
With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas
Ang is accountable therefor in his capacity as an accommodation party. Citing Sec. 29 of the
NIL, he is liable to the bank in spite of the latter's knowledge, at the time of taking the notes,
that he is only an accommodation party. Moreover, as a co-maker who agreed to be jointly and
severally liable on the promissory notes, Tomas Ang cannot validly set up the defense that he
did not receive any consideration therefor as the fact that the loan was granted to the principal
debtor already constitutes a sufficient consideration.
Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in
business rendered it implausible that he would just sign the promissory notes as a co-maker
without even checking the real amount of the debt to be incurred, or that he merely acted on
the belief that the first loan application was cancelled. According to the appellate court, it is
apparent that he was negligent in falling for the alibi of Antonio Ang Eng Liong and such fact
would not serve to exonerate him from his responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and
overdue charges as well as attorney's fees on the ground that the promissory notes made no
mention of such charges/fees.
Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals denied
the motion in its Resolution dated December 26, 2000. 42
In his motion for reconsideration,40 Tomas Ang raised for the first time the assigned errors as
follows:
Petitioner now submits the following issues for resolution:
xxx
2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has
recently discovered that upon the filing of the complaint on August 28, 1990, under the
jurisdictional rule laid down in BP Blg. 129, appellant bank fraudulently failed to specify
the amount of compounded interest at 14% per annum, service charges at 2% per
annum and overdue penalty charges at 12% per annum in the prayer of the complaint
as of the time of its filing, paying a total of only P640.00(!!!) as filing and court docket
fees although the total sum involved as of that time was P647,566.75 including 20%
attorney's fees. In fact, the stated interest in the body of the complaint alone amount
to P328,373.39 (which is actually compounded and capitalized) in both causes of
action and the total service and overdue penalties and charges and attorney's fees
further amount to P239,193.36 in both causes of action, as of July 31, 1990, the time
of filing of the complaint. Significantly, appellant fraudulently misled the Court,
describing the 14% imposition as interest, when in fact the same was capitalized as
principal by appellant bank every month to earn more interest, as stated in the notes.
In view thereof, the trial court never acquired jurisdiction over the case and the same
may not be now corrected by the filing of deficiency fees because the causes of action
had already prescribed and more importantly, the jurisdiction of the Municipal Trial
Court had been increased to P100,000.00 in principal claims last March 20, 1999,
pursuant to SC Circular No. 21-99, section 5 of RA No. 7691, and section 31, Book I
of the 1987 Administrative Code. In other words, as of today, jurisdiction over the
subject falls within the exclusive jurisdiction of the MTC, particularly if the bank
foregoes capitalization of the stipulated interest.
3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO
APPELLEE ANG ENG LIONG, THE APPEALED JUDGMENT OF THE TRIAL COURT
WHICH LEFT OUT TOMAS ANG'S CROSS-CLAIM AGAINST ENG LIONG
(BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG BECOME FINAL AND
EXECUTORY, AS AGAINST ENG LIONG. Accordingly, Tomas Ang's right of
subrogation against Ang Eng Liong, expressed in his cross-claim, is now SEVERAL
TIMES foreclosed because of the fault or negligence of appellant bank since 1979 up
to its insistence of an ex-parte trial, and now when it failed to serve notice of appeal
and appellant's brief upon him. Accordingly, appellee Tomas Ang should be released
from his suretyship obligation pursuant to Art. 2080 of the Civil Code. The above is
related to the issues above-stated.
4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the
benefit of appellant bank which defrauded the judiciary by the payment of deficient
docket fees.41
1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas Ang as
accommodation maker or surety because of the failure of [private] respondent bank to
serve its notice of appeal upon the principal debtor, respondent Eng Liong?
2. Did the trial court have jurisdiction over the case at all?
3. Did the Court of Appeals [commit] error in assigning its own error and raising its own
issue?
 4. Are petitioner's other real and personal defenses such as successive extensions
coupled with fraudulent collusion to hide Eng Liong's default, the payee's grant of
additional burdens, coupled with the insolvency of the principal debtor, and the defense
of incomplete but delivered instrument, meritorious?43
Petitioner allegedly learned after the promulgation of the Court of Appeals' decision that,
pursuant to the parties' agreement on the compounding of interest with the principal amount
(per month in case of default), the interest on the promissory notes as of July 31, 1990 should
have been only P81,647.22 for PN No. DVO-78-382 (instead of P203,538.98) and P49,618.33
for PN No. DVO-78-390 (instead of P125,334.41) while the principal debt as of said date should
increase to P647,566.75 (instead of P539,638.96). He submits that the bank carefully and
shrewdly hid the fact by describing the amounts as interest instead of being part of either the
principal or penalty in order to pay a lesser amount of docket fees. According to him, the total
fees that should have been paid at the time of the filing of the complaint on August 28, 1990
was P2,216.30 and not P614.00 or a shortage of 71%. Petitioner contends that the bank may
not now pay the deficiency because the last demand letter sent to him was dated September
9, 1986, or more than twenty years have elapsed such that prescription had already set in.
Consequently, the bank's claim must be dismissed as the trial court loses jurisdiction over the
case.
Petitioner also argues that the Court of Appeals should not have assigned its own error and
raised it as an issue of the case, contending that no question should be entertained on appeal
unless it has been advanced in the court below or is within the issues made by the parties in
the pleadings. At any rate, he opines that the appellate court's decision that the bank is the real
party in interest because it is the payee named in the note or the holder thereof is too simplistic
since: (1) the power and control of Asset Privatization Trust over the bank are clear from the
explicit terms of the duly certified trust documents and deeds of transfer and are confirmed by
the newspaper clippings; (2) even under P.D. No. 902-A or the General Banking Act, where a
corporation or a bank is under receivership, conservation or rehabilitation, it is only the
representative (liquidator, receiver, trustee or conservator) who may properly act for said entity,
and, in this case, the bank was held by Asset Privatization Trust as trustee; and (3) it is not
entirely accurate to say that the payee who has not indorsed the notes in all cases is the real
party in interest because the rights of the payee may be subject of an assignment of incorporeal
rights under Articles 1624 and 1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank served its notice of appeal and
appellant's brief only on him, it rendered the judgment of the trial court final and executory with
respect to Antonio Ang Eng Liong, which, in effect, released him (Antonio Ang Eng Liong) from
any and all liability under the promissory notes and, thereby, foreclosed petitioner's cross-
claims. By such act, the bank, even if it be the "holder" of the promissory notes, allegedly
discharged a simple contract for the payment of money (Sections 119 [d] and 122, NIL [Act No.
2031]), prevented a surety like petitioner from being subrogated in the shoes of his principal
(Article 2080, Civil Code), and impaired the notes, producing the effect of payment (Article
1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems proper
under the circumstances obtaining, error/s not assigned on an appealed case. In Mendoza v.
Bautista,44 this Court recognized the broad discretionary power of an appellate court to waive
the lack of proper assignment of errors and to consider errors not assigned, thus:
As a rule, no issue may be raised on appeal unless it has been brought before the
lower tribunal for its consideration. Higher courts are precluded from entertaining
matters neither alleged in the pleadings nor raised during the proceedings below, but
ventilated for the first time only in a motion for reconsideration or on appeal.
However, as with most procedural rules, this maxim is subject to exceptions. Indeed,
our rules recognize the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned. Section 8 of
Rule 51 of the Rules of Court provides:
SEC. 8. Questions that may be decided. — No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from or the
proceedings therein will be considered, unless stated in the assignment of errors, or
closely related to or dependent on an assigned error and properly argued in the brief,
save as the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review rulings even if they
are not assigned as errors in the appeal in these instances: (a) grounds not assigned
as errors but affecting jurisdiction over the subject matter; (b) matters not assigned as
errors on appeal but are evidently plain or clerical errors within contemplation of law;
(c) matters not assigned as errors on appeal but consideration of which is necessary
in arriving at a just decision and complete resolution of the case or to serve the interests
of justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned
as errors on appeal but raised in the trial court and are matters of record having some
bearing on the issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned is dependent. (Citations omitted) 45
To the Court's mind, even if the Court of Appeals regarded petitioner's two assigned errors as
"irrelevant" and "not meritorious," the issue of whether the trial court erred in dismissing the
complaint for collection of sum of money for lack of cause of action (on the ground that the
bank was not the "holder" of the notes at the time of the filing of the action) is in reality closely
related to and determinant of the resolution of whether the lower court correctly ruled in not
holding Antonio Ang Eng Liong and petitioner Tomas Ang liable to the bank on their unpaid
loans despite documentary exhibits allegedly proving their obligations and in dismissing the
complaint based on newspaper clippings. Hence, no error could be ascribed to the Court of
Appeals on this point.
Now, the more relevant question is: who is the real party in interest at the time of the institution
of the complaint, is it the bank or the Asset Privatization Trust?
To answer the query, a brief history on the creation of the Asset Privatization Trust is proper.
Taking into account the imperative need of formally launching a program for the rationalization
of the government corporate sector, then President Corazon C. Aquino issued Proclamation
No. 5046 on December 8, 1986. As one of the twin cornerstones of the program was to establish
the privatization of a good number of government corporations, the proclamation created the
Asset Privatization Trust, which would, for the benefit of the National Government, take title to
and possession of, conserve, provisionally manage and dispose of transferred assets that were
identified for privatization or disposition.47
In accordance with the provisions of Section 23 48 of the proclamation, then President Aquino
subsequently issued Administrative Order No. 14 on February 3, 1987, which approved the
identification of and transfer to the National Government of certain assets (consisting of loans,
equity investments, accrued interest receivables, acquired assets and other assets) and
liabilities (consisting of deposits, borrowings, other liabilities and contingent guarantees) of the
Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The
transfer of assets was implemented through a Deed of Transfer executed on February 27, 1987
between the National Government, on one hand, and the DBP and PNB, on the other. In turn,
the National Government designated the Asset Privatization Trust to act as its trustee through
a Trust Agreement, whereby the non-performing accounts of DBP and PNB, including, among
others, the DBP's equity with respondent Bank, were entrusted to the Asset Privatization
Trust.49 As provided for in the Agreement, among the powers and duties of the Asset
Privatization Trust with respect to the trust properties consisting of receivables was to handle
their administration and collection by bringing suit to enforce payment of the obligations or any
installment thereof or settling or compromising any of such obligations or any other claim or
demand which the Government may have against any person or persons, and to do all acts,
institute all proceedings, and to exercise all other rights, powers, and privileges of ownership
that an absolute owner of the properties would otherwise have the right to do. 50
Incidentally, the existence of the Asset Privatization Trust would have expired five (5) years
from the date of issuance of Proclamation No. 50.51 However, its original term was extended
from December 8, 1991 up to August 31, 1992,52 and again from December 31, 1993 until June
30, 1995,53 and then from July 1, 1995 up to December 31, 1999, 54 and further from January
1, 2000 until December 31, 2000.55 Thenceforth, the Privatization and Management Office was
established and took over, among others, the powers, duties and functions of the Asset
Privatization Trust under the proclamation.56
Based on the above backdrop, respondent Bank does not appear to be the real party in interest
when it instituted the collection suit on August 28, 1990 against Antonio Ang Eng Liong and
petitioner Tomas Ang. At the time the complaint was filed in the trial court, it was the Asset
Privatization Trust which had the authority to enforce its claims against both debtors. In fact,
during the pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted
that it was under the trusteeship of the Asset Privatization Trust. 57 The Asset Privatization
Trust, which should have been represented by the Office of the Government Corporate
Counsel, had the authority to file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioner's
insistence that the case must be dismissed. Significantly, it stands without refute, both in the
pleadings as well as in the evidence presented during the trial and up to the time this case
reached the Court, that the issue had been rendered moot with the occurrence of a supervening
event – the "buy-back" of the bank by its former owner, Leonardo Ty, sometime in October
1993. By such re-acquisition from the Asset Privatization Trust when the case was still pending
in the lower court, the bank reclaimed its real and actual interest over the unpaid promissory
notes; hence, it could rightfully qualify as a "holder"58 thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation party as a person "who has signed
the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person." As gleaned from the text, an
accommodation party is one who meets all the three requisites, viz: (1) he must be a party to
the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of lending his name or credit to some other
person.59 An accommodation party lends his name to enable the accommodated party to obtain
credit or to raise money; he receives no part of the consideration for the instrument but assumes
liability to the other party/ies thereto.60 The accommodation party is liable on the instrument to
a holder for value even though the holder, at the time of taking the instrument, knew him or her
to be merely an accommodation party, as if the contract was not for accommodation. 61
As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety – the accommodation party being the
surety.62 As such, he is deemed an original promisor and debtor from the beginning; 63 he is
considered in law as the same party as the debtor in relation to whatever is adjudged touching
the obligation of the latter since their liabilities are interwoven as to be inseparable. 64 Although
a contract of suretyship is in essence accessory or collateral to a valid principal obligation, the
surety's liability to the creditor is immediate, primary and absolute; he
is directly and equally bound with the principal.65 As an equivalent of a regular party to the
undertaking, a surety becomes liable to the debt and duty of the principal obligor even without
possessing a direct or personal interest in the obligations nor does he receive any benefit
therefrom.66
Contrary to petitioner's adamant stand, however, Article 208067 of the Civil Code does not apply
in a contract of suretyship.68 Art. 2047 of the Civil Code states that if a person binds himself
solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of the
Civil Code must be observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and
solidary obligations) shall govern the relationship of petitioner with the bank.
The case of Inciong, Jr. v. CA69 is illuminating:
Petitioner also argues that the dismissal of the complaint against Naybe, the principal
debtor, and against Pantanosas, his co-maker, constituted a release of his obligation,
especially because the dismissal of the case against Pantanosas was upon the motion
of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil
Code which provides that:
"The guarantors, even though they be solidary, are released from their obligation
whenever by come act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the promissory note as a solidary co-
maker and not as a guarantor. This is patent even from the first sentence of the
promissory note which states as follows:
"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY
(P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid."
A solidary or joint and several obligation is one in which each debtor is liable for the
entire obligation, and each creditor is entitled to demand the whole obligation. On the
other hand, Article 2047 of the Civil Code states:
"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such a case the contract is called
a suretyship." (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
"A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all intents
and purposes. There is a difference between a solidary co-debtor, and a fiador in
solidum (surety). The later, outside of the liability he assumes to pay the debt before
the property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of rights of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, title I, Book IV of the Civil Code."
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and
several obligations. Under Art. 1207 thereof, when there are two or more debtors in
one and the same obligation, the presumption is that obligation is joint so that each of
the debtors is liable only for a proportionate part of the debt. There is a solidarily liability
only when the obligation expressly so states, when the law so provides or when the
nature of the obligation so requires.
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them may be
proceeded against for the entire obligation. The choice is left to the solidary creditor to
determine against whom he will enforce collection. (Citations omitted)70
In the instant case, petitioner agreed to be "jointly and severally" liable under the two
promissory notes that he co-signed with Antonio Ang Eng Liong as the principal debtor. This
being so, it is completely immaterial if the bank would opt to proceed only against petitioner or
Antonio Ang Eng Liong or both of them since the law confers upon the creditor the prerogative
to choose whether to enforce the entire obligation against any one, some or all of the debtors.
Nonetheless, petitioner, as an accommodation party, may seek reimbursement from Antonio
Ang Eng Liong, being the party accommodated.71
It is plainly mistaken for petitioner to say that just because the bank failed to serve the notice
of appeal and appellant's brief to Antonio Ang Eng Liong, the trial court's judgment, in effect,
became final and executory as against the latter and, thereby, bars his (petitioner's) cross-
claims against him: First, although no notice of appeal and appellant's brief were served to
Antonio Ang Eng Liong, he was nonetheless impleaded in the case since his name appeared
in the caption of both the notice and the brief as one of the defendants-appellees;72 Second,
despite including in the caption of the appellee's brief his co-debtor as one of the defendants-
appellees, petitioner did not also serve him a copy thereof; 73 Third, in the caption of the Court
of Appeals' decision, Antonio Ang Eng Liong was expressly named as one of the defendants-
appellees;74 and Fourth, it was only in his motion for reconsideration from the adverse judgment
of the Court of Appeals that petitioner belatedly chose to serve notice to the counsel of his co-
defendant-appellee.75
Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his "special
appearance" through counsel, that the Court of Appeals, much less this Court, already lacked
jurisdiction over his person or over the subject matter relating to him because he was not a
party in CA-G.R. CV No. 53413. Stress must be laid of the fact that he had twice put himself in
default – one, in not filing a pre-trial brief and another, in not filing his answer to petitioner's
cross-claims. As a matter of course, Antonio Ang Eng Liong, being a party declared in default,
already waived his right to take part in the trial proceedings and had to contend with the
judgment rendered by the court based on the evidence presented by the bank and petitioner.
Moreover, even without considering these default judgments, Antonio Ang Eng Liong even
categorically admitted having secured a loan totaling P80,000. In his Answer to the complaint,
he did not deny such liability but merely pleaded that the bank "be ordered to submit a more
reasonable computation" instead of collecting excessive interest, penalty charges, and
attorney's fees. For failing to tender an issue and in not denying the material allegations stated
in the complaint, a judgment on the pleadings76 would have also been proper since not a single
issue was generated by the Answer he filed.
As the promissory notes were not discharged or impaired through any act or omission of the
bank, Sections 119 (d)77 and 12278 of the NIL as well as Art. 124979 of the Civil Code would
necessarily find no application. Again, neither was petitioner's right of reimbursement barred
nor was the bank's right to proceed against Antonio Ang Eng Liong expressly renounced by
the omission to serve notice of appeal and appellant's brief to a party already declared in
default.
Consequently, in issuing the two promissory notes, petitioner as accommodating party
warranted to the holder in due course that he would pay the same according to its tenor.80 It is
no defense to state on his part that he did not receive any value therefor 81 because the
phrase "without receiving value therefor" used in Sec. 29 of the NIL means "without receiving
value by virtue of the instrument" and not as it is apparently supposed to mean, "without
receiving payment for lending his name."82 Stated differently, when a third person advances
the face value of the note to the accommodated party at the time of its creation, the
consideration for the note as regards its maker is the money advanced to the accommodated
party. It is enough that value was given for the note at the time of its creation.83 As in the instant
case, a sum of money was received by virtue of the notes, hence, it is immaterial so far as the
bank is concerned whether one of the signers, particularly petitioner, has or has not received
anything in payment of the use of his name.84
Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral
security, if there be any, and dispose of it to his benefit, or, if applicable, subrogate himself in
the place of the creditor with the right to enforce the guaranty against the other signers of the
note for the reimbursement of what he is entitled to recover from them.85 Regrettably, none of
these were prudently done by petitioner. When he was first notified by the bank sometime in
1982 regarding his accountabilities under the promissory notes, he lackadaisically relied on
Antonio Ang Eng Liong, who represented that he would take care of the matter, instead of
directly communicating with the bank for its settlement.86 Thus, petitioner cannot now claim that
he was prejudiced by the supposed "extension of time" given by the bank to his co-debtor.
Furthermore, since the liability of an accommodation party remains not only primary but
also unconditional to a holder for value, even if the accommodated party receives an extension
of the period for payment without the consent of the accommodation party, the latter is still
liable for the whole obligation and such extension does not release him because as far as a
holder for value is concerned, he is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:
x x x The mere delay of the creditor in enforcing the guaranty has not by any means
impaired his action against the defendant. It should not be lost sight of that the
defendant's signature on the note is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he, the defendant, will be personally
responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its
value, or discharged, such an act would have wholly or partially released the surety;
but it must be born in mind that it is a recognized doctrine in the matter of suretyship
that with respect to the surety, the creditor is under no obligation to display any
diligence in the enforcement of his rights as a creditor. His mere inaction indulgence,
passiveness, or delay in proceeding against the principal debtor, or the fact that he did
not enforce the guaranty or apply on the payment of such funds as were available,
constitute no defense at all for the surety, unless the contract expressly requires
diligence and promptness on the part of the creditor, which is not the case in the
present action. There is in some decisions a tendency toward holding that the creditor's
laches may discharge the surety, meaning by laches a negligent forbearance. This
theory, however, is not generally accepted and the courts almost universally consider
it essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-
1034)89
Neither can petitioner benefit from the alleged "insolvency" of Antonio Ang Eng Liong for want
of clear and convincing evidence proving the same. Assuming it to be true, he also did not
exercise diligence in demanding security to protect himself from the danger thereof in the event
that he (petitioner) would eventually be sued by the bank. Further, whether petitioner may or
may not obtain security from Antonio Ang Eng Liong cannot in any manner affect his liability to
the bank; the said remedy is a matter of concern exclusively between themselves as
accommodation party and accommodated party. The fact that petitioner stands only as a surety
in relation to Antonio Ang Eng Liong is immaterial to the claim of the bank and does not a whit
diminish nor defeat the rights of the latter as a holder for value. To sanction his theory is to give
unwarranted legal recognition to the patent absurdity of a situation where a co-maker, when
sued on an instrument by a holder in due course and for value, can escape liability by the
convenient expedient of interposing the defense that he is a merely an accommodation party. 90
In sum, as regards the other issues and errors alleged in this petition, the Court notes that
these were the very same questions of fact raised on appeal before the Court of Appeals,
although at times couched in different terms and explained more lengthily in the petition. Suffice
it to say that the same, being factual, have been satisfactorily passed upon and considered
both by the trial and appellate courts. It is doctrinal that only errors of law and not of fact are
reviewable by this Court in petitions for review on certiorari under Rule 45 of the Rules of Court.
Save for the most cogent and compelling reason, it is not our function under the rule to examine,
evaluate or weigh the probative value of the evidence presented by the parties all over again. 91
WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court
of Appeals in CA-G.R. CV No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.
No costs.
SO ORDERED.
G.R. No. 154127 December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the
parties or by the complete incompatibility between the old and the new agreements. Petitioner
herein fails to show either requirement convincingly; hence, the summary judgment holding him
liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the
November 26, 2001 Decision2 and the June 26, 2002 Resolution3 of the Court of Appeals (CA)
in CA-GR CV No. 60521. The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as
it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorney’s fees and cost of suit is DELETED. The portion of the
judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly,
the case against x x x Eduardo de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas’ evidence against x x x Eduardo de Jesus." 4
The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"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 ₱400,000.00 from [respondent]; that, on the same day, [they] executed a
promissory note wherein they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest 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] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner
and de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to the complaint were
the promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
"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 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 [respondent’s] acceptance thereof
novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that the
loan remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that
[Petitioner] Garcia’s answer was not even accompanied by a certificate of non-forum shopping.
Annexed to the reply were the face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed ₱400,000.00 loan, he received only ₱360,000.00, the P40,000.00 having been
advance interest thereon for two months, that is, for January and February 1997; that[,] in fact[,]
he paid the sum of ₱120,000.00 by way of interests; that this was made when [respondent’s]
daughter, one Nits Llamas-Quijencio, received from the Central Police District Command at
Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of ₱40,000.00,
representing the peso equivalent of his accumulated leave credits, another ₱40,000.00 as
advance interest, and still another ₱40,000.00 as interest for the months of March and April
1997; that he had difficulty in paying the loan and had asked [respondent] for an extension of
time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed to
accept the benefits he (de Jesus) would receive for his retirement, but [respondent]
nonetheless filed the instant case while his retirement was being processed; and that, in
defense of his rights, he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus
₱1,000.00 for every court appearance.
"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 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, 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.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him
to present 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 case for judgement on the pleadings, withdrawing in the
process his previous motion. Thereunder, he asserted that [petitioner’s and de Jesus’] solidary
liability under the promissory note cannot be any clearer, and that the check issued by de Jesus
did not discharge the loan since the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the
case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor
of [respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly
and severally, the [respondent] the following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per month
from January 23, 1997 until the same shall have been fully paid, less the amount of
₱120,000.00 representing interests already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each day of
[c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against
De Jesus. According to the appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte. Thus, respondent was not
ipso facto entitled to the 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 former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had
failed to raise even a single genuine issue regarding any material fact.
The appellate court 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.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"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 loan obligation he obtained from x x x Respondent Dionisio Llamas,
as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of
₱400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the]
substitution by x x x de Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of ₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due
to financial difficulties, he be given an extension of time to pay his loan obligation and
that his retirement benefits from the Philippine National Police will answer for said
obligation.
"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 subsequent events showed that the principal obligor was in truth and in fact x
x x de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole
liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed of by
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."8
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2)
whether the defense that petitioner was only an accommodation party had any basis; and 3)
whether the judgment against him -- be it a judgment on the pleadings or a summary judgment
-- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the
replacement of the promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-obligor, "paid" the loan
with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law,9 the delivery of a
check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor.10 Article 1293 of the Civil Code defines novation as follows:
"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 creditor. Payment by the new debtor gives him rights mentioned in articles 1236
and 1237."
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 without the knowledge of -- the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent of the third person and
the creditor. In delegacion, the debtor 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.11 Both modes of substitution by the debtor require the consent of the
creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible with the
amendatory agreement.13 Whether 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.14 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 extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation
is incompatible with the old one on every point.16 The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. 17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance 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. As the CA correctly
observed, the check had been issued precisely to answer for the obligation. On the one hand,
the note evidences the loan obligation; and on the other, the check answers for it. Verily, the
two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation18 -
- change the terms and conditions of the obligation. Such payment was already provided for in
the promissory note 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 debtors. In order to change the person of the debtor, the old one must be expressly released
from the obligation, and the third person or new debtor must assume the former’s place in the
relation.19 Well-settled is the rule that novation is never presumed. 20 Consequently, that which
arises from a purported change in the person of the debtor must be clear and express. 21 It is
thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken
place.
In the present case, petitioner has not shown that he was expressly released from the
obligation, that a 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. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either,
the nature of the obligation being solidary due to the fact that the promissory note expressly
declared that the 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 payment made by one of them extinguishes the obligation. It
therefore follows that in case the creditor fails to collect from one of the solidary debtors, he
may still proceed against the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law requires that the
creditor expressly consent to the substitution of a new debtor. 23 Since novation implies a waiver
of the right the creditor had before the novation, such waiver must be express. 24 It cannot be
supposed, without clear proof, that the present respondent has done away with his right to
exact fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the beginning, he was
a joint and solidary obligor of the ₱400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondent’s acceptance of his check did not change the person of the
debtor, because a joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction
of the whole obligation from any or all of the debtors.26 It is up to the former to determine against
whom to enforce collection.27 Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and
that, as such, he was released as obligor when respondent agreed to extend the term of the
obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note
reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND
PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St.
Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30
By its terms, the note was made payable to a specific person rather than to bearer or to order31 -
- a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence,
petitioner cannot avail himself of the NIL’s provisions on the liabilities and defenses of an
accommodation party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the assent of the
parties.32 The promissory note is thus covered by the general provisions of the Civil Code, not
by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the
instrument to a holder for 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 principal and surety -- the accommodation party being the
surety.33 It is a settled rule that a surety is bound equally and absolutely with the principal and
is deemed an original promissor and debtor from the beginning. The liability is immediate and
direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a
summary 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 that (1) except as to the amount of damages, there is no genuine
issue regarding any material fact; and (2) the moving party is entitled to a judgment as a matter
of law.
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.35 Consequently, facts are asserted in the complaint regarding which there is yet no
admission, disavowal or qualification; or specific denials or affirmative defenses are set forth in
the answer, but the issues are fictitious as shown by the pleadings, depositions or
admissions.36 A summary judgment may be applied for by either a claimant or a defending
party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the
pleadings is proper when an answer fails to render an issue or otherwise admits the material
allegations of the adverse party’s pleading. The essential question is whether there are issues
generated by the pleadings.38 A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a
declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was
correctly treated by the appellate court as a summary judgment, rather than as a judgment on
the pleadings. His Answer40 apparently raised several issues -- that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was extinguished by
either payment or novation. However, these are not factual issues requiring trial. We quote with
approval the CA’s observations:
"Although Garcia’s [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 issues. Firstly, Garcia’s 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 liability under this loan is jointly and severally [sic].’
Secondly, his claim that his co-defendant de Jesus already paid the loan by means of a check
collapses in view of the dishonor thereof as shown at the dorsal side of said check."41

From the records, it also appears that petitioner himself moved to submit the case for judgment
on the basis of the pleadings and documents.1âwphi1 In a written Manifestation,42 he stated
that "judgment on the pleadings may now be rendered without further evidence, considering
the allegations and admissions of the parties."43

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.
G.R. No. 158262 July 21, 2008
SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,
vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision 1 and May 15, 2003
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance
Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third
Party Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-
spouses Pedro and Florencia Violago pray for the reversal of the appellate court’s ruling which
held them liable to respondent BA Finance Corporation (BA Finance) under a promissory note
and a chattel mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged
directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC),
offered to sell a car to his cousin, Pedro F. Violago, and the latter’s wife, Florencia. Avelino
explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the
spouses would just have to pay a down payment of PhP 60,500 while the balance would be
financed by respondent BA Finance. The spouses would pay the monthly installments to BA
Finance while Avelino would take care of the documentation and approval of financing of the
car. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983
from VMSC.3
On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound
themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36
monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on
September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation
which showed the net purchase price of the vehicle, down payment, balance, and finance
charges. VMSC then issued a sales invoice in favor of the spouses with a detailed description
of the Toyota Cressida car. In turn, the spouses executed a chattel mortgage over the car in
favor of VMSC as security for the amount of PhP 209,601. VMSC, through Avelino, endorsed
the promissory note to BA Finance without recourse. After receiving the amount of PhP
209,601, VMSC executed a Deed of Assignment of its rights and interests under the promissory
note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount
of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which
issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The
spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago,
another cousin of Avelino, and registered in Esmeraldo’s name by the LTO-San Rafael Branch.
Despite the spouses’ demand for the car and Avelino’s repeated assurances, there was no
delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any monthly
amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay
City a complaint for Replevin with Damages against the spouses. The complaint, docketed as
Civil Case No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery
cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month
from February 15, 1984 until fully paid. BA Finance also asked for the payment of attorney’s
fees, liquidated damages, replevin bond premium, expenses in the seizure of the vehicle, and
costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses,
as defendants a quo, were declared in default for failing to file an answer. Eventually, the RTC
rendered on December 3, 1984 a decision in favor of BA Finance. A writ of execution was
thereafter issued on January 11, 1985, followed by an alias writ of execution. 6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued
Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On
May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez
as security for a loan covered by a promissory note in the amount of PhP 260,664. This
promissory note was later endorsed to BA Finance, Cebu City branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to
Quash Writ of Execution on the basis of lack of a valid service of summons on them, among
other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari
under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA
nullified the RTC’s order. This CA decision became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following:
they never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA
Finance was not a holder in due course under Section 59 of the Negotiable Instruments
Law (NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995,
the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino
praying that he be held liable to them in the event that they be held liable to BA Finance, as
well as for damages. VMSC was not impleaded as third party defendant. In his Motion to
Dismiss and Answer, Avelino contended that he was not a party to the transaction personally,
but VMSC. Avelino’s motion was denied and the third party complaint against him was
entertained by the trial court. Subsequently, the spouses belabored to prove that they affixed
their signatures on the promissory note and chattel mortgage in favor of VMSC in blank. 8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago
spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The
dispositive portion of the RTC’s decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R.
Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the
BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car,
model 1983, bearing Engine No. 21R-02854117, and with Serial No. RX60-804614, covered
by the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to
pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty
[thereon] at three percent (3%) a month, from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to
the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees,
and another amount also equivalent to twenty five percent (25%) of the said unpaid balance,
as liquidated damages. The defendant-third party-plaintiffs are also required to shoulder the
litigation expenses and costs.1awphil
As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-
third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed
motor vehicle; or if such delivery is not possible, to pay to the said spouses the sum of
P198,003.06, together with the penalty thereon at three (3%) a month from March 1, 1984, until
the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party plaintiffs
spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and
another sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as
liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the
sum of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00
as moral damages; P10,000.00 as exemplary damages; and reimburse them for all the
expenses and costs of the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit, are
dismissed.9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory
note is a negotiable instrument; hence, the trial court should have applied the NIL and not the
Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle at
the time of sale, the sale was null and void for the failure in the "cause or consideration" of the
promissory note, which in this case was the sale and delivery of the vehicle. The spouses also
alleged that BA Finance was not a holder in due course of the note since it knew, through its
Cebu City branch, that the car was never delivered to the spouses.10 On the other hand, Avelino
prayed for the dismissal of the complaint against him because he was not a party to the
transaction, and for an order to the spouses to pay him moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and that BA
Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted
petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the promissory
note, as a party in their Third Party Complaint. Citing Salas v. Court of Appeals,11 the appellate
court reasoned that since VMSC is an indispensable party, any judgment will not bind it or be
enforced against it. The absence of VMSC rendered the proceedings in the RTC and the
judgment in the Third Party Complaint "null and void, not only as to the absent party but also
to the present parties, namely the Defendants-Appellants (petitioners herein) and the Third-
Party-Defendant-Appellant (Avelino Violago)." The CA set aside the trial court’s order holding
Avelino liable for damages to the spouses without prejudice to the action of the spouses against
VMSC and Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants
is DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED. The
Decision of the Court a quo is AFFIRMED, with the modification that the Third-Party Complaint
against the Third-Party-Defendant-appellant is DISMISSED, without prejudice. The
counterclaims of the Third-Party Defendant Appellant against the Defendants-Appellants are
DISMISSED, also without prejudice.13
The spouses Violago sought but were denied reconsideration by the CA per its Resolution of
May 15, 2003.
The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY
NOTE MAY BE CONSIDERED A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID
DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE
MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND
SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO
The Court’s Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third
party complaint of petitioners against Avelino thereby effectively absolving Avelino from any
liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of the
(Sgd.) (Sgd.)
promissory note, we must determine whether the note is a negotiable instrument and, hence,
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
covered by the NIL. In their appeal to the CA, petitioners argued that the promissory note is a
negotiable instrument and that the provisions of the NIL, not the Civil Code, should be applied. 763 Constancia St., Sampaloc, Manila same
In the present petition, however, petitioners claim that Article 1318 of the Civil Code 14 should (Address) (Address)
be applied since their consent was vitiated by fraud, and, thus, the promissory note does not
carry any legal effect despite its negotiation. Either way, the petitioners’ arguments deserve no (Sgd.) (Sgd.)
merit. Marivic Avaria Jesus Tuazon

The promissory note is clearly negotiable. The appellate court was correct in finding all the (WITNESS) (WITNESS)
requisites of a negotiable instrument present. The NIL provides:
PAY TO THE ORDER OF BA FINANCE CORPORATION
Section 1. Form of Negotiable Instruments. – An instrument to be negotiable must conform to
the following requirements: WITHOUT RECOURSE

(a) It must be in writing and signed by the maker or drawer; VIOLAGO MOTOR SALES CORPORATION

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15
The promissory note clearly satisfies the requirements of a negotiable instrument under the
NIL. It is in writing; signed by the Violago spouses; has an unconditional promise to pay a
certain amount, i.e., PhP 209,601, on specific dates in the future which could be determined
from the terms of the note; made payable to the order of VMSC; and names the drawees with
certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and regular.

The promissory note signed by petitioners reads: The more important issue now is whether or not BA Finance is a holder in due course. The
resolution of this issue will determine whether petitioners’ defense of fraud and nullity of the
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983 sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides:

For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR Section 52. What constitutes a holder in due course.––A holder in due course is a holder who
SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND has taken the instrument under the following conditions:
SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest at the
rate stipulated herein below, in installments as follows: (a) That it is complete and regular upon its face;

Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on
9-16-83, and the succeeding monthly installments on the 16th day of each and every
succeeding month thereafter until the account is fully paid, provided that the penalty charge of
three (3%) per cent per month or a fraction thereof shall be added on each unpaid installment
from maturity thereof until fully paid.
xxxx
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Notice of demand, presentment, dishonor and protest are hereby waived.

The law presumes that a holder of a negotiable instrument is a holder thereof in due
course. 16 In this case, the CA is correct in finding that BA Finance meets all the foregoing
requisites:
In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and
regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c)
the Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee was
never informed, before and at the time the "Promissory Note" was endorsed to the Appellee,
that the vehicle sold to the Defendants-Appellants was not delivered to the latter and that VMSC
had already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged
the vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu
Branch), the same occurred only on May 8, 1987, much later than August 4, 1983, when VMSC
assigned its rights over the "Chattel Mortgage" by the Defendants-Appellants to the Appellee.
Hence, Appellee was a holder in due course.17
In the hands of one other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable.18 A holder in due course, however, holds the
instrument free from any defect of title of prior parties and from defenses available to prior
parties among themselves, and may enforce payment of the instrument for the full amount
thereof.19 Since BA Finance is a holder in due course, petitioners cannot raise the defense of
non-delivery of the object and nullity of the sale against the corporation. The NIL considers
every negotiable instrument prima facie to have been issued for a valuable
consideration.20 In Salas, we held that a party holding an instrument may enforce payment of
the instrument for the full amount thereof. As such, the maker cannot set up the defense of
nullity of the contract of sale.21 Thus, petitioners are liable to respondent corporation for the
payment of the amount stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners
likewise pray for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a
device to defeat the labor laws, this separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is
as follows:
1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust acts in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.22
This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was
previously sold to Avelino’s other cousin, Esmeraldo. Nowhere in the pleadings did Avelino
refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he merely
insisted that he cannot be held liable because he was not a party to the transaction. The fact
that Avelino and Pedro are cousins, and that Avelino claimed to have a need to increase the
sales quota, was likely among the factors which motivated the spouses to buy the car. Avelino,
knowing fully well that the vehicle was already sold, and with abuse of his relationship with the
spouses, still proceeded with the sale and collected the down payment from petitioners. The
trial court found that the vehicle was not delivered to the spouses. Avelino clearly defrauded
petitioners. His actions were the proximate cause of petitioners’ loss. He cannot now hide
behind the separate corporate personality of VMSC to escape from liability for the amount
adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners’ third party complaint does
not preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute
a bar to the application of the piercing-of-the-corporate-veil doctrine. We suggested as much
in Arcilla v. Court of Appeals, an appellate proceeding involving petitioner Arcilla’s bid to avoid
the adverse CA decision on the argument that he is not personally liable for the amount
adjudged since the same constitutes a corporate liability which nevertheless cannot even be
enforced against the corporation which has not been impleaded as a party below. In that case,
the Court found as well-taken the CA’s act of disregarding the separate juridical personality of
the corporation and holding its president, Arcilla, liable for the obligations incurred in the name
of the corporation although it was not a party to the collection suit before the trial court. An
excerpt from Arcilla:
x x x In short, even if We are to assume arguendo that the obligation was incurred in the name
of the corporation, the petitioner [Arcilla] would still be personally liable therefor because for all
legal intents and purposes, he and the corporation are one and the same. Csar Marine
Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of separate
juridical personality conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CA’s] application of the doctrine which
permits the piercing of the corporate veil and the disregarding of the fiction of a separate
juridical personality; this is because he knows only too well that from the beginning, he merely
used the corporation for his personal purposes.23

WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R.
CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third party
complaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino
Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs
against Avelino Violago.

SO ORDERED.
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions
of law a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17,
1985, as well as its resolution dated October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging
activities for the year 1978 the opening of additional roads, and simultaneous logging
operations along the route of said roads, in its logging concession area at Baganga, Manay,
and Caraga, Davao Oriental. 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, through its sister company and marketing arm, Industrial Products Marketing (the
"seller-assignor"), a 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.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May
28, 1980, 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 assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave the corresponding warranty of
ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28, 1980,
pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment,
petitioner-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 payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors
(Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with promissory note
was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory
note, the 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.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the
petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics
to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down
and after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp.
68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact
that the tractors broke down and requested for the seller-assignor's usual prompt attention
under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-
assignor sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A,"
"6-B," 16 C," "16-C-1," "6-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).
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-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).
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 were to be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the
reconditioning cost (E exh. " 7 ").
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 was filed by the respondent against the petitioners, the corporation, Wee,
and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the
principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred
Eighteen Pesos & 86/100 (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 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and
asking the trial 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 (P5,000.00) for expenses of litigation. The petitioners likewise
prayed for such other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal
capacities the principal sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED NINETY 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 15, 1979 and
accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent
to ten percent (10%) of the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by
the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the
following errors:
I and signed by the maker; it contains an unconditional promise to pay a certain
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND
PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM
OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A
HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE
AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in
toto the decision of the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
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 Deed of Sale of the tractors and even admitting
that in a contract of sale unless a contrary 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 who is
the assignee of the promissory note and a holder of the same in due course.
Warranty 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.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants
either to withdraw from the contract and/or demand a proportionate reduction
of the price with damages 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.
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 industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable
instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing
sum of money payable at a fixed or determinable future time; it is payable to
order (Sec. 1, NIL); the promissory note was negotiated when it was
transferred 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 was overdue and without notice,
that it had been previously dishonored and that the note is in good faith and
for value without notice of any infirmity or defect in the title of IPM (Sec. 52,
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 thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note according to its tenor, and
admit the existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
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.
WHEREFORE, finding the decision appealed from according to law and
evidence, We find the appeal without merit and thus affirm the decision in toto.
With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the
Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was
received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT
AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO
BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE
ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
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 SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE
BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR
OF THE PROMISSORY NOTE.
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 SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY
COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED
THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17,
1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but
granting petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February
20, 1986, contended that the petition was filed out of time; that the promissory note is a
negotiable instrument and 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.
The core issue herein is whether or not the promissory note in question is a negotiable
instrument so as to bar completely all the available defenses of the petitioner against the
respondent-assignee.
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, therefore, be considered pro- formal.
The petition is impressed with merit.
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 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.
The Civil Code provides that:
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 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 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 known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to
the quality or fitness of the goods, as follows:
(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 (whether he be the grower
or manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a
particular purpose may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.
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).
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 assignee is a holder in due course of the promissory note in question,
assuming the note is 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.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-
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. 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.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-
assignor.
Articles 1191 and 1567 of the Civil Code provide 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.
The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. (Emphasis
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-
assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. 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 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 injured by the other's breach will have to passively sit and watch its
damages accumulate 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)
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.
The pertinent portion of the note is as follows:
 FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE 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 monthly installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer, " it cannot be denied that the promissory
note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-
called 'words of negotiable, must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order
where it is drawn payable to the order of a specified person or to him or his
order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the
same. 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.
Any subsequent purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all defenses
available against the latter." (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows
that the respondent can never be a holder in due course but remains a mere assignee of the
note in question. Thus, the petitioner may raise against the respondent all defenses available
to it as against the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was
sued by the respondent-assignee because the petitioner's defenses apply to both or either of
either of them. Actually, the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
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 indorsed?
(Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,
COURT:
You confirm his manifestation? You are nodding your head?
Do you confirm that?
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 to the IFC Leasing
& Acceptance Corporation.
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
indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in
one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN.,
February 13, 1980).
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.
The evidence presented in the instant case shows that prior to the sale on installment of the
tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing,
and the 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 from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents
evidencing the sale on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-
assignor which is the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not defective. The respondent knew that
when the tractors turned out to be defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from the petitioners. Even 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 which the petitioners may raise against the seller-assignor. Any other interpretation
would be most inequitous to the unfortunate buyer who is not only saddled with two useless
tractors but must also face a lawsuit from the assignee for the entire purchase price and all its
incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any
fact, which would justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder
in due course is a holder who has taken the instrument under the following
conditions:
xxx xxx xxx
xxx xxx xxx
(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 the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute
notice of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it 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)
We subscribe to the view of Campos and Campos that a financing company is not a holder in
good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase 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 country, it is most
probable that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will be subject
to the defense of failure of consideration and cannot recover the purchase
price from the buyer. As against the argument that such a rule would seriously
affect "a certain mode of transacting business adopted throughout the State,"
a court in one case stated:
It may be that our holding here will require some changes in
business methods and will impose a greater burden on the
finance companies. We think the buyer-Mr. & Mrs. General
Public-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 to protect his interests against unscrupulous
and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it
is a potent argument in favor of a rule which win afford public
protection to the general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d
766) 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 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.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the
subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note.
It follows that the respondent's rights under the promissory note involved in this case are
subject to all defenses that the petitioners have against the seller-assignor, Industrial Products
Marketing. For Section 58 of the 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. ... "

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 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-assignor has not been impleaded herein, there is no
obstacle for the respondent to file a civil Suit and litigate its claims against the seller- assignor
in the rather unlikely possibility that it so desires,

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 complaint against the petitioner before the trial court is DISMISSED.

SO ORDERED.
G.R. No. 101163 January 11, 1993 On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint,
and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE INVESTMENT HOUSE, INC., petitioner,
vs. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed
COURT OF APPEALS and NORA B. MOULIC, respondents. the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the
period prescribed by the Negotiable Instruments Law and that even if STATE did serve such
Escober, Alon & Associates for petitioner. notice on MOULIC within the reglementary period it would be of no consequence as the checks
should never have been presented for payment. The sale of the jewelry was never effected;
Martin D. Pantaleon for private respondents. the checks, therefore, ceased to serve their purpose as security for the jewelry.

We are not persuaded.

BELLOSILLO, J.: The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at
the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the
checks in due course.1
The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for Review of the Decision of respondent In this regard, Sec. 52 of the Negotiable Instruments Law provides —
Court of Appeals.
Sec. 52. What constitutes a holder in due course. — A holder in due course is
a holder who has taken the instrument under the following conditions: (a) That
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in it is complete and regular upon its face; (b) That he became the holder of it
the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the before it was overdue, and without notice that it was previously dishonored, if
such was the fact; (c) That he took it in good faith and for value; (d) That at the
other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State
time it was negotiated to him he had no notice of any infirmity in the instrument
Investment House. Inc. (STATE).
or defect in the title of the person negotiating it.
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
of the checks. The checks, however, could no longer be retrieved as they had already been
instrument is a holder in due course.2 Consequently, the burden of proving that STATE is not
negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the
a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC
drawee bank.
failed.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their
requested that it be paid in cash instead, although MOULIC avers that no such notice was given
due dates;3 (c) petitioner took these checks in good faith and for value, albeit at a discounted
her.
price; and, (d) petitioner was never informed nor made aware that these checks were merely
issued to payee as security and not for value.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
from any defect of title of prior parties, and from defenses available to prior parties among
In her Answer, MOULIC contends that she incurred no obligation on the checks because the themselves; STATE may, therefore, enforce full payment of the checks.4
jewelry was never sold and the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full
MOULIC cannot set up against STATE the defense that there was failure or absence of
responsibility for the checks.
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of
the instrument as against a holder in due course. For the only grounds are those outlined in
Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. — A negotiable instrument is
discharged: (a) By payment in due course by or on behalf of the principal
debtor; (b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation; (c) By the intentional
cancellation thereof by the holder; (d) By any other act which will discharge a
simple contract for the payment of money; (e) When the principal debtor
becomes the holder of the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c)
is that cancellation effected by destroying the instrument either by tearing it up, 5 burning it,6 or
writing the word "cancelled" on the instrument. The act of destroying the instrument must also
be made by the holder of the instrument intentionally. Since MOULIC failed to get back
possession of the post-dated checks, the intentional cancellation of the said checks is
altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money
under paragraph (d) are determined by other existing legislations since Sec. 119 does not
specify what these acts are, e.g., Art. 1231 of the Civil Code7 which enumerates the modes of
extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant
case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor
while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no
longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no
legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable
Instruments Law:
Sec. 114. When notice need not be given to drawer. — Notice of dishonor is
not required to be given to the drawer in the following cases: (a) Where the
drawer and the drawee are the same person; (b) When the drawee is a
fictitious person or a person not having capacity to contract; (c) When the
drawer is the person to whom the instrument is presented for payment: (d)
Where the drawer has no right to expect or require that the drawee or acceptor
will honor the instrument; (e) Where the drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when
she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred
them to another to protect herself. After withdrawing her funds, she could not have expected
her checks to be honored. In other words, she was responsible for the dishonor of her checks,
hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that
a specified instrument, upon proper proceedings taken, has not been accepted or has not been
paid, and that the party notified is expected to pay it.8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case.9
The drawing and negotiation of a check have certain effects aside from the transfer of title or
the incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in
the bank upon which it is drawn.10 Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the
instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in
due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with
the drawee bank to meet her obligation on the checks,11 so that Notice of Dishonor would be
futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of
Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1
million.12 Thus, the value of the property foreclosed was not even enough to pay the debt in
full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure
of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus
taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a
proceeding for the sale of the property and its action cannot be taken to mean a waiver of its
right to demand payment for the whole debt.14 For, while Act 3135, as amended, does not
discuss the mortgagee's right to recover such deficiency, it does not contain any provision
either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature
intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure
of a security given to guarantee an obligation, it so expressly provides. For instance, with
respect to pledges, Art. 2115 of the Civil Code15 does not allow the creditor to recover the
deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a
thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary will be void".16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot
be concluded that the creditor loses his right recognized by the Rules of Court to take action
for the recovery of any unpaid balance on the principal obligation simply because he has
chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of
Attorney given him by the mortgagor in the contract of mortgage.17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
course, STATE, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-
Party Defendants.

Costs against private respondent.

SO ORDERED.
G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalañgan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest
from September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn
by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff
received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said
check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the
check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check
but they allege in their answer, as affirmative defense, that it was issued subject to a condition,
which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to
protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully
submit the following Agreed Stipulation of Facts;
First. — That on or about 8 September 1953, in the evening, defendant Anita C.
Gatchalian who was then interested in looking for a car for the use of her husband and
the family, was shown and offered a car by Manuel Gonzales who was accompanied
by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian;
Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he
was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said
car and to negotiate for and accomplish said sale, but which facts were not known to
plaintiff;
Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by
Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her husband
would be able to see same; that on this request of defendant Anita C. Gatchalian,
Manuel Gonzales advised her that the owner of the car will not be willing to give the
certificate of registration unless there is a showing that the party interested in the
purchase of said car is ready and willing to make such purchase and that for this
purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him
(Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's
good faith in the intention to purchase the said car, the said check to be for safekeeping
only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the
following day when Manuel Gonzales brings the car and the certificate of registration,
but which facts were not known to plaintiff;
Fourth. — That relying on these representations of Manuel Gonzales and with his
assurance that said check will be only for safekeeping and which will be returned to
said defendant the following day when the car and its certificate of registration will be
brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff,
defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel
Gonzales executed and issued a receipt for said check, Exh. "1";
Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his
failure to bring the car and its certificate of registration and to return the check, Exh.
"B", on the following day as previously agreed upon, defendant Anita C. Gatchalian
issued a "Stop Payment Order" on the check, Exh. "3", with the drawee bank. Said
"Stop Payment Order" was issued without previous notice on plaintiff not being know
to defendant, Anita C. Gatchalian and who furthermore had no reason to know check
was given to plaintiff;
Sixth. — That defendants, both or either of them, did not know personally Manuel
Gonzales or any member of his family at any time prior to September 1953, but that
defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. — That defendants, both or either of them, had no arrangements or
agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953
for the hospitalization of the wife of Manuel Gonzales and neither or both of said
defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. — That defendants, both or either of them, had no obligation or liability, directly
or indirectly with the Ocampo Clinic before, or on 9 September 1953;
Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant
Anita C. Gatchalian under the representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising
from the hospitalization of his wife;
Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization
and the release of the wife of Manuel Gonzales from its hospital, accepted said check,
applying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and
 delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D")
representing the balance on the amount of the said check, Exh. "B";
Eleventh. — That the acts of acceptance of the check and application of its proceeds
in the manner specified above were made without previous inquiry by plaintiff from
defendants:
Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of
Manila, a complaint for estafa against Manuel Gonzales based on and arising from the
acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the
cash balance of the check, Exh. "B" and that said complaint was subsequently
dropped;
Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits
submitted previously, be considered as parts of this stipulation, without necessity of
formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be
admitted and that the parties hereto be given fifteen days from today within which to
submit simultaneously their memorandum to discuss the issues of law arising from the
facts, reserving to either party the right to submit reply memorandum, if necessary,
within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record
on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment
already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument,
under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a
holder in due course. In support of the first contention, it is argued that defendant Gatchalian
had no intention to transfer her property in the instrument as it was for safekeeping merely and,
therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that
assuming for the sake of argument that delivery was not for safekeeping merely, delivery was
conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant
argues that plaintiff-appellee cannot be a holder in due course because there was no
negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in
due course presupposes a prior party from whose hands negotiation proceeded, and in the
case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is
also claimed that the plaintiff-appellee is not a holder in due course because it acquired the
check with notice of defect in the title of the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there were circumstances that brought suspicion
about Gonzales' possession and negotiation, which circumstances should have placed the
plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as
follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation
of Facts). Plaintiff could have inquired why a person would use the check of another to
pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as
defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V.
R. de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales.
(Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted only
to P441.75. The check is in the amount of P600.00, which is in excess of the amount
due plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par.
10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff
should have been more cautious and wary in accepting a piece of paper and disbursing
cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should have been made by
plaintiff. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in
accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may
be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th
edition, page 252. On this issue Brannan holds that a payee may be a holder in due course
and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at
common law, is a question upon which the courts are in serious conflict. There can be
no doubt that a proper interpretation of the act read as a whole leads to the conclusion
that a payee may be a holder in due course under any circumstance in which he meets
the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
 Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due
course as "a holder who has taken the instrument under the following conditions: 1.
That it is complete and regular on its face. 2. That he became the holder of it before it
was overdue, and without notice that it had been previously dishonored, if such was
the fact. 3. That he took it in good faith and for value. 4. That at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect in the title
of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by
the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee
who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial
that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument,
because the drawer did not deliver the instrument to Manuel Gonzales with the intention of
negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts
declares the check was to remain in the possession Manuel Gonzales, and was not to be
negotiated, but was to serve merely as evidence of good faith of defendants in their desire to
purchase the car being sold to them. Admitting that such was the intention of the drawer of the
check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee
if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the
plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel
Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was
the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned.
So, when the agent of drawer Manuel Gonzales negotiated the check with the intention of
getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-
appellee, unless it can be shown that the plaintiff-appellee should be considered as having
notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this
issue leads us to a consideration of the last question presented by the appellants, i.e., whether
the plaintiff-appellee may be considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we agree with
the defendants-appellants that the circumstances indicated by them in their briefs, such as the
fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the
check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice
means that the check could only be deposited but may not be converted into cash — all these
circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of
the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's account.
It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's
title to the check was or the nature of his possession. Having failed in this respect, we must
declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title
and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not
be considered as a holder of the check in good faith. To such effect is the consensus of
authority.
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's
assignor, it being sufficient to show that the defendant had notice that there was
something wrong about his assignor's acquisition of title, although he did not have
notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114
N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the particulars or
even the nature of the fraud, since all that is required is knowledge of such facts that
his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.),
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old,
less than five feet tall, immature in appearance and bearing on his face the stamp a
degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his
mother. The defendants paid the boy for the bonds without any further inquiry. Held,
the plaintiff could recover the value of the bonds. The term 'bad faith' does not
necessarily involve furtive motives, but means bad faith in a commercial sense. The
manner in which the defendants conducted their Liberty Loan department provided an
easy way for thieves to dispose of their plunder. It was a case of "no questions asked."
Although gross negligence does not of itself constitute bad faith, it is evidence from
which bad faith may be inferred. The circumstances thrust the duty upon the
 defendants to make further inquiries and they had no right to shut their eyes
deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913,
affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee
should not be allowed to recover the value of the check. Let us now examine the express
provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling
conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie
to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due
course it is necessary that "at the time the instrument was negotiated to him "he had no notice
of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that every holder
is deemed prima facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder in due
course does not apply because there was a defect in the title of the holder (Manuel Gonzales),
because the instrument is not payable to him or to bearer. On the other hand, the stipulation of
facts indicated by the appellants in their brief, like the fact that the drawer had no account with
the payee; that the holder did not show or tell the payee why he had the check in his possession
and why he was using it for the payment of his own personal account — show that holder's title
was defective or suspicious, to say the least. As holder's title was defective or suspicious, it
cannot be stated that the payee acquired the check without knowledge of said defect in holder's
title, and for this reason the presumption that it is a holder in due course or that it acquired the
instrument in good faith does not exist. And having presented no evidence that it acquired the
check in good faith, it (payee) cannot be considered as a holder in due course. In other words,
under the circumstances of the case, instead of the presumption that payee was a holder in
good faith, the fact is that it acquired possession of the instrument under circumstances that
should have put it to inquiry as to the title of the holder who negotiated the check to it. The
burden was, therefore, placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the
following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in
this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where
the rule was distinctly laid down by the court of King's Bench that the purchaser of
negotiable paper must exercise reasonable prudence and caution, and that, if the
circumstances were such as ought to have excited the suspicion of a prudent and
careful man, and he made no inquiry, he did not stand in the legal position of a bona
fide holder. The rule was adopted by the courts of this country generally and seem to
have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey,
4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and
adopted the rule that nothing short of actual bad faith or fraud in the purchaser would
deprive him of the character of a bona fide purchaser and let in defenses existing
between prior parties, that no circumstances of suspicion merely, or want of proper
caution in the purchaser, would have this effect, and that even gross negligence would
have no effect, except as evidence tending to establish bad faith or fraud. Some of the
American courts adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this court in Roth v.
Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in
harmony with that announced in Gill v. Cubitt, which has been adhered to in
subsequent cases, including those cited above. Stated briefly, one line of cases
including our own had adopted the test of the reasonably prudent man and the other
that of actual good faith. It would seem that it was the intent of the Negotiable
Instruments Act to harmonize this disagreement by adopting the latter test. That such
is the view generally accepted by the courts appears from a recent review of the cases
concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To
effectuate the general purpose of the act to make uniform the Negotiable Instruments
Law of those states which should enact it, we are constrained to hold (contrary to the
rule adopted in our former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry, will not of
themselves prevent a recovery, but are to be considered merely as evidence bearing
on the question of bad faith. See G. L. 3113, 3172, where such a course is required in
construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is called
upon to prove himself a holder in due course to be entitled to recover, he is required to
establish the conditions entitling him to standing as such, including good faith in taking
the instrument. It devolves upon him to disclose the facts and circumstances attending
the transfer, from which good or bad faith in the transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which should have
put it to inquiry, why the holder had the check and used it to pay his own personal account, the
duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good
faith. The stipulation of facts contains no statement of such good faith, hence we are forced to
the conclusion that plaintiff payee has not proved that it acquired the check in good faith and
may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs against plaintiff-
appellee.