Great Asian Sales vs.

CA

The Case

Before us is a Petition for Review on Certiorari assailing the decision of the Court of Appeals which
affirmed the decision of the RTC. The prior decision ordered Great Asian Sales (petitioners) and Tan
Chong Lin to pay solidarily Bancasa Finance the amount of 1,042,005. The Court of Appeals
affirmed the trial court’s award of interest and costs of suit but deleted the award of attorney’s fees.

The Facts

● Great Asian Sales is engaged in the business of buying and selling general merchandise, in
particular household appliances.

● In March of 1981, the board of directors of Great Asian ​approved a resolution authorizing its
Treasurer and General Manager, Arsenio Lim Piat, Jr​. ("Arsenio" for brevity) ​to secure a loan
from Bancasia in an amount not to exceed P1.0 million.

● The board resolution also ​authorized Arsenio to sign all papers, documents or promissory
notes necessary to secure the loan.

● A year later, the board of directors of Great Asian approved a ​second resolution authorizing
Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2.0
million.​ The second board resolution also​ designated Arsenio as the authorized signatory to
sign all instruments​, documents and checks necessary to secure the discounting line.

● 1991 Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee, solidarily,
the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin signed a
Comprehensive and Continuing Surety Agreement in favor of Bancasia to guarantee,
solidarily, the debts of Great Asian to Bancasia​. Thus, Tan Chong Lin signed t​wo surety
agreements ("Surety Agreements" for brevity) in favor of Bancasia.

● Great Asian, ​through its Treasurer and General Manager Arsenio, signed four (4) Deeds of
Assignment of Receivables ("Deeds of Assignment" for brevity), assigning to Bancasia
fifteen (15) postdated checks.

○ Nine of the checks were payable to Great Asian

○ Three were payable to "New Asian Emp.",
○ The last three were payable to cash. Various customers of Great Asian issued these
postdated checks in payment for appliances and other merchandise.
● Great Asian and Bancasia signed the first Deed of Assignment on January 12, 1982 covering
four postdated checks with a total face value of P244,225.82, with maturity dates not later
than March 17, 1982. Of these four postdated checks, ​two were dishonored​.

● Great Asian and Bancasia signed the second Deed of Assignment also on January 12, 1982
covering four postdated checks with a total face value of P312,819.00, with maturity dates
not later than April 1, 1982. All these four checks were dishonored.

● Great Asian and Bancasia signed the third Deed of Assignment on February 11, 1982
covering eight postdated checks with a total face value of P344,475.00, with maturity dates
not later than April 30, 1982. All these eight checks were dishonored.

● Great Asian and Bancasia signed the fourth Deed of Assignment on March 5, 1982 covering
one postdated check with a face value of P200,000.00, with maturity date on March 18,
1982. ​This last check was also dishonored. Great Asian assigned the postdated checks to
Bancasia at a discount rate of less than 24% of the face value of the checks.

● Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the
checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped
name of "Great Asian Sales Center", while the rest of the dishonored checks just bore the
signature of Arsenio.

● The ​drawee banks dishonored the fifteen checks on maturity when deposited for collection
by Bancasia, with any of the following as reason for the dishonor: "account closed",
"payment stopped", "account under garnishment", and "insufficiency of funds". ​The total
amount of the fifteen dishonored checks is P1,042,005.00. Below is a table of the fifteen
dishonored checks:

● After the drawee bank dishonored Check No. 097480 dated March 16, 1982, Bancasia
referred the matter to its lawyer, Atty. Eladia Reyes, ​who ​sent by registered mail to Tan
Chong Lin a letter dated March 18, 1982, notifying him of the dishonor and demanding
payment from him​. Subsequently, Bancasia sent by personal delivery a letter dated June 16,
1982 to Tan Chong Lin, notifying him of the dishonor of the fifteen checks and demanding
payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored
checks.

● Great Asian filed with the then Court of First Instance of Manila a petition for insolvency,
verified under oath by its Corporate Secretary​, Mario Tan. Attached to the verified petition
was a "Schedule and Inventory of Liabilities and Creditors of Great Asian Sales Center
Corporation," ​listing Bancasia as one of the creditors of Great Asian in the amount of
P1,243,632.00.

● On June 23, 1982, ​Bancasia filed a complaint for collection of a sum of money against Great
Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety
Agreements he signed in favor of Bancasia​. In its answer,
● Great Asian denied the material allegations of the complaint claiming it was unfounded,
malicious, baseless, and unlawfully instituted since there was already a pending insolvency
proceedings, although Great Asian subsequently withdrew its petition for voluntary
insolvency. Great Asian further raised the alleged lack of authority of Arsenio to sign the
Deeds of Assignment as well as the absence of consideration and consent of all the parties
to the Surety Agreements signed by Tan Chong Lin.

Ruling of the Trial Court

● "From the foregoing facts and circumstances, the Court finds that the plaintiff has
established its causes of action against the defendants​ (Bancasia)​.

● The Board Resolution (Exh. "T"), dated March 17, 1981, authorizing Arsenio Lim Piat, Jr.,
general manager and treasurer of the defendant Great Asian to apply and negotiate for a
loan accommodation or credit line with the plaintiff Bancasia

● Plaintiff herein, sufficiently establish the liability of the defendant Great Asian to the plaintiff
for the amount of P1,042,005.00 sought to be recovered by the latter in this case.

● Great Asia and Tan Chong ordering the latter, jointly and severally, to pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the
filing of the complaint until the same is fully paid;

(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount due; and

Ruling of the Court of Appeals

● On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the
award of attorney’s fees

The Issues

1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF ​ASSIGNMENT

AND THUS BIND GREAT ASIAN;

2. WHETHER GREAT ASIAN IS ​LIABLE TO BANCASIA UNDER THE DEEDS OF

ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL CODE,
INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS LAW;

3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE SURETY
AGREEMENTS.
 The Supreme Court’s Ruling

The petition is bereft of merit.

1. First Issue: Authority of Arsenio to Sign the Deeds of Assignment

Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in his
personal capacity. The primordial question that must be resolved is whether Great Asian authorized
Arsenio to sign the Deeds of Assignment. If Great Asian so authorized Arsenio, then Great Asian is
bound by the Deeds of Assignment and must honor its terms.

The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate
powers of the corporation, save in those instances where the Code requires stockholders’ approval
for certain specific acts. Section 23 of the Code provides:

"SEC. 23. ​The Board of Directors or Trustees​. Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees x x x."

In the ordinary course of business, a corporation can borrow funds or dispose of assets of the
corporation only on authority of the board of directors. The board of directors normally designates
one or more corporate officers to sign loan documents or deeds of assignment for the corporation.

To secure a credit accommodation from Bancasia, ​the board of directors of Great Asian adopted two
board resolutions on different dates​, the first on March 17, 1981, and the second on February 10,
1982. These two board resolutions, as certified under oath by Great Asian’s Corporate Secretary
Mario K. Tan, state:

First Board Resolution

"RESOLVED, that the Treasurer of the corporation, ​Mr. Arsenio Lim Piat, Jr., be authorized as he is
authorized to apply for and negotiate for a ​loan accommodation or credit line i​ n the amount not to
exceed ONE MILLION PESOS (P1,000,000.00), with Bancasia Finance and Investment
Corporation, and likewise to sign any and all papers, documents, and/or promissory notes in
connection with said loan accommodation or credit line, including the power to mortgage such
10 ​
properties of the corporation as may be needed to effectuate the same."​ (Emphasis supplied)

Second Board Resolution

"RESOLVED that Great Asian Sales Center Corp. obtain a discounting line with BANCASIA
FINANCE & INVESTMENT CORPORATION, at prevailing discounting rates, in an amount not to
exceed** TWO MILLION PESOS ONLY (P2,000,000),** Philippine Currency.

RESOLVED FURTHER, that the corporation secure such other forms of credit lines with BANCASIA
FINANCE & INVESTMENT CORPORATION in an amount not to exceed** TWO MILLION PESOS
ONLY (P2,000,000.00),** PESOS, under such terms and conditions as the signatories may deem fit
and proper.

RESOLVED FURTHER, that the following persons be authorized individually, jointly or collectively to
sign, execute and deliver any and all instruments, documents, checks, sureties, etc. necessary or
incidental to secure any of the foregoing obligation:

(signed)

Specimen Signature

1​. ​ARSENIO LIM PIAT, JR.

2. _______________________

3. _______________________

4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and effective until revoked by the
Board of Directors in the manner prescribed by law, and that BANCASIA FINANCE & INVESTMENT
CORPORATION shall not be bound by any such revocation until such time as it is noticed in writing
11 ​
of such revocation."​ (Emphasis supplied)

The ​first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, to apply for a
"​loan accommodation or credit line​" ​with Bancasia for not more than P1.0 million. Also, the first
resolution explicitly authorizes Arsenio to sign any document, paper or promissory note, including
mortgage deeds over properties of Great Asian, to secure the loan or credit line from Bancasia.

The second board resolutio​n expressly authorizes Great Asian to secure a "​discounting line​" from
Bancasia for not more than P2.0 million. The second board resolution also expressly empowers
Arsenio, as the authorized signatory of Great Asian, "​to sign, execute and deliver any and all
documents, checks x x x necessary or incidental to secure"​ ​the discounting line. The second board
resolution specifically authorizes Arsenio to secure the discounting line "​under such terms and
conditions as (he) x x x may deem fit and proper.​ "

As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a ​loan or
discounting line from Bancasia. The two board resolutions also categorically designate Arsenio as
the authorized signatory to sign and deliver all the implementing documents, including checks, for
Great Asian. There is no iota of doubt whatsoever about the purpose of the two board resolutions,
and about the authority of Arsenio to act and sign for Great Asian. The second board resolution even
gave Arsenio ​full authority to agree with Bancasia on the terms and conditions of the discounting
line. Great Asian adopted the correct and proper board resolutions to secure a loan or discounting
line from Bancasia, and Bancasia had a right to rely on the two board resolutions of Great Asian.
Significantly, the two board resolutions specifically refer to Bancasia as the financing institution from
whom Great Asian will secure the loan accommodation or discounting line.

Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and
endorsing, the fifteen checks of Great Asian to Bancasia. On the face of the Deeds of Assignment,
the contracting parties are indisputably Great Asian and Bancasia as the names of these entities are
expressly mentioned therein as the assignor and assignee, respectively. ​Great Asian claims that
Arsenio signed the Deeds of Assignment in his personal capacity because Arsenio signed above his
printed name, below which was the word "Assignor"​, thereby making Arsenio the assignor. Great
Asian conveniently omits to state that the first paragraph of the Deeds expressly contains the
following words: "​the ASSIGNOR, Great Asian Sales Center, a domestic corporation x x x herein
represented by its Treasurer Arsenio Lim Piat, Jr.​ " The assignor is undoubtedly Great Asian,
represented by its Treasurer, Arsenio. The only issue to determine is whether the Deeds of
Assignment are indeed the transactions the board of directors of Great Asian authorized Arsenio to
sign under the two board resolutions.

Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a discount, over three
months, to Bancasia. The Deeds of Assignment uniformly state that Great Asian, –

"x x x for valuable consideration received, does hereby SELL, TRANSFER, CONVEY, and ASSIGN,
unto the ASSIGNEE, BANCASIA FINANCE & INVESTMENT CORP., a domestic corporation x x x,
the following ACCOUNTS RECEIVABLES due and payable to it, having an aggregate face value of
x x x."

The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen checks,
which were still not due and demandable then. In short, instead of waiting for the maturity dates of
the fifteen postdated checks, Great Asian sold the checks to Bancasia ​at less than the total face
value of the checks. In exchange for receiving an amount less than the face value of the checks,
Great Asian obtained immediately much needed cash. Over three months, Great Asian entered into
four transactions of this nature with Bancasia, showing that Great Asian availed of a discounting line
with Bancasia.

In the financing industry, the term "discounting line" means a credit facility with a financing company
or bank, which allows a business entity to sell, on a continuing basis, its accounts receivable at a
​
discount. The term "discount" means the sale of a receivable at less than its face value. The purpose
of a discounting line is to enable a business entity to generate instant cash out of its receivables
which are still to mature at future dates. The financing company or bank which buys the receivables
makes its profit out of the difference between the face value of the receivable and the discounted
price. Thus, Section 3 (a) of the Financing Company Act of 1998 provides:

"Financing companies" are corporations x x x primarily organized for the purpose of ​extending credit
facilities to consumers and to industrial, commercial or agricultural enterprises ​by discounting or
factoring commercial papers or ​accounts receivable, or by buying and selling contracts, leases,
chattel mortgages, or other ​evidences of indebtedness,​ or by financial leasing of movable as well as
immovable property." (Emphasis supplied)
This definition of "financing companies" is substantially the same definition as in the old Financing
Company Act (R.A. No. 5980).

Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and Exchange
Commission to implement the Financing Company Act of 1998 states:

"Discounting" is a type of receivables financing whereby evidences of indebtedness of a third party,

such as installment contracts, promissory notes and similar instruments, are purchased by, or
assigned to, a financing company in an amount or for a consideration less than their face value.​ "
(Emphasis supplied)

Likewise, this definition of "discounting" is an exact reproduction of the definition of "discounting" in

the implementing rules of the old Finance Company Act.

Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment were
the very transactions envisioned in the two board resolutions of Great Asian to raise funds for its
business. Arsenio acted completely within the limits of his authority under the two board resolutions.
Arsenio did exactly what the board of directors of Great Asian directed and authorized him to do.

Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign
the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of
Assignment as agent and authorized signatory of Great Asian ​under an authority expressly granted
by its board of directors. The signature of Arsenio on the Deeds of Assignment is effectively also the
signature of the board of directors of Great Asian, binding on the board of directors and on Great
Asian itself. Evidently, Great Asian shows its bad faith in disowning the Deeds of Assignment signed
by its own Treasurer, after receiving valuable consideration for the checks assigned under the
Deeds.

Second Issue: Breach of Contract by Great Asian

Bancasia’s complaint against Great Asian is founded on the latter’s breach of contract under the
​
Deeds of Assignment. The Deeds of Assignment uniformly stipulate​ as follows:

"​If for any reason the receivables or any part thereof cannot be paid by the obligor/s, the ASSIGNOR
unconditionally and irrevocably agrees to pay the same​, assuming the liability to pay, by way of
penalty three per cent (3%) of the total amount unpaid, for the period of delay until the same is fully
paid.

In case of any litigation which the ASSIGNEE may institute to enforce the terms of this agreement,
the ASSIGNOR shall be liable for all the costs, plus attorney’s fees equivalent to twenty-five (25%)
per cent of the total amount due. Further thereto, the ASSIGNOR agrees that any and all actions
which may be instituted relative hereto shall be filed before the proper courts of the City of Manila, all
other appropriate venues being hereby waived.
The last Deed of Assignmentcontains the following added stipulation:

"xxx Likewise, it is hereby understood that the ​warranties which the ASSIGNOR hereby made are
deemed part of the consideration for this transaction, such that any violation of any one, some, or all
of said warranties shall be deemed as deliberate misrepresentation on the part of the ASSIGNOR. In
such event, the monetary obligation herein conveyed unto the ASSIGNEE shall be conclusively
deemed defaulted, giving rise to the immediate responsibility on the part of the ASSIGNOR to make
good said obligation​, and making the ASSIGNOR liable to pay the penalty stipulated hereinabove as
if the original obligor/s of the receivables actually defaulted. xxx"

Obviously, there is one vital suspensive condition in the Deeds of Assignment​. That is, in case the
drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face
value of the dishonored checks, ​including penalty and attorney’s fees. The failure of the drawers to
pay the checks is a suspensive condition which gives rise to Bancasia’s right to demand payment
from Great Asian. This conditional obligation of Great Asian arises from its written contracts with
Bancasia as embodied in the Deeds of Assignment. Article 1157 of the Civil Code provides that -

"Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts."

By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay
Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated checks ​on
with recourse basis against itself. This is an obligation that Great Asian is bound to faithfully comply
because it has the force of law as between Great Asian and Bancasia. Article 1159 of the Civil Code
further provides that -

"Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith."

Great Asian and Bancasia agreed on this specific ​with recourse stipulation, despite the fact that the
receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties
had the right to adopt the ​with recourse stipulation ​which is separate and distinct from the warranties
of an endorser under the Negotiable Instruments Law. Article 1306 of the Civil Code provides that –

"The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy."
The explicit ​with recourse stipulation against Great Asian effectively enlarges, by agreement of the
parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus,
whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to
Bancasia because of the ​with recourse stipulation which is independent of the warranties of an
endorser under the Negotiable Instruments Law.

There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or new),
that prohibits Great Asian and Bancasia parties from adopting the ​with recourse stipulation uniformly
found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be
​
assigned. Assignment of a negotiable instrument is actually the principal mode of conveying
accounts receivable under the Financing Company Act. Since in discounting of receivables the
assignee is subrogated as creditor of the receivable, the endorsement of the negotiable instrument
becomes necessary to enable the assignee to collect from the drawer. This is particularly true with
checks because collecting banks will not accept checks unless endorsed by the payee. The purpose
of the endorsement is merely to facilitate collection of the proceeds of the checks.

The purpose of the endorsement is not to make the assignee finance company a holder in due
course because policy considerations militate against according finance companies the rights of a
​
holder in due course. Otherwise, consumers who purchase appliances on installment, giving their
promissory notes or checks to the seller, will have no defense against the finance company should
the appliances later turn out to be defective. Thus, the endorsement does not operate to make the
finance company a holder in due course. For its own protection, therefore, the finance company
usually requires the assignor, in a separate and distinct contract, to pay the finance company in the
event of dishonor of the notes or checks.

As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the
Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have
governed Bancasia’s cause of action. Bancasia, however, did not choose this route. Instead,
Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that
Bancasia had under the express ​with recourse​ stipulation in the Deeds of Assignment.

The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not
leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as
creditor of the receivables. Great Asian can then proceed against the drawers who issued the
checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no prejudice
whatever to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is not required if
the drawer has no right to expect or require the bank to honor the check, or if the drawer has
countermanded payment.In the instant case, all the checks were dishonored for any of the following
reasons: "account closed", "account under garnishment", insufficiency of funds", or "payment
stopped". In the first three instances, the drawers had no right to expect or require the bank to honor
the checks, and in the last instance, the drawers had countermanded payment.
Moreover, under common law, delay in notice of dishonor, where such notice is required, discharges
20 ​
the drawer only to the extent of the loss caused by the delay.​ This rule finds application in this
jurisdiction pursuant to Section 196 of the Negotiable Instruments Law which states, "Any case not
provided for in this Act shall be governed by the provisions of existing legislation, or in default
thereof, by the rules of the Law Merchant." Under Section 186 of the Negotiable Instruments Law,
delay in the presentment of checks discharges the drawer. However, Section 186 refers only to
delay in presentment of checks but is silent on delay in giving notice of dishonor. Consequently, the
common law or Law Merchant can supply this gap in accordance with Section 196 of the Negotiable
Instruments Law.

One other issue raised by Great Asian, that of lack of consideration for the Deeds of Assignment, is
completely unsubstantiated. The Deeds of Assignment uniformly provide that the fifteen postdated
checks were assigned to Bancasia "for valuable consideration." Moreover, Article 1354 of the Civil
Code states that, "Although the cause is not stated in the contract, ​it is presumed that it exists and is
lawful, unless the debtor proves the contrary." The record is devoid of any showing on the part of
Great Asian rebutting this presumption. On the other hand, Bancasia’s Loan Section Manager,
Cynthia Maclan, testified that Bancasia paid Great Asian a consideration at the discount rate of less
​
than 24% of the face value of the postdated checks. Moreover, in its verified petition for voluntary
insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia as one of its creditors,
an extra-judicial admission that Bancasia proved when it formally offered in evidence the verified
​
petition for insolvency. The Insolvency Law requires the petitioner to submit a schedule of debts that
​
must "contain a full and true statement of all his debts and liabilities." The Insolvency Law even
requires the petitioner to state in his verification that the schedule of debts contains "a full, correct
​
and true discovery of all my debts and liabilities x x x." Great Asian cannot now claim that the listing
of Bancasia as a creditor was not an admission of its debt to Bancasia but merely an
acknowledgment that Bancasia had sent a demand letter to Great Asian.

Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation but a
sale of the checks. With the sale, ownership of the checks passed to Bancasia, which must now,
according to Great Asian, sue the drawers and indorser of the check who are the parties primarily
liable on the checks. Great Asian forgets that under the Deeds of Assignment, Great Asian expressly
undertook to pay the full value of the checks in case of dishonor. Again, we reiterate that this
obligation of Great Asian is separate and distinct from its warranties as indorser under the
Negotiable Instruments Law.

Great Asian is, however, ​correct in saying that the assignment of the checks is a sale, or more
properly a discounting, of the checks and not a loan accommodation. However, it is precisely
because the transaction is a sale or a discounting of receivables, embodied in separate Deeds of
Assignment, that the relevant provisions of the Civil Code are applicable and not the Negotiable
Instruments Law.
At any rate, there is indeed a fine distinction between a discounting line and a loan accommodation.
If the accounts receivable, like postdated checks, are sold for a consideration less than their face
value, the transaction is one of discounting, and is subject to the provisions of the Financing
Company Act. The assignee is immediately subrogated as creditor of the accounts receivable.
However, if the accounts receivable are merely used as collateral for the loan, the transaction is only
a simple loan, and the lender is not subrogated as creditor until there is a default and the collateral is
foreclosed.

In summary, Great Asian’s four contracts assigning its fifteen postdated checks to Bancasia
expressly stipulate the suspensive condition that in the event the drawers of the checks fail to pay,
Great Asian itself will pay Bancasia​. Since the common condition in the contracts had transpired, an
obligation on the part of Great Asian arose from the four contracts, and that obligation is to pay
Bancasia the full value of the checks, including the stipulated penalty and attorney’s fees.

Third Issue: The liability of surety Tan Chong Lin

Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the
Surety Agreements he signed wherein he solidarily held himself liable with Great Asian for the
payment of its debts to Bancasia. The Surety Agreements contain the following common condition:

"Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above
mentioned, or in case of the Principal’s failure promptly to respond to any other lawful demand made
by the Creditor, its successors, administrators or assigns, ​both the Principal and the Surety/ies shall
be considered in default and the Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal​, whether due or not due, and whether held by the Creditor as
Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due
from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and
purposes."

Indisputably, ​Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia, solidarily
with Great Asian, if the drawers of the checks fail to pay on due date. ​The condition on which Tan
Chong Lin’s obligation hinged had happened. As surety, Tan Chong Lin automatically became liable
for the entire obligation to the same extent as Great Asian.

Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment enlarge
or increase his risks under the Surety Agreements:

"The ASSIGNOR warrants:

1. the soundness of the receivables herein assigned;

2. that said receivables are duly noted in its books and are supported by appropriate documents;

3. that said receivables are genuine, valid and subsisting;

4. that said receivables represent bona fide sale of goods, merchandise, and/or services rendered in
the ordinary course of its business transactions;

5. that the obligors of the receivables herein assigned are solvent;

6. that it has valid and genuine title to and indefeasible right to dispose of said accounts;

7. that said receivables are free from all liens and encumbrances;

8. that the said receivables are freely and legally transferable, and that the obligor/s therein will not
interpose any objection to this assignment, and has in fact given his/their consent hereto."

Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially altered his
obligations under the Surety Agreements​, and therefore he is released from any liability to Bancasia.
Under Article 1215 of the Civil Code, what releases a solidary debtor is a "novation, compensation,
confusion or remission of the debt" made by the creditor with any of the solidary debtors. These
warranties, however, are the usual warranties made by one who discounts receivables with a
financing company or bank. The Surety Agreements, written on the letter head of "Bancasia Finance
& Investment Corporation," uniformly state that "Great Asian Sales Center x x x has obtained and/or
desires to obtain loans, overdrafts, ​discounts and/or other forms of credits from" Bancasia. Tan
Chong Lin was clearly on notice that he was holding himself as surety of Great Asian which was
discounting postdated checks issued by its buyers of goods and merchandise. Moreover, Tan Chong
Lin, as President of Great Asian, cannot feign ignorance of Great Asian’s business activities or
discounting transactions with Bancasia. Thus, the warranties do not increase or enlarge the risks of
Tan Chong Lin under the Surety Agreements. There is, moreover, no novation of the debt of Great
Asian that would warrant release of the surety.

In any event, the provisions of the Surety Agreements are broad enough to include the obligations of
Great Asian to Bancasia under the warranties. The first Surety Agreement states that:

"x x x ​herein Surety/ies, jointly and severally among themselves and likewise with principal, hereby
agree/s and bind/s himself/themselves to pay at maturity all the notes, drafts, bills of exchange,
overdraft and other obligations of every kind which the Principal may now or may hereafter owe the
Creditor,​ including extensions or renewals thereof in the sum *** ONE MILLION ONLY*** PESOS
(P1,000,000.00), Philippine Currency, plus stipulated interest thereon at the rate of sixteen percent
(16%) per annum, or at such increased rate of interest which the Creditor may charge on the
Principal’s obligations or renewals or the reduced amount thereof, plus all the costs and expenses
which the Creditor may incur in connection therewith.

xxx

Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above
mentioned, or in case of the Principal’s failure promptly to respond to any other lawful demand made
by the Creditor​, its successors, administrators or assigns, both the Principal and the Surety/ies shall
be considered in default and the ​Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal​, whether due or not due, and whether held by the Creditor as
Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due
from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and
purposes. (Emphasis supplied)

The second Surety Agreement contains the following provisions:

"x x x ​herein Surety/ies, jointly and severally among themselves and likewise with PRINCIPAL,
hereby ​agree and bind themselves to pay at maturity all the notes, drafts, bills of exchange, overdraft
and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the
Creditor,​ including extensions and/or renewals thereof in the principal sum not to exceed TWO
MILLION (P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest thereon, or such
increased or decreased rate of interest which the Creditor may charge on the principal sum
outstanding pursuant to the rules and regulations which the Monetary Board may from time to time
promulgate, together with all the cost and expenses which the CREDITOR may incur in connection
therewith.

If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity any of the obligations or
amounts due to the CREDITOR, or if for any reason whatsoever the PRINCIPAL fails to promptly
respond to and comply with any other lawful demand made by the CREDITOR, or if for any reason
whatsoever any obligation of the PRINCIPAL in favor of any person or entity should be considered
as defaulted, then both the PRINCIPAL and the SURETY/IES shall be considered in default under
the terms of this Agreement. ​Pursuant thereto, ​the SURETY/IES agree/s to pay jointly and severally
with the PRINCIPAL, all outstanding obligations of the CREDITOR,​ whether due or not due, and
whether owing to the PRINCIPAL in its personal capacity or as agent of any person, endorsee,
assignee or transferee. x x x. (Emphasis supplied)

Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when the obligation
expressly so states, or when the law or nature of the obligation requires solidarity." The stipulations
in the Surety Agreements undeniably mandate the solidary liability of Tan Chong Lin with Great
Asian. Moreover, the stipulations in the Surety Agreements are sufficiently broad, expressly
encompassing "​all the notes, drafts, bills of exchange, overdraft and other obligations of every kind
which the PRINCIPAL may now or may hereafter owe the Creditor"​ . Consequently, Tan Chong Lin
must be held solidarily liable with Great Asian for the nonpayment of the fifteen dishonored checks,
including penalty and attorney’s fees in accordance with the Deeds of Assignment.

The Deeds of Assignment stipulate that in case of suit Great Asian shall pay attorney’s fees
equivalent to 25% of the outstanding debt. The award of attorney’s fees in the instant case is
25 ​
justified,​ not only because of such stipulation, but also because Great Asian and Tan Chong Lin
acted in gross and evident bad faith in refusing to pay Bancasia’s plainly valid, just and demandable
claim. We deem it just and equitable that the stipulated attorney’s fee should be awarded to
Bancasia.

The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of failure to
pay, but the Deeds are silent on whether this penalty is a running monthly or annual penalty. Thus,
the 3% penalty can only be considered as a one-time penalty. Moreover, the Deeds of Assignment
do not provide for interest if Great Asian fails to pay. We can only award Bancasia legal interest at
12% interest per annum, and only from the time it filed the complaint because the records do not
26 ​
show that Bancasia made a written demand on Great Asian prior to filing the complaint.​ Bancasia
made an extrajudicial demand on Tan Chong Lin, the surety, but not on the principal debtor, Great
Asian.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167 is
AFFIRMED with MODIFICATION. Petitioners are ordered to pay, solidarily, private respondent the
following amounts: (a) P1,042,005.00 plus 3% penalty thereon, (b) interest on the total outstanding
amount in item (a) at the legal rate of 12% per annum from the filing of the complaint until the same
is fully paid, (c) attorney’s fees equivalent to 25% of the total amount in item (a), including interest at
12% per annum on the outstanding amount of the attorney’s fees from the finality of this judgment
until the same is fully paid, and (c) costs of suit.

SO ORDERED.

Vitug, (Acting Chairman), and Panganiban, JJ., concur.

Melo, (Chairman), J.,​ on leave.

Sandoval-Gutierrez, J.,​ no part.

Bank of America vs. Philippine Racing Club

● This is a petition for review on certiorari under.

● CA had affirmed the decision of the RTC in favor of The Philippine Racing Club so the
bank of America raised the issue to the Supreme Court.

Facts:

● PRC is a domestic corporation which maintains several accounts with different banks in
Manila. Among these accounts was the current Account with BA (Paseo de Roxas Branch).
The authorized joint signatories with respect to said Current Account were plaintiff-appellee’s
President (Antonia Reyes) and Vice President for Finance (Gregorio Reyes).

● On or about the 2nd week of December 1988, the President and Vice President of PRC’s
corporation were scheduled to go out of the country in connection with the corporation’s
business.

● In order not to disrupt operations in their absence, they pre-signed several checks relating to
Current Account No. 58891-012. The intention was to ensure continuity of plaintiff-appellee’s
operations by making available cash/money especially to settle obligations that might
become due.

● These checks were ​entrusted to the accountant with instruction to make use of the same as
the need arose.

● It turned out that on December 16, 1988, a ​John Doe presented to defendant-appellant bank
for encashment

● Two pre-signed checks worth 110k each were presented

● The two (2) checks had similar entries with similar infirmities and irregularities. ​On the space
where the name of the payee should be indicated (Pay To The Order Of) the following 2-line
entries were instead typewritten: ​on the upper line was the word ​"CASH" while the lower line
had the following typewritten words, viz: "ONE HUNDRED TEN THOUSAND PESOS
ONLY."

● Despite the highly irregular entries on the face of the checks, defendant-appellant bank,
without as much as verifying and/or confirming the legitimacy of the checks ​encashed said
checks​. A verification process, even by was of a telephone call to PRCI office, would have
taken less than ten (10) minutes. But this was not done by BA.

● Investigation conducted by plaintiff-appellee corporation yielded the fact that there was no
transaction involving PRCI that call for the payment of P220,000.00 to anyone. The checks
 appeared to have come into the hands of an employee of PRCI (one Clarita Mesina who was
subsequently criminally charged for qualified theft) who eventually completed without
authority the entries on the pre-signed checks.

● PRCI’s demand for the bank to pay fell on deaf ears. Hence, the complaint.

RTC

● PRC won

CA

● Bank of America appealed

● CA however, affirmed said decision in toto in its July 16, 2001 Decision. Petitioner’s Motion
for Reconsideration of the CA Decision was subsequently denied on September 28, 2001.

SC

Petitioner now comes before this Court arguing that:

I. The Court of Appeals gravely ​erred in holding that the proximate cause of
respondent’s loss was petitioner’s encashment of the checks.

A. The Court of Appeals gravely erred in holding that petitioner was ​liable for the
amount of the checks despite the fact that petitioner was merely fulfilling its obligation
under law and contract.

B. The Court of Appeals gravely erred in holding that ​petitioner had a duty to verify the
encashment, despite the absence of any obligation to do so.

C. The Court of Appeals gravely erred in not applying Section 14 of the Negotiable
Instruments Law, despite its clear applicability to this case;

II. The Court of Appeals gravely erred in not holding that the ​proximate cause of
respondent’s loss was its own grossly negligent practice of pre-signing checks without
payees and amounts and delivering these pre-signed checks to its employees

SC RULING

● From the discussions of both parties in their pleadings, the key issue to be resolved in
the present case is whether the proximate cause of the wrongful encashment of the
 checks in question was due to (a) petitioner’s failure to make a verification regarding
the said checks with the respondent in view of the misplacement of entries on the face
of the checks or (b) the practice of the respondent of pre-signing blank checks and
leaving the same with its employees. (So basically, whose fault is it?)

● Bank of America insists that it merely fulfilled its obligation under law and contract when it
encashed the aforesaid checks. Invoking Sections 126​7 and 185​8 of the Negotiable
Instruments Law (NIL), petitioner claims that its ​duty as a drawee bank to a drawer-client
maintaining a checking account with it is to pay orders for checks bearing the drawer-client’s
genuine signatures. The genuine signatures of the client’s duly authorized signatories affixed
on the checks signify the order for payment. Thus, pursuant to the said obligation, the
drawee bank has the duty to determine whether the signatures appearing on the check are
the drawer-client’s or its duly authorized signatories.

● If the signatures are genuine, the bank has the unavoidable legal and contractual duty
to pay. If the signatures are forged and falsified, the drawee bank has the corollary,
but equally unavoidable legal and contractual, duty not to pay

● Furthermore, Bank of America maintains that there exists a duty on the drawee bank to
inquire from the drawer before encashing a check only when the check bears a material
alteration​. A material alteration is defined in Section 125 of the NIL to be one which
changes the date, the sum payable, the time or place of payment, the number or relations of
the parties, the currency in which payment is to be made or one which adds a place of
payment where no place of payment is specified, or any other change or addition which
alters the effect of the instrument in any respect. ​With respect to the checks at issue,
petitioner points out that they do not contain any material alteration. ​This is a fact which was
affirmed by the trial court itself.

● There is no dispute that the signatures appearing on the subject checks were genuine
signatures of the respondent’s authorized joint signatories; namely, Antonia Reyes and
Gregorio Reyes who were respondent’s President and Vice-President for Finance,
respectively. Both pre-signed the said checks since they were both scheduled to go abroad
and it was apparently their practice to leave with the company accountant checks signed in
black to answer for company obligations that might fall due during the signatories’ absence.
It is ​likewise admitted that neither of the subject checks contains any material alteration or
erasure.

● However, ​on the blank space of each check reserved for the payee, the following typewritten
words appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the
typewritten word, "CASH." ​On the blank reserved for the amount, the same amount of One
Hundred Ten Thousand Pesos was indicated with the use of a check writer. The presence of
 these irregularities in each check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.

● It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact business with
them. They have the obligation to treat their client’s account meticulously and with the
highest degree of care, considering the fiduciary nature of their relationship. ​The diligence
required of banks, therefore, is more than that of a good father of a family.

● Bank of America asserts ​that it was not duty-bound to verify with the respondent since the
amount below the typewritten word "CASH," expressed in words, is the very same amount
indicated in figures by means of a check writer ​on the amount portion of the check. The
amount stated in words is, therefore, a mere reiteration of the amount stated in figures.
Petitioner emphasizes that a ​reiteration of the amount in words is merely a repetition and that
a repetition is not an alteration ​which if present and material would have enjoined it to
commence verification with respondent.​13

SC SPEAKS

● We do not agree with petitioner’s myopic view and carefully crafted defense. Although not in
the strict sense "material alterations," ​the misplacement of the typewritten entries for the
payee and the amount on the same blank and the repetition of the amount using a check
writer were glaringly obvious irregularities on the face of the check. Clearly, someone made
a mistake in filling up the checks and the repetition of the entries was possibly an attempt to
rectify the mistake. ​Also, if the check had been filled up by the person who customarily
accomplishes the checks of respondent, ​it should have occurred to petitioner’s employees
that it would be unlikely such mistakes would be made. All these circumstances should have
alerted the bank to the possibility that the holder or the person who is attempting to encash
the checks did not have proper title to the checks ​or did not have authority to fill up and
encash the same.

● As noted by the CA, petitioner could have made a simple phone call to its client to clarify the
irregularities and the loss to respondent due to the encashment of the stolen checks would
have been prevented.

● In the case at bar, extraordinary diligence demands that petitioner should have ascertained
from respondent the authenticity of the subject checks or the accuracy of the entries therein
not only because of the presence of highly irregular entries on the face of the checks but also
of the decidedly unusual circumstances surrounding their encashment. Respondent’s
witness testified that for checks in amounts greater than Twenty Thousand Pesos
(₱20,000.00) it is the company’s practice to ensure that the payee is indicated by name in the
 check.​14 This was not rebutted by petitioner. Indeed, it is ​highly uncommon for a corporation
to make out checks payable to "CASH" for substantial amounts such as in this case. If each
irregular circumstance in this case were taken singly or isolated, the bank’s employees might
have been justified in ignoring them. However, the confluence of the irregularities on the face
of the checks and circumstances that depart from the usual banking practice of respondent
should have put petitioner’s employees on guard that the checks were possibly not issued by
the respondent in due course of its business. Petitioner’s subtle sophistry cannot exculpate it
from behavior that fell extremely short of the highest degree of care and diligence required of
it as a banking institution.

● Indeed, taking this with the testimony of petitioner’s operations manager that in case of an
irregularity on the face of the check (such as when blanks were not properly filled out) the
bank may or may not call the client depending on how busy the bank is on a particular day,​15
we are even more convinced that petitioner’s safeguards to protect clients from check fraud
are arbitrary and subjective. Every client should be treated equally by a banking institution
regardless of the amount of his deposits and each client has the right to expect that every
centavo he entrusts to a bank would be handled with the same degree of care as the
accounts of other clients. Perforce, we find that petitioner plainly failed to adhere to the high
standard of diligence expected of it as a banking institution.

● In defense of its cashier/teller’s questionable action, petitioner insists that pursuant to

Sections 14​16 and 16​17 of the NIL, it could validly presume, upon presentation of the checks,
that the party who filled up the blanks had authority and that a valid and intentional delivery
to the party presenting the checks had taken place. ​Thus, in petitioner’s view, the sole blame
for this debacle should be shifted to respondent for having its signatories pre-sign and deliver
the subject checks​.18
​ Petitioner argues that there was indeed delivery in this case because,
following American jurisprudence, the gross negligence of respondent’s accountant in
safekeeping the subject checks which resulted in their theft should be treated as a voluntary
delivery by the maker who is estopped from claiming non-delivery of the instrument.​19

● Petitioner’s contention would have been correct if the subject checks were correctly and
properly filled out by the thief and presented to the bank in good order. In that instance, there
would be nothing to give notice to the bank of any infirmity in the title of the holder of the
checks and it could validly presume that there was proper delivery to the holder. The bank
could not be faulted if it encashed the checks under those circumstances. ​However, the
undisputed facts plainly show that there were circumstances that should have alerted the
bank to the likelihood that the checks were not properly delivered to the person who
encashed the same. In all, we see no reason to depart from the finding in the assailed CA
Decision that the subject checks are properly characterized as incomplete and undelivered
instruments thus making ​Section 15​20 of the NIL applicable in this case. (Cause the bank
tried to use this as a defense)
● However, we do ​agree with petitioner that respondent’s officers’ practice of pre-signing of
blank checks should be deemed seriously negligent behavior and a highly risky means of
purportedly ensuring the efficient operation of businesses. It ​should have occurred to
respondent’s officers and managers that the pre-signed blank checks could fall into the
wrong hands as they did in this case where the said checks were stolen from the company
accountant to whom the checks were entrusted.

● Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the
loss, petitioner will still emerge as the party foremost liable in this case. ​In instances where
both parties are at fault, this Court has consistently applied the doctrine of last clear chance
in order to assign liability.

In Westmont Bank v. Ong,​21​ we ruled:

…[I]t is petitioner [bank] which had the last clear chance to stop the fraudulent encashment
of the subject checks had it exercised due diligence ​and followed the proper and regular
banking procedures in clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is chargeable with the
consequences thereof.​22​ (emphasis ours)

● In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence
on the part of respondent because, even if we concur that the latter was indeed negligent in
pre-signing blank checks, the former had the last clear chance to avoid the loss. ​To reiterate,
petitioner’s own operations manager admitted that they could have called up the client for
verification or confirmation before honoring the dubious checks. Verily, petitioner had the
final opportunity to avert the injury that befell the respondent. Failing to make the necessary
verification due to the volume of banking transactions on that particular day is a flimsy and
unacceptable excuse, considering that the "banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount importance
such that the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence."​23 Petitioner’s negligence has been undoubtedly established and, thus,
pursuant to Art. 1170 of the NCC,​24​ it must suffer the consequence of said negligence.

● In the interest of fairness, however, we believe it is proper to consider respondent’s own

negligence to mitigate petitioner’s liability. Article 2179 of the Civil Code provides:

Art. 2179. When the plaintiff’s own negligence was the immediate and proximate cause of his
injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant’s lack of due care, the
plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.​ 1avvph!1

Explaining this provision in Lambert v. Heirs of Ray Castillon,​25​ the Court held:
 ● The underlying precept on contributory negligence is that a plaintiff who is partly responsible
for his own injury should not be entitled to recover damages in full but must bear the
consequences of his own negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence​. xxx xxx xxx

● As we previously stated, ​respondent’s practice of signing checks in blank whenever its

authorized bank signatories would travel abroad was a dangerous policy, especially
considering the lack of evidence on record that respondent had appropriate safeguards or
internal controls to prevent the pre-signed blank checks from falling into the hands of
unscrupulous individuals and being used to commit a fraud against the company. We cannot
believe that there was no other secure and reasonable way to guarantee the non-disruption
of respondent’s business. As testified to by petitioner’s expert witness, other corporations
would ordinarily have another set of authorized bank signatories who would be able to sign
checks in the absence of the preferred signatories.​26 Indeed, if not for the fortunate
happenstance that the thief failed to properly fill up the subject checks, respondent would
expectedly take the blame for the entire loss since the defense of forgery of a drawer’s
signature(s) would be unavailable to it. Considering that respondent knowingly took the risk
that the pre-signed blank checks might fall into the hands of wrongdoers, it is but just that
respondent shares in the responsibility for the loss.

● We also cannot ignore the fact that the ​person who stole the pre-signed checks subject of
this case from respondent’s accountant turned out to be another employee, purportedly a
clerk in respondent’s accounting department. As the employer of the "thief," respondent
supposedly had control and supervision over its own employee. This gives the Court more
reason to allocate part of the loss to respondent.

● Following established jurisprudential precedents,​2​7 we believe the allocation of sixty percent

(60%) of the actual damages involved in this case (represented by the amount of the checks
with legal interest) to petitioner is proper under the premises. ​Respondent should, in light of
its contributory negligence, bear forty percent (40%) of its own loss.

● Finally, we find that the ​awards of attorney’s fees and litigation expenses in favor of
respondent are not justified ​under the circumstances and, thus, must be deleted. The power
of the court to award attorney’s fees and litigation expenses under Article 2208 of the NCC
demands factual, legal, and equitable justification.

WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution dated
September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner Bank of
America NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%) of the sum of
Two Hundred Twenty Thousand Pesos (₱220,000.00) ​with legal interest as awarded by the trial
court and (b) the awards of attorney’s fees and litigation expenses in favor of respondent are
deleted.
Salazar vs. J.Y Brothers

Before us is a petition for review seeking to annul and set aside the decision of the CA

Facts:

● J.Y Bros is a ​corporation engaged in the business of selling sugar, rice and other
commodities.

● On October 15, 1996, Anamer ​Salazar, a freelance sales agent, was approached by two
people: kaleja and kalos, they asked if she knew a supplier of rice​.

● ​ alazar accompanied the two to J.Y. Bros. As a consequence,

Answering in the positive, S
Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worth
₱214,000.00.

● As payment, S​alazar negotiated and indorsed to J.Y. Bros. ​Prudential Bank Check No.
067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of
₱214,000.00​ with the ​assurance that the check is good as cash.

● On that assurance, ​J.Y. Bros. parted with 300 cavans of rice to Salazar​. However, upon
presentment, the check was dishonored due to "closed account."

● Informed of the dishonor of the check​, Calleja, Kallos and Salazar delivered to J.Y. Bros. a
replacement cross ​Solid Bank Check No​. PA365704 dated October 29, 1996 again issued
by Nena Jaucian Timario in the amount of ₱214,000.00 but which, just the same, bounced
due to insufficient funds.

● When ​despite the demand lette​r dated February 27, 1997, Salazar failed to settle the amount
due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa ​before the
Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474.

● After the prosecution rested its case and with prior leave of court, Salazar submitted a
demurrer to evidence. On November 19, 2001, the court ​a quo rendered an Order, the
dispositive portion of which reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the
crime charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D.
Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of ₱214,000.00.
Costs against the accused.

SO ORDERED.

RTC Again After MR

● The RTC found that the Prudential Bank check drawn by Timario for the amount of
₱214,000.00 was payable to the order of respondent, and such check was a negotiable order
instrument; that petitioner was not the payee appearing in the check, but respondent who
had not endorsed the check, much less delivered it to petitioner. It then found that
petitioner’s liability should be limited to the allegation in the amended information that "she
endorsed and negotiated said check," and since she had never been the holder of the check,
petitioner's signing of her name on the face of the dorsal side of the check did not produce
the technical effect of an indorsement arising from negotiation.

● The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a
Solid Bank check which, however, was also subsequently dishonored; that since the Solid
Bank check was a crossed check, which meant that such check was only for deposit in
payee’s account, a condition that rendered such check non-negotiable, the substitution of a
non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential
change which had the effect of discharging from the obligation whoever may be the endorser
of the negotiable check. The RTC concluded that the absence of negotiability rendered
nugatory the obligation arising from the technical act of indorsing a check and, thus, had the
effect of novation; and that the ultimate effect of such substitution was to extinguish the
obligation arising from the issuance of the Prudential Bank check.

CIVIL LIABILITY EXTINGUISHED

CA:

J.Y brothers filed an appeal with the CA on the sole assignment of error that:

● IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR
BY INDORSING THE CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID
NOT PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT ARISING FROM
NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.​6

Instant appeal is GRANTED, the challenged Decision is REVERSED and SET ASIDE, and a new
one entered ordering the appellee to pay the appellant the amount of ₱214,000.00, plus interest at
the legal rate from the written demand until full payment. Costs against the appellee.
In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later
replaced by a Solid Bank check issued by Timario, also indorsed by petitioner as payment for the
300 cavans of rice bought from respondent. ​The CA, applying Sections 63,​8 66​9 and 29​10 of the
Negotiable Instruments Law, found that ​petitioner was considered an indorser of the checks paid to
respondent and considered her as an accommodation indorser, who was liable on the instrument to
a holder for value, notwithstanding that such holder at the time of the taking of the instrument knew
her only to be an accommodation party.

SC

Salazar raised the following issues:

1. THE COURT OF APPEALS ERRED IN ​IGNORING THE RAMIFICATIONS OF THE ISSUANCE

OF THE SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH
WOULD HAVE RESULTED TO THE NOVATION OF THE OBLIGATION ARISING FROM THE
ISSUANCE OF THE LATTER CHECK.

2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL
COURT OF LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL
ASPECT OF THE CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION
ARISING FROM THE ISSUANCE OF THE PRUDENTIAL BANK CHECK.

3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO

LACK OR EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR
RECONSIDERATION OF THE PETITIONER ON THE GROUND THAT THE ISSUE RAISED
THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN THE DECISION
SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH ISSUE HAD NOT
BEEN RESOLVED AS YET.​11

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the
respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that
discharged the latter check; that respondent's acceptance of the Solid Bank check, notwithstanding
its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility,
under Article 315 of the Revised Penal Code, t​he drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof in the amount of ₱214,000.00; and that a check is a
contract which is susceptible to a novation just like any other contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 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. (Emphasis ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

xxxx

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the
dishonored Prudential bank check resulted to novation which discharged the latter check is
unmeritorious.

In ​Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co.,
Inc.​,12​
​ we stated the concept of novation, thus:

x x x ​Novation is done by the substitution or change of the obligation by a subsequent one which
extinguishes the first, either by changing the object or principal conditions, or by substituting the
person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never presumed; there must be an express intention to
novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to
dissolve the old obligation as the moving consideration for the emergence of the new one​. Implied
novation necessitates that the incompatibility between the old and new obligation be total on every
point such that the old obligation is completely superceded by the new one. The test of
incompatibility is whether they can stand together, each one having an independent existence; if
they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, ​first,​ extinguishing an existing obligation
and, ​second,​ creating a new one in its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a
new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.
Novation is merely modificatory where the change brought about by any subsequent agreement is
merely incidental to the main obligation (​e.g.,​ a change in interest rates or an extension of time to
pay; in this instance, the new agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.)
The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the
old, changes only the terms of payment, adds other obligations not incompatible with the old ones or
the new contract merely supplements the old one.​13

In ​Nyco Sales Corporation v. BA Finance Corporation,​ 14

​ we found u​ntenable petitioner Nyco's claim
that novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was
subsequently replaced by a Security Bank check,​15​ and said:

● There are ​only two ways which indicate the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the
same. First, novation must be explicitly stated and declared in unequivocal terms as
novation is never presumed. Secondly, the old and the new obligations must be
incompatible on every point.​ The test of incompatibility is whether or not the two
1avvph​i1

obligations can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the first. In the instant
case, there was no express agreement that BA Finance's acceptance of the SBTC
check will discharge Nyco from liability. Neither is there incompatibility because both
checks were given precisely to terminate a single obligation arising from Nyco's sale
of credit to BA Finance. As novation speaks of two distinct obligations, such is
inapplicable to this case.​16

In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as there was no express agreement to establish
that petitioner was already discharged from his liability to pay respondent the amount of ₱214,000.00
as payment for the 300 bags of rice.

As we said, novation is never presumed, there must be an express intention to novate. In fact, when
the Solid Bank check was delivered to respondent, the same was also indorsed by petitione​r which
shows petitioner’s recognition of the existing obligation to respondent to pay ₱214,000.00 subject of
the replaced Prudential Bank check.

Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility,
since the two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying
the amount of ₱214,000.00, ​i.e​., the credit obtained from the purchase of the 300 bags of rice from
respondent. Indeed, there was no substantial change in the object or principal condition of the
obligation of petitioner as the indorser of the check to pay the amount of ₱214,000.00. It would
appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her
obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being
a crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a
new obligation in lieu of the old obligation arising from the issuance of the Prudential Bank check,
since there was an essential change in the circumstance of each check.
Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check.​17 The Negotiable
Instruments Law is silent with respect to crossed checks,​18 although the Code of Commerce ​makes
reference to such instruments.​19 We have taken judicial cognizance of the practice that a check with
two parallel lines in the upper left hand corner means that it could only be deposited and could not
be converted into cash.​20 Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, ​i.e.​ , the
payee named therein.​21 The change in the mode of paying the obligation was not a change in any of
the objects or principal condition of the contract for novation to take place.​22

Considering that when the Solid Bank check, which replaced the Prudential Bank check, was
presented for payment, the same was again dishonored; thus, the obligation which was secured by
the Prudential Bank check was not extinguished and the Prudential Bank check was not discharged.
Thus, we found no reversible error committed by the CA in holding petitioner liable as an
accommodation indorser for the payment of the dishonored Prudential Bank check.

WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution
dated March 2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are ​AFFIRMED.

SECTION 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.