G.R. No.

L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO,
partners of the defunct partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion &
Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents.
Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate Appellate Court,
affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their real estate mortgage and held them
jointly and severally liable with the principal debtors on a promissory note which they signed as accommodation makers.
The factual background of this case is stated in the decision of the appellate court:
Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by T.C.T. 35161 of
the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by the appellants to the Philippine
National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio.
Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a pending
contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of the municipal building in
Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction,
Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to
mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB.
After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate Mortgage',
mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and
conditions of the original mortgage for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both
documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00
dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company,
and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the
PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the
'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company,
executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account
of the contract for the construction of the Puerto Princesa building in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB, conditioned, however
that they should be for labor and materials, made three payments to the Company on account of the contract price
totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for
the reason that since the loan was already overdue as of April 28, 1956, the remaining balance of the contract price
should be applied to the loan.
The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded the
construction contract and assumed the work of completing the building. On November 14, 1958, appellants wrote the
PNB contending that since the PNB authorized payments to the Company instead of on account of the loan guaranteed
by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which
entitled the latter to a cancellation of their mortgage contract.
Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the
PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan,
seeking the cancellation of their real estate mortgage. The complaint was amended to exclude the Company as
defendant, it having been shown that its life as a partnership had already expired and, in lieu thereof, Ramon
Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as
defendants.
After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from their obligation
under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were ordered to pay jointly and severally
with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from
the date of the filing of the complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees.

The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties together with all
the improvements thereon belonging to the petitioners would be sold at public auction and applied to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners' liability is that of
solidary co-makers and that since "the amounts released to the construction company were used therein and, therefore, were spent for the
successful accomplishment of the work constructed for, the authorization made by the Philippine National Bank of partial payments to the
construction company which was also one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors.
Moreover, those who rendered services and furnished materials in the construction are preferred creditors and have a lien on the price of the
contract." The appellate court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three
payments in the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to the
deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners everytime it
authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present in the form of errors:
I. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY
CO-DEBTORS INSTEAD OF SURETIES:
II. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED
FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND
CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS
MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO
SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN
ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors
such that "a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties,
completely discharges the sureties from all liability on the contract of suretyship. " They state that when respondent PNB did not apply the
initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment, they were released from their obligation
as sureties and, therefore, the real estate mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
Liability of accommodation party. An accommodation party is one 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.
Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the accommodated
party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation party
remains not only primary but also unconditional to a holder for value such that 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.
Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled in Ang Tiong v. Ting (22
SCRA 713, 716):
3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to
protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as
the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that
the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is
immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder
for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give
unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a
holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing
the defense that he is a mere accommodation indorser.
There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory
note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely
immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released
from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and
consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in

this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments
Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal
defenses which may be set up against a party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course
under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he
does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable (Section
58, Negotiable Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?
Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing
than a mere assignee.
In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not
directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71):
We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before
maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was negotiated as a
completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude
the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was
delivered.
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it
was held:
It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the
parties between whom there is a privity-the consideration may be inquired into; and as to them the only superiority of a
bill or note over other unsealed evidence of debt is that it prima facie imports a consideration.
Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the
respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners
knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the
Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners
were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB
altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred
and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all
payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal
Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and
conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the
assignor to execute to evidence the above-mentioned obligation."
Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the
consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of
which loan was guaranteed by the petitioners in the amount of P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the
Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property
once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a
holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply
with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of
release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note
became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as
sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same,
including PNB.
It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however,
that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses
did not need the money for themselves.

The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but
the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and
signed the promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage.
They only want to have it cancelled because the Bank violated the deed of assignment and extended the period of time of payment of the
promissory note without the petitioners' consent and to the latter's detriment.
The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should
be foreclosed or cancelled. Without the promissory note which determines the amount of indebtedness there would have been no basis for
the mortgage.
True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor on the promissory
note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one
and the samethe Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason
why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the
debt or to foreclose on their property.
Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the
wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first
place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the
deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should
bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the
wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation
proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies
available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the
condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated
earlier, was the principal reason why the petitioners consented to become accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court is hereby REVERSED
and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory note and under the mortgage contract. The
Philippine National Bank is ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the amount
of THREE THOUSAND PESOS (P3,000.00) as attorney's fees.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

The Lawphil Project - Arellano Law Foundation

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 sellerassignor 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
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTSAPPELLANTS 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 and signed by the maker; it contains an

unconditional promise to pay a certain 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 SELLERASSIGNOR 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 sellerassignor, 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 sellerassignor'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.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
G.R. No. 76788 January 22, 1990
JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance &
Leasing Corporation v. Salas", which modified the decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a
collection suit between the same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor vehicle from the Violago
Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to
Filinvest Finance & Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the
vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she
discovered when the vehicle figured in an accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial
Court of San Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff
the sum of P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and
the further amount of P1,000.00 as attorney's fees.
The counterclaim of defendant is dismissed.
With costs against defendant.

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to
petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved from the
obligation under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which is
quoted hereunder:
The allegations, statements, or admissions contained in a pleading are conclusive as
against the pleader. A party cannot subsequently take a position contradictory of, or
inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by
the parties in the pleadings, or in the course of the trial or other proceedings, do not
require proof and cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs.
Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written instrument, copied in or attached to
the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party,

under oath, specifically denied them, and sets forth what he claims to be the facts (Sec.
8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's
motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as
admitted by the plaintiff, defendant's account became delinquent only beginning May,
1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining
balance of P54,908.30 at l4% per annum from October 2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is hereby modified
ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from
October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With
costs to defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad faith
and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and which fraud,
bad faith and misrepresentation supposedly released petitioner from any liability to private respondent
who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by description 4 which she alleges is
applicable here, no contract ever existed between her and VMS and therefore none had been assigned in
favor of private respondent.
She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the
case before it can be made to answer for damages because VMS was earlier sued by her for "breach of
contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil
Case No. 2916-0. She cites as authority the decision therein where the court originally ordered petitioner
to pay the remaining balance of the motor vehicle installments in the amount of P31,644.30 representing
the difference between the agreed consideration of P49,000.00 as shown in the sales invoice and
petitioner's initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision was
however reversed later on, with the same court ordering defendant VMS instead to return to petitioner the
sum of P17,855.70. Parenthetically, said decision is still pending consideration by the First Civil Case
Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and counters that the issues
raised and the allegations adduced therein are a mere rehash of those presented and already passed
upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as an
authority as the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which
will bar completely all the available defenses of the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which she never
denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of credit as petitioner would
have it appear, where the assignee merely steps into the shoes of, is open to all defenses available
against and can enforce payment only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 6 this
Court had the occasion to clearly distinguish between a negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must contain the so-called "words of
negotiability i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may be made payable to order. There
must always be a specified person named in the instrument and 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. Such being the situation in
the above-cited case, it was held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim
against petitioner is a promissory note which bears all the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to wit:
P1,614.95 monthly for "36" months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for
______ months due and payable on the ______ day of each month starting _____198__
thru and inclusive of _____, 198________ provided that interest at 14% per annum shall
be added on each unpaid installment from maturity hereof until fully paid.
xxx xxx xxx

Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note shows that it is a negotiable instrument, having
complied with the requisites under the law as follows: [a] it is in writing and signed by the maker Juanita
Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed
or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day
of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having
taken the instrument under the following conditions: [a] it is complete and regular upon its face; [b] it
became the holder thereof before it was overdue, and without notice that it had previously been
dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the
latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. 12
Accordingly, respondent corporation holds 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. 13 This being so, petitioner cannot set up against respondent the
defense of nullity of the contract of sale between her and VMS.
Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that there
was in fact deception made upon her in that the vehicle she purchased was different from that actually
delivered to her, this matter cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.
Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract"
case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this
unfortunate incident. Indeed, there is nothing We can do as far as the Violago Motor
Sales Corporation is concerned since it is not a party in this case. To even discuss the
issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction
in question would amount, to denial of due process, hence, improper and
unconstitutional. She should have impleaded Violago Motor Sales. 14
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against
petitioner.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Corts, JJ., concur.

Footnotes
1 Rollo, p. 21.

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 Pangalagan 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 plaintiffappellee 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.
Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ.,
concur.
Bengzon, C.J., concurs in the result.

The Lawphil Project - Arellano Law Foundation

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
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
Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) postdated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the
other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no
longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the
drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified
MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given
her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the 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 responsibility for the checks.
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 elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed 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
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; the checks, therefore, ceased to serve their purpose as security for the jewelry.
We are not persuaded.
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.

In this regard, Sec. 52 of the Negotiable Instruments Law provides

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 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 was 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.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a
holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies
in the person who disputes the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b)
petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner
took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued to payee as security and not for value.
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 themselves; STATE may,
therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of 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 Code 7 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 Code 15 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. 72764 July 13, 1989

STATE INVESTMENT HOUSE, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ANITA PEA CHUA and HARRIS CHUA,
respondents.
Macalino, Salonga & Associates for petitioner.
Edgardo F. Sundiam for respondents.

FERNAN, C.J.:
Petitioner State Investment House seeks a review of the decision of respondent
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No. 04523
reversing the decision of the Regional Trial Court of Manila, Branch XXXVII dated April
30, 1984 and dismissing the complaint for collection filed by petitioner against private
respondents Spouses Anita Pena Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc.
requested for a loan from private respondent Harris Chua. The latter agreed to grant the
same subject to the condition that the former should wait until December 1980 when he
would have the money. In view of this agreement, private respondent-wife, Anita Pena
Chua issued three (3) crossed checks payable to New Sikatuna Wood Industries, Inc.
all postdated December 22, 1980 as follows:

DRAWEE BANK

CHECK NO.

DATE

AMOUNT

1. China Banking Corporation

589053

Dec. 22, 1980

P98,750.00

2. International Corporate Bank

04045549

Dec. 22, 1980

102,313.00

3. Metropolitan Bank & Trust Co.

036512

Dec. 22, 1980

98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with
herein petitioner State Investment House, Inc. whereby for and in consideration of the
sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted with
petitioner eleven (11) postdated checks including the aforementioned three (3)
postdated checks issued by herein private respondent-wife Anita Pea Chua to New
Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua were allegedly
deposited by petitioner, these checks were dishonored by reason of "insufficient funds",
"stop payment" and "account closed", respectively. Petitioner claims that despite
demands on private respondent Anita Pea to make good said checks, the latter failed

to pay the same necessitating the former to file an action for collection against the latter
and her husband Harris Chua before the Regional Trial Court of Manila, Branch XXXVII
docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint against New Sikatuna
Wood Industries, Inc. for reimbursement and indemnification in the event that they be
held liable to petitioner-plaintiff. For failure of third party defendant to answer the third
party complaint despite due service of summons, the latter was declared in default.
On April 30, 1984, the lower court 1 rendered judgment against herein private respondents
spouses, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the
defendants ordering the defendants to pay jointly and severally to the plaintiff the
following amounts:
1. P 229,450.00 with interest at the rate of 12% per annum from
February 24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.
On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is
ordered to pay third party plaintiffs Anita Pena Chua and Harris Chua all amounts said
defendants' third- party plaintiffs may pay to the plaintiff on account of this case. 2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court 3 (now
Court of Appeals) reversed the lower court's judgment in the now assailed decision, the dispositive portion
of which reads:
WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed
judgment, dated April 30, 1984 and a new judgment is hereby rendered dismissing the
complaint, with costs against plaintiff-appellee. 4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to
proceed against private respondents for the amount stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the
instrument "in good faith and for value". On the other hand, Section 52(d) provides 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 x x x defect in the title of the person negotiating it." However, under Section 59 every
holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the
lights and liabilities arising therefrom, does not mention "crossed checks". But this Court has taken
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 may not be converted into cash. Consequently, such circumstance should
put the payee on inquiry and upon him devolves the duty to ascertain the holder's title to the check or the

nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence
amounting to legal absence of good faith and as such the consensus of authority is to the effect that the
holder of the check is not a holder in good faith. 5
Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New
Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the
latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed
but only deposited in the bank; the check may be negotiated only once to one who has an account with a
bank; and the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise he is not a holder in due course. Further, the appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood
Industries, Inc., the purpose for which the three checks were cross despite the warning of
the crossing, prevents him from being considered in good faith and thus he is not a
holder in due course. Being not a holder in due course, plaintiff is subject to personal
defenses, such as lack of consideration between appellants and New Sikatuna Wood
Industries. Note that under the facts the checks were postdated and issued only as a loan
to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the
checks. Such deposits were not made, hence no loan was made, hence the three checks
are without consideration (Sec. 28, Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in
violation of Article (sic) 55, Negotiable Instruments Law, which is a personal defense
available to the drawer of the check. 6
In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein
that it be paid to a certain banker or institution, which he shall do by writing across the
face the name of said banker or institution, or only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the
person on whom it is drawn, if the payment was not correctly made.
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should pay only with the intervention
of that bank or company, or crossing may be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a)
by the holder, or by some person authorized to receive payment on his behalf ... As to who the holder or
authorized person will be depends on the instructions stated on the face of the check.

The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit
only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and the liability did not attach to
the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. 7 Consequently, no right of
recourse is available to petitioner against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks in
question.
Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course
as found by the appellate court for having taken the instruments in question with notice that the same is
for deposit only to the account of payee named in the subject checks, petitioner could not recover on the
checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument for in the case at bar, petitioner may recover from the New
Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses
as if it were non-negotiable. 8
That the subject checks had been issued subject to the condition that private respondents on due date
would make the back up deposit for said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due
course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner.
SO ORDERED.

G.R. No. L-18751

April 28, 1962

A.C. ESGUERRA and SONS, petitioner-appellee,

vs.
DOMINADOR R. AYTONA, ET AL., respondents-appellants.
Juan T. David for petitioner-appellee.
Office of the Solicitor General for respondent-appellant Dominador R. Aytona.
Eladio P. Oleta for respondent-appellant A. R. Reyes and Co.
BAUTISTA ANGELO, J.:
A.C. Esguerra & Sons, a registered partnership, was the operator of the warehouses located in
the customs zone of the Bureau of Customs. It acquired the right to operate them by virtue of a
contract entered into between said company and the Commissioner of Customs on August 22,
1956. It was extended on July 25, 1957 for reasons stated in the letter of said Commissioner
bearing the same date. As the period of said firm's operation was coming to an end, the Secretary
of Finance, in an indorsement sent to the Commissioner of Customs on February 8, 1960

directed the latter to conduct a public bidding for the operation of said warehouses, and pursuant
to said directive the Commissioner of Customs issued an invitation to bid, with corresponding
instructions, which was published in some local newspapers on March 14, 21, and 28, 1960.
In response to the invitation, the following bids or proposals were received: Veloso Brothers,
46%; A.C. Esguerra & Sons, 35%; D.I. Cruz & Enterprises, 85%; A.R. Reyes & Co., if gross
income does not exceed P35,000.00, 30%, and if it exceeds that amount, 55%; and B.E.
Berkenkotter, a guaranteed minimum share of P2,000,000.00 per annum.
A bidding committee was created to evaluate the bids submitted which in due time submitted its
report to the Commissioner of Customs. This report was in turn submitted to the Secretary of
Finance who expressed his conformity to the findings and recommendations made therein. The
bidding committee recommended that the bid of A.R. Reyes & Co. be accepted, since the terms
and conditions thereof are most favorable to the government. 1wph1.t
The Secretary of Finance, in approving the recommendation of the bidding committee, stated,
however, that the award should be made subject to the following condition:
That being the case, the offer in the bid of A.R. Reyes & Company to give 30%
government share if the total gross income does not exceed P35,000 should not be
incorporated in the contract between the Government and the said firm. Instead, the
contract should contain the stipulation that 55% shall be the government share in any case
and irrespective of the amount of the total gross income that may be derived from
whatever source in connection with the operation of the old and new warehouses.
A. C. Esguerra & Sons was notified of the award made in favor of A.R. Reyes & Co., and was
advised that it should be prepared to effect the transfer of the operation of the warehouses to the
latter within 15 days from notice. Upon receipt of this advise, A.C. Esguerra & Sons asked for a
reconsideration of the award, but before any action could be taken thereon the Secretary of
Finance instructed the Commissioner of Customs to execute the corresponding contract with the
winning firm and, accordingly, the Commissioner and A.R. Reyes & Co. executed the operation
contract on June 22, 1960.
Having learned of the execution of the contract before its motion for reconsideration was acted
upon, A.C. Esguerra & Sons commenced the present action of certiorari before the Court of First
Instance of Manila against the Secretary of Finance and the Commissioner of Customs with a
prayer that the other officials be restrained from enforcing the contract for the operation of the
warehouses awarded to A.R. Reyes & Co., as well as from disturbing the operation thereof by
petitioner pending termination of the case. The petition was amended by including a paragraph
praying that the contract be declared null and void, and before the trial could be completed, it

was ordered that A.R. Reyes & Co. be included as party-respondent. In the meantime, the court
issued a preliminary injunction as prayed for.
Respondents filed a motion to dismiss the injunction calling attention to the fact that while
petitioner is paying only 25% of the gross income on the operation of the customs warehouses,
the successful bidder would pay 55% of the gross income, or a difference of 30%, and
considering that the yearly gross income of the warehouses, exceeds P1,000,000.00, the
government stands to loss about P300,000.00 a year if the writ is not lifted. Action on the motion
was deferred until after the parties had submitted their evidence. In the meantime, respondents
filed their answer sustaining the validity of the award and setting up a counterclaim for losses.
Petitioner filed its reply to this answer and counterclaim.
The parties held a pre-trial to thresh out certain incidental issues. Thereafter, they submitted a
stipulation of facts, which was supplemented by testimonial evidence. And after the trial was
completed, the court rendered judgment declaring the award in favor of A.R. Reyes & Co. null
and void and making the injunction permanent. Respondents have appealed.
The trial court, in sustaining the plea of petitioner, ruled that the power of the Secretary of
Finance relative public biddings is only to approve or disapprove the commendation of the
Commissioner of Customs and not to alter or modify it. Since the bid -of A.R. Reyes & Co. is
30% of the gross income if the same does not exceed P35,000.00 a month, and 55% of the gross
income if it exceeds that amount, and the Secretary of Finance has approved that bid as the most
favorable to the government subject to the condition that the contract should contain a stipulation
that 55% shall be the government's share irrespective of the amount of the total gross income that
may be derived from the operation of the warehouses, it is contended that said official has
exceeded his authority an so his approval of the bid is improper and illegal.
Respondents controvert this ruling contending that what the Secretary of Finance did was merely
to eliminate what he considered to be a mere surplusage because of the proven fact that during
the previous years the operation of the warehouses has always yielded a monthly gross income
between P90,000.00 to P110,000.00.
We share this view. In fact, this is supported by report of the bidding committee wherein the
following appears: "From the report of the monthly gross income of the present operator based
on their monthly remittances of the government share, as reported by the Chairman the Special
Committee now auditing the books of the operator, it is evident that during the past four years,
from 1956 to 1959, the monthly gross income of the operator always exceed P35,000.00. In fact,
during the past three years, the average monthly gross income was between P90,000.00 to
P110,000.00." With this finding, it would appear that the offer of 30% if the gross income does
not exceed P35,000.00 would indeed be a surplusage for, as the figures show, there would never
be an occasion where such average monthly income would be less than P35,000.00 if the

operation be given to the winning bidder. It is for this reason that that portion of the bid was
disregarded and was stipulated in lieu thereof that the rate of 55% be charged irrespective of the
total gross income that may be derived from the operation of the bonded warehouses. It is,
therefore, clear that there has been no substantial change in the bid as submitted. If at all, the
change is negligible, or of no legal consequence. At any rate, if the change can be considered of
some consequence, the same operated to the advantage of the government, and the bidder has not
complained.
It is true that upon the taking over of the warehouses by the new bidder the latter has to start its
operation with the first ton to be delivered for storage for the warehouses are filled with cargoes
handled by the old operator whose unloading or removal will have to be awaited before the
warehouses could be operated at their maximum capacity, and so, as petitioner contends, "it is
highly possible that the monthly income of the new operator may go lower than P35,000.00 a
month" during that period of transition. But this situation is merely temporary. According to
Rolando Geotina, Acting Commissioner of Customs, who was called as a witness of petitioner,
the complete turn over can be effected about one or two months considering that the average
monthly delivery to consignees is about 13,500 tons. And this testimony is binding on petitioner
because it was said petitioner who presented said official as its own witness. Moreover, even
during that transition period, the government will not stand to lose for it will get just the same its
55% share from the new operator and at the same time its 25% share from the old operator until
the whole cargoes had been completely removed.
Another factor that the trial court has overlooked is the fact that in the invitation to bid there is a
condition imposed upon the bidders to the effect that the bidding shall be subject to the right of
the government to reject any and all bids subject to its discretion. Here the government has made
its choice, and unless an unfairness or injustice is shown, the losing bidders have no cause to
complain, nor right to dispute that choice. This is a well-settled doctrine in this jurisdiction and
elsewhere (Ocampo v. Municipal Council, G.R. No. L-9393, May 31, 1957; Leoquinco v. Postal
Savings Bank, 47 Phil., 772).
Frequently, either by statute or by the terms of the advertisement for bids, the right to
reject any or all bids is reserved. Such a reservation is generally held to vest in the
authorities a wide discretion as to who is the best as well as the lowest bidder, and this
involves inquiry, investigation, comparison, deliberation and decision; which are quasijudicial functions and, when honestly exercised, may not be reviewed by the courts. In
these cases there is no binding obligation to award the contract to any bidder, and
although all bids are rejected and the enterprise abandoned, if in good faith, or all bids are
rejected and new bids asked for, the courts will seldom, if ever, interfere. It has been held
that where the rights to reject is reserved, the lowest bid or any bid may be rejected on a
mere technicality, that all bids may be rejected, even if arbitrarily and unwisely, or under

a mistake, and that in the exercise of a sound discretion, the award may be made to
another than the lowest bidder. (43 Am. Jur., 788)
Since petitioner does not claim that its right has been violated or jeopardized by the acceptance
of the bid of A.R. Reyes & Co., for it is apparent that its bid is less favorable than that of the
latter, while, on the other hand, the winning bid is undisputably the best and most advantageous
to the government, petitioner has no cause to complain against the decision of the Secretary of
Finance. This is more so when it appears that petitioner is disqualified because one of bidders is
the son-in-law and employee of A.C. Esguerra, as found by the bidding committee. This is in
violation of the instructions attached to the invitation to bid.
WHEREFORE, the decision appealed from is reversed, with costs against petitioner.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.
G.R. No. 17230

March 17, 1922

JOSE VELASCO, plaintiff-appelle,

vs.
TAN LIUAN & CO., TAN LIUAN, UY TENGPIAO, and AW YONG CHIOW SOO,
defendants.
AW YONG CHIOW SOO, appellant.
Jesus E. Blanco for appellant.
De Joya and Espiritu for appellee.
STATEMENT
The defendant Tan Liuan and Co. executed to the defendant Aw Yong Chiow Soo four certain
promissory notes: The first, for P12,000, dated February 18th, the second, for P16,000, dated
February 23d, the third, for P38,000, dated March 17th, and the fourth, for P21,000, dated March
27th, all in the year 1919, and each payable six months after its respective date.
March 17, 1919, the defendant Aw Yong Chiow Soo drew a bill of exchange or sight draft, for
P33,500 Yen on Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, in favor of the Philippine
National Bank, which at first it refused to cash. The plaintiff was then induced to, and did,
endorse it, and the bank cashed the draft, no part of which plaintiff received, and it is claimed
that all of the money was paid to Tan Liauan and Co. In the ordinary course of business, the draft
was dishonored when presented, and later the plaintiff was requested to, and did, personally
execute to the Philippine National Bank his promissory note, for the amount of the draft, interest
and expenses.
August 18, 1991, Tan Liuan made the following written statement:

In consideration for the indorsement by Jose Velasco at my request of a draft drawn by

Aw Yong Chiow Soo on Messrs. Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, Japan,
for the payment of which he became liable upon his indorsement for the sum of 33,500
Yen, I promise to pay to Jose Velasco, or oder, within ten days after he shall have been
obligated to pay the amount of said draft, or any part thereof, the full amount with all
costs, expenses and attorney's fees which he shall pay on account of his indorsement of
said draft, with interest on the amount paid by him at 10 per cent per annum thereon from
the time of payment.
On the same day, the plaintiff made the following written statement:
Aw Yong Chiow Soo having this day transferred to me his claim of credit against the firm
of Tan Liuan and Co. as collateral security in consideration of my having indorsed his
draft made by him on Messrs. Jing Kee and Co. for the sum of 33,500 Yen and presented
to the Philippine National Bank by which it was cashed, now if the drawer of said draft or
the said Aw Yong Chiow Soo shall pay the said draft so that I am relieved from all
responsibility in connection therewith and the expenses incurred on account thereof, then
I will reassign the said claim against Tan Liuan and Co. to him, and if I am obliged to pay
said draft, any amount which I may receive on account of said claim assigned to me over
and above the amount paid by me, including all expenses and attorney's fees, shall be
delivered to the said Aw Yong Chiow Soo.
August 22, 1919, the defendant Aw Yong Chiow Soo made the following written statement:
For value received and to me in hand paid, I hereby assign, transfer and deliver to Jose Velasco
the whole amount of my credit against Tan Liuan and Co., amounting to eighty-seven thousand
pesos (P87,000), evidenced by four (4) promissory notes, which are described as follows:
1. Promissory note dated Manila, February 18, 1919, for the sum of P12,000; for six (6)
months;
2. Promissory note dated Manila, February 23, 1919, for the sum of P16,000; for six (6)
months;
3. Promissory note dated Manila, March 17, 1919, for the sum of P38,000; for six (6)
months;
4. Promissory note dated Manila, March 27, 1919, for the sum of P21,000; for six (6)
months;
the above-mentioned promissory notes being attached hereto and made a part hereof, and fully
autnorize the said Jose Velasco to collect and receive the said amount from Tan Liuan and Co., or
from the legal representative of, or liquidator of said Tan Liuan and Co.
Concurrent therewith, the defendant unqualifiedly indorsed the four promissory notes to the
plaintiff, who, on February 19, 1920, commenced this action against the defendants.

The complaints alleges the execution of the notes by the defendant Tan Liuan and Co. to the
defendant Aw Yong Chiow Soo. That the defendant Aw Yong Chiow Soo indorsed the notes to
the plaintiff; that at their maturity they were duly presented to Tan Liuan and Co.; and that
payment was refused, of which refusal the defendant Aw Yong Chiow Soo was duly notified.
For answer, Aw Yong Chiow Soo makes a general denial, and, as a further and separate defense,
alleges the drawing of the sight draft, and that it was an accommodation only, and that,
conforming to the agreement, it was duly indorsed by the plaintiff, and Aw Yong Chiow So
delivered the money to the defendant Tan Liuan. The defendant then alleges the making of the
written statement by Tan Liuan of August 18, 1919, above quoted. On that date, Aw Yong Chiow
Soo was a creditor of the defendant Tan Liuan and Co., evidenced by the promissory notes above
described, and that Tan Liuan and Co. was insolvent. That by reason thereof, one of the
promissory notes was executed to guarantee Aw Yong Chiow Soo against any liability in case
that Tan Liuan or the plaintiff would not pay the sight draft, and because the bank had requested
the plaintiff to pay the draft, this defendant and the plaintiff agreed that this defendant should
transfer to him all of its interest in the four promissory notes, under an agreement that, in case
Jing Kee and Co. should pay the draft, the plaintiff would transfer the note to this defendant, but
in the event that the plaintiff was required to pay the draft, the he would endeavor to collect the
notes in full, and from the proceeds would first reimburse himself and then pay any remainder to
the defendant. It is also alleged that the palintiff has not paid the draft or made any effort to
collect it from Tan Liuan. That this defendant is not liable to the plaintiff on any contract, and
does not owe him anything, but that, under the agreement, the plaintiff should return to this
defendant any amount which he should collect over the amount of his personal claim. That, by
reason of the contract between the plaintiff and the defendant, Tan Liuan, this defendant has been
released and discharged of all liability, and that the action is premature.
Upon such issues, the case was tried, and the lower court rendered judgment against the
defendants Tan Liuan and Co. and Tan Liuan and Uy Tengpiao, for the full amount of the notes,
from which the plaintiff should only receive a sufficient amount to fully compensate him as an
indorser of the draft; to wit, P46,135.70, and that, if collected, the remainder, if any, should be
paid to Aw Yong Chiow Soo against whom judgment was rendered for the amount of P46,135.70
should be defendant Tan Liuan and Co. fail to pay the judgment. From this, the defendant Aw
Yong Chiow Soo only appealed, claiming that the lower court erred in rendering judgment
against it upon the four promissory notes, or that it was liable for the payment of either of them,
or that it should pay the plaintiff P46,135.70, or that he should have any judgment against this
defendant.

JOHNS, J.:
It will be noted that two of the promissory notes are dated in February; that the third is dated
March 17th, and the last March 27th, all in 1919. That each promissory note is payable six
months after date, and is executed by Tan Liuan and Co. in favor of Aw Yong Chiow Soo.

The sight draft is dated March 17, 1919, payable thirty days after date, and is drawn by Aw Yong
Chiow Soo upon Jing Kee and Co. in favor of the Philippine National Bank.
The written statement of Tan Liuan is dated August 18, 1919, and that three of the promissory
notes were then due and payable.
Although it is claimed taht Tan Liuan and Co. received the proceeds from the draft, its name does
not appear in or upon the draft, and it is very apparent that the written statement of Tan Liuan
and Co., of August 18th, was signed, for the purpose of showing the true relations of that firm to
the transaction, and that within ten days after the plaintiff had assumed and paid the amount of
the draft, with costs and expenses, Tan Liuan and Co. would pay the plaintiff the full amount
which plaintiff had obligated himself to pay. In other words, Tan Liuan and Co., by that writing,
assumes all liability for the amount of the draft and promises to pay the plaintiff and release him
from all liability. In legal effect, plaintiff's written statement of August 18th, is an
acknowledgment of the reciept from Aw Yong Chiow Soo of the four promissory notes as
collateral security for his indorsement of the draft, and that, in the event the plaintiff is released
from his liability, he will then reassign the notes to the defendant, Aw Yong Chiow Soo, and that,
if he is required to pay the draft, any amount which he may receive on account of the promissory
notes over and above the amount which he is required to pay, he will then pay any remainder to
the defendant Aw Yong Chiow Soo. The indorsement of Aw Yong Chiow Soo of the notes to the
plaintiff was unqualified, and the law fixes the liability of an unqualified indorser, and oral
testimony is not admisible to vary or contradict the terms of a written instrument.
Section 30 of Act No. 2031, of the Philippine Legislature, known as "The Negotiable Instruments
Law," says:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it is
transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder completed by delivery.
SEC. 31. Indorsement; how made. The indorsement must be written on the instrument
itself or upon a paper attached thereto. The signature of the indorser, without additional
words, is a sufficient indorsement.
SEC. 33. Kinds of indorsement. An indorsement may be either special or in blank; and
it may also be either restrictive or qualified, or conditional.
SEC. 38. Qualified indorsement. A qualified indorsement constitutes the indorser a
mere assignor of the title to the instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.
SEC. 45. Time of indorsement; presumption. Except where an indorsement bears date
after the maturity of the instrument, every negotiation is deemed prima facie to have been
effected before the instrument was overdue.

SEC. 63. When person deemed indorser. A person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser,
unless he clearly indicates by appropriate words his intention to be bound in some other
capacity.
SEC. 66. Liability of general indorser. Every indorser who indorses without
qualification, warrants to all subsequent holders in due course
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
(b) That the instrument is at the time of his indorsement valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.
SEC. 114. When notice need not be given to drawer. Notice of dishonor is not required
to be given to the drawer in either of the following cases:
xxx

xxx

xxx

(d) Where the drawer has no right to expect or require that the drawee or acceptor will
honor the instrument.
Aw Yong Chiow Soo, being an unqualified indorser, the law fixes its liability.
If it was not its purpose or intent to assume and agree to pay the notes, it should have indorsed
them "without recourse," or in such a manner as to discliam any personal liability. When a person
makes an unqualified indorsement of a promissory note, the Negotiable Instruments Law
specifies and defines his liability, and parol testimony is not admissible to explain or defeat such
liability. Here, the bill of exchange was drawn by the defendant, Aw Yong Chiow Soo, and it was
the bill of exchange which was indorsed by the plaintiff, and the testimony is conclusive taht
plaintiff's indorsement was required by the bank as one of the conditions upon which it would
cash the draft. Three of the notes had matured at the time they were indorsed and the written
instruments signed. Although the draft was drawn by Aw Yong Chiow Soo, it was dishonored,
and the plaintiff was required by the bank to execute his note for its amount. At the time of the
execution of the notes, Aw Yong Chiow Soo was a creditor of Tan Liuan and Co. for the amount
of the notes.
The action here is not based upon the draft. It is founded upon the promissory notes. The plaintiff
did not receive any part of the proceeds of the draft, but has been required by the bank to make
his promissory note for the amount of the draft. As collateral and to indemnify and protect
plaintiff from any liability, Aw Yong Chiow Soo indorsed the promissory notes, which it held

against Tan Liuan and Co. to the plaintiff and did not in any manner qualify its indorsement, and
the Negotiable Instruments Act says that
Every indorser who indorses without qualification, warrants to all subsequent holders in
due course, etc., engages that on due presentment, it shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it.
Section 80 of the Act says:
Presentment for payment is not required in order to charge an indorser where the
instrument was made or accepted for his accommodation and he has no reason to expect
that the instrument will be paid if presented.
And subdivision (d), of section 114, says:
Where the drawer has no right to expect or require that the drawee or acceptor will honor
the instrument.
The draft was drawn on March 18, 1919, payable thirty days after sight, and it was dishonored.
Three of the notes were past due at the time the written agreements were made, and the
testimony is conclusive that Tan Liuan and Co. was insolvent, and that Aw Yong Chiow Soo
knew it, and that none of the notes would be paid if presented, and the evidence shows that,
before they were indorsed, the first two had been duly presented and dishonored. In other words,
at the time the unqualified indorsement was made, two of the notes had been protested, and Aw
Yong Chiow Soo knew that Tan Liuan and Co. was insolvent, and had no reason to expect that
the notes would be paid if presented. There is no claim or pretense that its claim was prejudiced
or that it lost any legal right, because the last two notes were not protested, the first of which was
past due when it was indorsed.
The purpose and intent of the August written statements was to explain the transactions between
the parties, to whom the proceeds from the draft were paid, and that the notes were indorsed by
Aw Yong Chiow Soo to palintiff, as collateral, to protect and hold him harmless in his
indorsement of the draft, an to specify that Aw Yong Chiow Soo should have any proceeds from
the notes after the draft had been fully paid therefrom and the plaintiff released from his liability
as an indorser. The statements do not make any reference to the legal liability of Aw Yong Chiow
Soo as an indorser of the notes, do not and were never contended to fully discharge and release
that firm from its liability as an indorser.
With all due respect to the able and ingenious brief for the appellant, there is no merit in the
defense, and the judgment of the lower court is affirmed, with costs in favor of the plaintiff. So
ordered.
Araullo, C.J., Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

The Lawphil Project - Arellano Law Foundation

G.R. No. L-16477

November 22, 1921

R. N. CLARK, plaintiff-appellant,
vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson & Schwarzkopf for appellant.
Williams & Ferrier for appellee.

ROMUALDEZ, J.:
The defendant, in conjunction with two other persons, signed the following note in favor of the
plaintiff:
P12,000.00 MANILA, July 1, 1914.
Six months after date, for value received, we jointly and severally promise to pay
to the order of R. N. Clark at his office in the city of Manila, the sum of twelve
thousand pesos, Philippine currency, with interest thereon in like currency from
date until paid at the rate of ten per cent per annum, payable quarterly.
If suit is necessary to collect this note, we hereby agree to pay as attorney's fees
ten per centum of the amount found due.
(Sgd.) W. H. CLARKE,
[INTERNAL REVENUE JOHN MAYE. STAMP.] By W. H. CLARKE, his
attorney.
GEO. C. SELLNER."
The note matured, but its amount was not paid.
Counsel for the defendant allege that the latter did not receive in that transaction either the whole
or any part of the amount of the debt; that the instrument was not presented to the defendant for
payment; and that the defendant, being an accommodation party, is not liable unless the note is
negotiated, which was not done, as shown by the evidence.
With regard to the first point, the liability of the defendant, as one of the signers of the note, is
not dependent on whether he has, or has not, received any part of the amount of the debt. The
defendant is really and expressly one of the joint and several debtors on the note, and as such he

is liable under the provisions of section 60 of Act No. 2031, entitled The Negotiable Instruments
Law, which provisions should be applied in this case in view of the character of the instrument.
As to presentment for payment, such action is not necessary in order to charge the person
primarily liable, as is the defendant. (Sec. 70, Act No. 2031.)
And as to whether or not the defendant is an accommodation party, it should be taken into
account that by putting his signature to the note, he lent his name, not to the creditor, but to those
who signed with him placing himself with respect to the creditor in the same position and with
the same liability as the said signers. It should be noted that the phrase "without receiving value
therefor," as used in section 29 of the aforesaid Act, means "without receiving value by virtue of
the instrument" and not, as it apparently is supposed to mean, "without receiving payment for
lending his name." If, as in the instant case, a sum of money was received by virtue of the note, it
is immaterial, so far as the creditor is concerned, whether one of the singers has, or has not,
received anything in payment of the use of his name. In reality the legal situation of the
defendant in this case may properly be regarded as that of a joint surety rather than that of an
accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay
the debt, demand the collateral security and dispose of it to his benefit; but there is no proof
whatever that this was done. As to the plaintiff, he is the "holder for value," under the phrase of
said section 29, for he had paid the money to the signers at the time the note was executed and
delivered to him. Who is the "holder" is defined in section 191 of the said law thus:
"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof.
And as such holder, he has the right to demand payment of the debt from the signer of the note,
even though he knows that said person is merely an accommodation party (section 29 above
cited), assuming the defendant to be such, which, as has been stated, is not the case.
The trial judge took into account the fact that at the time of the maturity of the note, the collateral
security given to guarantee the payment was worth more than what was due on the note, but it
depreciated to such an extent that, at the time of the institution of this action, it was entirely
valueless. And taking this circumstance, together with the fact that this case was not commenced
until after the lapse of four years from the date on which the payment fell due, and with the
further fact that the defendant had not received any part of the amount mentioned in the note, he
was of the opinion, and so decided, that the defendant could not be held liable. The theory of the
judge a quo was that the plaintiff's failure to enforce the guaranty for the payment of the debt,
and his delay in instituting this action constitute laches, which had the effect of extinguishing his
right of action.
We see no sufficient ground for applying such a theory to the case before us. As stated, the
defendant's position being, as it is, that of a joint surety, he may, at any time after the maturity of
the note, make payment, thus subrogating 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. 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.)
We find that in the judgment appealed from there were committed the errors assigned, and that
the defendant is under obligation to pay the plaintiff the amount of the debt, as prayed for in the
complaint.lawphil.net
The judgment appealed from must, therefore, be, as is hereby, reversed. Let an order be issued to
the effect that the plaintiff have and recover from the defendant the sum of twelve thousand
pesos (P12,000), as principal debt, plus one thousand two hundred pesos (P1,200), the sum
agreed upon as attorney's fees, and 10 per cent interest on the principal debt from July 1, 1914,
until it is fully paid, deducting therefrom the sum of three hundred pesos (P300) already paid on
account, as stated in the complaint.
This decision is rendered without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Avancea and Villamor, JJ., concur.
Johnson, J., took no part.
The Lawphil Project - Arellano Law Foundation
G.R. No. L-8844 December 16, 1914
FERNANDO MAULINI, ET AL., plaintiffs-appellees,
vs.
ANTONIO G. SERRANO, defendant-appellant.
R. M. Calvo for appellant.
Jose Arnaiz for appellees.

MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila in favor of
the plaintiff for the sum of P3,000, with interest thereon at the rate of
1 per cent month from September 5, 1912, together with the costs.
The action was brought by the plaintiff upon the contract of indorsement alleged to have been
made in his favor by the defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or before
the 5th day of September, 1912, the sum of three thousand pesos (P3,000) for value
received for commercial operations. Notice and protest renounced. If the sum herein
mentioned is not completely paid on the 5th day of September, 1912, this instrument will
draw interest at the rate of 1 per cent per month from the date when due until the date of
its complete payment. The makers hereof agree to pay the additional sum of P500 as
attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose Padern,
by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912.
(Sgd.) A.G. Serrano.
The first question for resolution on this appeal is whether or not, under the Negotiable
Instruments Law, an indorser of a negotiable promissory note may, in an action brought by his
indorsee, show, by parol evidence, that the indorsement was wholly without consideration and
that, in making it, the indorser acted as agent for the indorsee, as a mere vehicle of transfer of the
naked title from the maker to the indorsee, for which he received no consideration whatever.
The learned trial court, although it received parol evidence on the subject provisionally, held, on
the final decision of the case, that such evidence was not admissible to alter, very, modify or
contradict the terms of the contract of indorsement, and, therefore, refused to consider the
evidence thus provisionally received, which tended to show that, by verbal agreement between
the indorser and the indorsee, the indorser, in making the indorsement, was acting as agent for
the indorsee, as a mere vehicle for the transference of naked title, and that his indorsement was
wholly without consideration. The court also held that it was immaterial whether there was a
consideration for the transfer or not, as the indorser, under the evidence offered, was an
accommodation indorser.

We are of the opinion that the trial court erred in both findings.1awphil.net
In the first place, the consideration of a negotiable promissory note, or of any of the contracts
connected therewith, like that of any other written instrument, is, between the immediate parties
to the contract, open to attack, under proper circumstances, for the purpose of showing an
absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally admitted on the trial, that the defendant
was a broker doing business in the city of Manila and that part of his business consisted in
looking up and ascertaining persons who had money to loan as well as those who desired to
borrow money and, acting as a mediary, negotiate a loan between the two. He had done much
business with the plaintiff and the borrower, as well as with many other people in the city of
Manila, prior to the matter which is the basis of this action, and was well known to the parties
interested. According to his custom in transactions of this kind, and the arrangement made in this
particular case, the broker obtained compensation for his services of the borrower, the lender
paying nothing therefor. Sometimes this was a certain per cent of the sum loaned; at other times
it was a part of the interest which the borrower was to pay, the latter paying 1 per cent and the
broker per cent. According to the method usually followed in these transactions, and the
procedure in this particular case, the broker delivered the money personally to the borrower, took
note in his own name and immediately transferred it by indorsement to the lender. In the case at
bar this was done at the special request of the indorsee and simply as a favor to him, the latter
stating to the broker that he did not wish his name to appear on the books of the borrowing
company as a lender of money and that he desired that the broker take the note in his own name,
immediately transferring to him title thereto by indorsement. This was done, the note being at
once transferred to the lender.
According to the evidence referred to, there never was a moment when Serrano was the real
owner of the note. It was always the note of the indorsee, Maulini, he having furnished the
money which was the consideration for the note directly to the maker and being the only person
who had the slightest interest therein, Serrano, the broker, acting solely as an agent, a vehicle by
which the naked title to the note passed fro the borrower to the lender. The only payment that the
broker received was for his services in negotiating the loan. He was paid absolutely nothing for
becoming responsible as an indorser on the paper, nor did the indorsee lose, pay or forego
anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned trial court quoted that provision
of the Negotiable Instruments Law which defines an accommodation party as "one 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. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking the instrument
knew the same to be only an accommodation party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The accommodation to
which reference is made in the section quoted is not one to the person who takes the note that
is, the payee or indorsee, but one to the maker or indorser of the note. It is true that in the case at
bar it was an accommodation to the plaintiff, in a popular sense, to have the defendant indorse

the note; but it was not the accommodation described in the law, but, rather, a mere favor to him
and one which in no way bound Serrano. In cases of accommodation indorsement the indorser
makes the indorsement for the accommodation of the maker. Such an indorsement is generally
for the purpose of better securing the payment of the note that is, he lend his name to the
maker, not to the holder. Putting it in another way: An accommodation note is one to which the
accommodation party has put his name, without consideration, for the purpose of
accommodating some other party who is to use it and is expected to pay it. The credit given to
the accommodation part is sufficient consideration to bind the accommodation maker. Where,
however, an indorsement is made as a favor to the indorsee, who requests it, not the better to
secure payment, but to relieve himself from a distasteful situation, and where the only
consideration for such indorsement passes from the indorser to the indorsee, the situation does
not present one creating an accommodation indorsement, nor one where there is a consideration
sufficient to sustain an action on the indorsement.
The prohibition in section 285 of the Code of Civil Procedure does not apply to a case like the
one before us. The purpose of that prohibition is to prevent alternation, change, modification or
contradiction of the terms of a written instrument, admittedly existing, by the use of parol
evidence, except in the cases specifically named in the section. The case at bar is not one where
the evidence offered varies, alters, modifies or contradicts the terms of the contract of
indorsement admittedly existing. The evidence was not offered for that purpose. The purpose
was to show that no contract of indorsement ever existed; that the minds of the parties never met
on the terms of such contract; that they never mutually agreed to enter into such a contract; and
that there never existed a consideration upon which such an agreement could be founded. The
evidence was not offered to vary, alter, modify, or contradict the terms of an agreement which it
is admitted existed between the parties, but to deny that there ever existed any agreement
whatever; to wipe out all apparent relations between the parties, and not to vary, alter or
contradict the terms of a relation admittedly existing; in other words, the purpose of the parol
evidence was to demonstrate, not that the indorser did not intend to make the particular
indorsement which he did make; not that he did not intend to make the indorsement in the terms
made; but, rather, to deny the reality of any indorsement; that a relation of any kind whatever was
created or existed between him and the indorsee by reason of the writing on the back of the
instrument; that no consideration ever passed to sustain an indorsement of any kind whatsoever.
The contention has some of the appearances of a case in which an indorser seeks prove forgery.
Where an indorser claims that his name was forged, it is clear that parol evidence is admissible to
prove that fact, and, if he proves it, it is a complete defense, the fact being that the indorser never
made any such contract, that no such relation ever existed between him and the indorsee, and that
there was no consideration whatever to sustain such a contract. In the case before us we have a
condition somewhat similar. While the indorser does not claim that his name was forged, he does
claim that it was obtained from him in a manner which, between the parties themselves, renders,
the contract as completely inoperative as if it had been forged.
Parol evidence was admissible for the purpose named.1awphil.net
There is no contradiction of the evidence offered by the defense and received provisionally by
the court. Accepting it as true the judgment must be reversed.

The judgment appealed from is reversed and the complaint dismissed on the merits; no special
finding as to costs.
Arellano, C.J., Johnson and Trent, JJ., concur.
Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which governs the present case,
establishes various kinds of indorsements by means of which the liability of the indorser is in
some manner limited, distinguishing it from that of the regular or general indorser, and among
those kinds is that of the qualified indorsement which, pursuant to section 38 of the same Act,
constitutes the indorser a mere assignor of the title to the instrument, and may be made by adding
to the indorser's signature the words "without recourse" or any words of similar import.
If the defendant, Antonio G. Serrano, intervened, as he alleged and tried to prove that he did at
the trial, only as a broker or agent between the lender and plaintiff, Maulini, and the makers of
the promissory note, Padern, Moreno & Co. and Angel Gimenez, in order to afford an
opportunity to the former to invest the amount of the note in such manner that it might bring him
interest, the defendant could have qualified the indorsement in question by adding to his
signature the words "without recourse" or any others such as would have made known in what
capacity he intervened in that transaction. As the defendant did not do so ad as he signed the
indorsement in favor of the plaintiff Maulini for value received from the latter, his liability,
according to section 66 of the Act aforecited, is that of a regular or general indorser, who, this
same section provides, engages that if the instrument be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it. And the evidence which the defendant
presented, tending to show what were the conditions to which the defendant presented, tending to
show what were the conditions to which he obligated himself and in what capacity he intervened
in making that indorsement and that this latter was absolutely without consideration, should not
have been admitted so that he might elude the aforesaid obligation, or, if admitted, should not be
taken into account, because as a regular indorser he warranted, pursuant to the said section 66,
that the instrument was genuine and in all respects what it purported to be, that he had a good
title to it, and that it was at the time of his indorsement valid and subsisting. He cannot, therefore,
by means of any evidence, and much less of such as consists of his own testimony, and as such
interested party, alter, modify, contradict or annul, as he virtually claimed and claims to be
entitled to do, what in writing and with a full and perfect knowledge of the meaning and import
of the words contained in the indorsement, he set forth therein over his signature.
Section 63 of the Act above cited says that a person placing his signature upon an instrument
otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly
indicates by appropriate words his contention to be bound indicates by appropriate words his
intention to be bound in some other capacity. This provision of the law clearly indicates that in
every negotiable instrument it is absolutely necessary to specify the capacity in which the person
intervenes who is mentioned therein or takes part in its negotiation, because only by so doing can

it be determined what liabilities arise from that intervention and from whom, how and when they
must be exacted. And if, in the vent of a failure to express the capacity in which the person who
signed the negotiable instrument intended to be bound, he should be deemed to be an indorser,
when the very words of the instrument expressly and conclusively show that such he is, as occurs
in the present case, and when the indorsement contains no restriction, modification, condition or
qualification whatever, there cannot be attributed to him, without violating the provisions of the
said Act, any other intention than that of being bound in the capacity in which he appears in the
instrument itself, nor can evidence be admitted or, if already admitted, taken into consideration,
for the purpose of proving such other intention, for the simple reason that if the law has already
fixed ad determined the capacity in which it must be considered that the person who signed the
negotiable instrument intervened and the intention of his being bound in a definite capacity, for
no other purpose, undoubtedly, than that there shall be no evidence given in the matter, when the
capacity appears in the instrument itself and the intention is determined by the very same
capacity, as occurs in this case, the admission of evidence in reference thereto is entirely
unnecessary, useless, and contrary to the purposes of the law, which is clear and precise in its
provisions and admits of no subterfuges or evasions for escaping obligations contracted upon the
basis of credit, with evident and sure detriment to those who intervened or took part in the
negotiation of the instrument.
However, it is held in the majority opinion, for the purpose of sustaining the premises that the
proofs presented by the defendant could have been admitted without violating the provisions of
section 285 of the Code of Civil Procedure, that the evidence was not offered to vary, alter,
modify, or contradict the terms of an agreement which it is admitted existed between the parties,
but to deny that there ever existed any agreement whatever; to wipe out all apparent relations
between the parties, and not to vary, alter or contradict the terms of a relation admittedly
existing; in other words, the purpose of the parol evidence was to demonstrate, not that the
indorser did not intend to make the particular indorsement in the terms made, but rather to deny
the reality of any indorsement; to deny that a relation of any kind whatsoever was created or
existed between him and the indorsee by reason of the writing on the back of the instrument; to
deny that any consideration ever passed to sustain an indorsement of any kind whatsoever. It is
stated in the same decision that the contention has some of the appearances of a case in which an
indorser seeks to prove forgery.
First of all, we do not see that there exists any appearance or similarity whatever between the
case at bar and one where forgery is sought to be proved. The defendant did not, either civilly or
criminally, impugn the indorsement as being false. He admitted its existence, as stated in the
majority opinion itself, and did not disown his signature written in the indorsement. His denial to
the effect that the indorsement was wholly without consideration, aside from the fact that it is i
contradiction to the statements that he over his signature made in the instrument, does not allow
the supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to convey, in calling attention to the
difference between what, as it says, was the purpose of the evidence presented by the defendant
and what was sought to be proved thereby, is that the defendant does not endeavor to contradict
or alter the terms of the agreement, which is contained in the instrument and is admitted to exist
between the parties; but to deny the existence of such an agreement between them, that is, the

existence of any indorsement at all, and that any consideration ever passed to sustain the said
indorsement, or, in other words, that the defendant acknowledged the indorsement as regards the
form in which it appears to have been drawn up, but not with respect to its essence, that is, to the
truth of the particular facts set forth in the indorsement. It cannot be denied that the practical
result evidence is other than to contradict, modify, alter or even to annul the terms of the
agreement contained in the indorsement: so that, in reality, the distinction does not exist that is
mentioned as a ground of the decision of the majority of the court in support of the opinion that
the evidence in question might have been admitted, without violating the provisions of the
aforementioned section 285 of the Code of Civil Procedure. This section is based upon the same
principle which is taken into account in the Negotiable Instruments Law to write into it such
positive and definite provisions which purport, without possibility of discussion or doubt, the
uselessness of taking evidence when the capacity of the person who intervened in a negotiable
instrument or his intention of being bound in a particular way appears in the instrument itself or
has been fixed by statute, if it is not shown that he did so in some other capacity than that of
maker, drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with respect to this matter, as the
present case is governed by the Negotiable Instruments Law, we must abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration; and every person whose signature appears
thereon, to have become a party thereto for value. If the Act establishes this presumption for the
case where there might be doubt with respect to the existence of a valuable consideration, in
order to avoid the taking of evidence in the matter, when the consideration appears from the
instrument itself by the expression of the value, the introduction of evidence is entirely
unnecessary and improper.
According to section 25 of the same Act, value is any consideration sufficient to support a simple
contract, and so broad is the scope the law gives to the meaning of "value" in this kind of
instruments that it considers as such a prior of preexistent debt, whether the instrument be
payable on demand or at some future date.
Section 26 provides that where value has at any time been given for the instrument, the holder is
deemed a holder for value, both in respect to the maker and to the defendant indorser, it is
immaterial whether he did so directly to the person who appears in the promissory note as the
maker or whether he delivered the sum to the defendant in order that this latter might in turn
deliver it to the maker.
The defendant being the holder of the instrument, he is also unquestionably the holder in due
course. In the first place, in order to avoid doubts with respect to this matter which might require
the introduction of evidence, the Act before mentioned has provided, in section 59, that every
holder is deemed prima facie to be a holder in due course, and such is the weight it gives to this
presumption and to the consequences derived therefrom, that it imposes upon the holder the
burden to prove that he or some person under whom he claims acquired the title in due course,
only when it is shown that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not apply in favor of a party who

became bound on the instrument prior to the acquisition of such defective title, in which case the
defendant Serrano is not included, because, in the first place, he was not bound on the instrument
prior to the acquisition of the title by the plaintiff, but it was the maker of the promissory note
who was bound on the instrument executed in favor of the defendant or indorser prior to the
acquisition of the title by the plaintiff; and, in the second place, it does not appear, nor was it
proved, as will be seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in due course of the
instrument in question, that is, of the promissory note containing the obligation compliance with
which is demanded of him by the defendant, because he took the instrument under the condition:
(a) That it was 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; (c) that he took it in
good faith and for value; and (d) that at the time it was negotiated to him he had no notice of any
deficiency in the instrument or defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a deficiency in the instrument or
defect in the title of the person negotiating the same, the person to whom it is transferred must
have had actual knowledge of the deficiency or defect, or knowledge of such facts that his action
in taking the instrument amounted to bad faith.
In the present case it cannot be said, for it is not proven, that the plaintiff, upon accepting the
instrument from the defendant, had actual knowledge of any deficiency or defect in the same, for
the simple reason that it contains no deficiency or defect. Its terms are very clear and positive.
There is nothing ambiguous, concealed, or which might give rise to any doubt whatever with
respect to its terms or to the agreement made by the parties. Furthermore, as stated in the
majority opinion, the defendant did not intend to make the particular indorsement which he did
make in the terms, form and manner in which it was made, nor did he intend to change or alter
the terms of the agreement which is admitted to have existed between the parties. All of which
indicates that, neither as regards the plaintiff nor as regards the defendant, was there any
deficiency or defect in the title or in the instrument, and that the plaintiff, upon taking or
receiving the instrument from the defendant, had no knowledge of any fact from which bad faith
on his part might be implied. Besides, no evidence was produced of the existence of any such
bad faith, nor of the knowledge of any deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a person who negotiates an
instrument is defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud. As no evidence was taken on these points, the only ones that may be proven as regards
negotiable instruments, the defendant must be deemed to be the holder of the instrument in due
course, pursuant to the provisions of the aforecited section 59, and he cannot be required to prove
that he or his predecessor in interest acquired the title as such holder in due course.
Now then, according to section 28 of the same Act, as against the holder of the instrument in due
course absence or failure of consideration is not a matter of defense; and, pursuant to section 57,
a holder in due course holds 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. And the next section, No.
58 prescribes 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 nonnegotiable.
So it could not be clearer than that, pursuant to the provisions of the Negotiable Instrument Law,
which governs the case at bar, as the plaintiff is the holder in due course of the instrument in
question, no proof whatever from the defendant could be admitted, nor if admitted should be
taken into account, bearing on the lack of consideration in the indorsement, as alleged by him,
and for the purpose of denying the existence of any indorsement and that any relation whatever
was created or existed between him and the indorsee; likewise, that no defense of any kind could
have been admitted from the defendant in respect to the said instrument, and, finally, that the
defendant is obligated to pay the sum mentioned in the said indorsement, it being immaterial
whether or not he be deemed to be an accommodation party in the instrument, in order that
compliance with the said obligation may be required of him in his capacity of indorser.
Basing our conclusions on the foregoing grounds, and regretting to dissent from the opinion of
the majority of our colleagues, we believe that the judgment appealed from should be affirmed,
with the costs against the appellant.
Araullo, J., dissents.
#Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which governs the present case,
establishes various kinds of indorsements by means of which the liability of the indorser is in
some manner limited, distinguishing it from that of the regular or general indorser, and among
those kinds is that of the qualified indorsement which, pursuant to section 38 of the same Act,
constitutes the indorser a mere assignor of the title to the instrument, and may be made by adding
to the indorser's signature the words "without recourse" or any words of similar import.
If the defendant, Antonio G. Serrano, intervened, as he alleged and tried to prove that he did at
the trial, only as a broker or agent between the lender and plaintiff, Maulini, and the makers of
the promissory note, Padern, Moreno & Co. and Angel Gimenez, in order to afford an
opportunity to the former to invest the amount of the note in such manner that it might bring him
interest, the defendant could have qualified the indorsement in question by adding to his
signature the words "without recourse" or any others such as would have made known in what
capacity he intervened in that transaction. As the defendant did not do so ad as he signed the
indorsement in favor of the plaintiff Maulini for value received from the latter, his liability,
according to section 66 of the Act aforecited, is that of a regular or general indorser, who, this
same section provides, engages that if the instrument be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it. And the evidence which the defendant
presented, tending to show what were the conditions to which the defendant presented, tending to

show what were the conditions to which he obligated himself and in what capacity he intervened
in making that indorsement and that this latter was absolutely without consideration, should not
have been admitted so that he might elude the aforesaid obligation, or, if admitted, should not be
taken into account, because as a regular indorser he warranted, pursuant to the said section 66,
that the instrument was genuine and in all respects what it purported to be, that he had a good
title to it, and that it was at the time of his indorsement valid and subsisting. He cannot, therefore,
by means of any evidence, and much less of such as consists of his own testimony, and as such
interested party, alter, modify, contradict or annul, as he virtually claimed and claims to be
entitled to do, what in writing and with a full and perfect knowledge of the meaning and import
of the words contained in the indorsement, he set forth therein over his signature.
Section 63 of the Act above cited says that a person placing his signature upon an instrument
otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly
indicates by appropriate words his contention to be bound indicates by appropriate words his
intention to be bound in some other capacity. This provision of the law clearly indicates that in
every negotiable instrument it is absolutely necessary to specify the capacity in which the person
intervenes who is mentioned therein or takes part in its negotiation, because only by so doing can
it be determined what liabilities arise from that intervention and from whom, how and when they
must be exacted. And if, in the vent of a failure to express the capacity in which the person who
signed the negotiable instrument intended to be bound, he should be deemed to be an indorser,
when the very words of the instrument expressly and conclusively show that such he is, as occurs
in the present case, and when the indorsement contains no restriction, modification, condition or
qualification whatever, there cannot be attributed to him, without violating the provisions of the
said Act, any other intention than that of being bound in the capacity in which he appears in the
instrument itself, nor can evidence be admitted or, if already admitted, taken into consideration,
for the purpose of proving such other intention, for the simple reason that if the law has already
fixed ad determined the capacity in which it must be considered that the person who signed the
negotiable instrument intervened and the intention of his being bound in a definite capacity, for
no other purpose, undoubtedly, than that there shall be no evidence given in the matter, when the
capacity appears in the instrument itself and the intention is determined by the very same
capacity, as occurs in this case, the admission of evidence in reference thereto is entirely
unnecessary, useless, and contrary to the purposes of the law, which is clear and precise in its
provisions and admits of no subterfuges or evasions for escaping obligations contracted upon the
basis of credit, with evident and sure detriment to those who intervened or took part in the
negotiation of the instrument.
However, it is held in the majority opinion, for the purpose of sustaining the premises that the
proofs presented by the defendant could have been admitted without violating the provisions of
section 285 of the Code of Civil Procedure, that the evidence was not offered to vary, alter,
modify, or contradict the terms of an agreement which it is admitted existed between the parties,
but to deny that there ever existed any agreement whatever; to wipe out all apparent relations
between the parties, and not to vary, alter or contradict the terms of a relation admittedly
existing; in other words, the purpose of the parol evidence was to demonstrate, not that the
indorser did not intend to make the particular indorsement in the terms made, but rather to deny
the reality of any indorsement; to deny that a relation of any kind whatsoever was created or
existed between him and the indorsee by reason of the writing on the back of the instrument; to

deny that any consideration ever passed to sustain an indorsement of any kind whatsoever. It is
stated in the same decision that the contention has some of the appearances of a case in which an
indorser seeks to prove forgery.
First of all, we do not see that there exists any appearance or similarity whatever between the
case at bar and one where forgery is sought to be proved. The defendant did not, either civilly or
criminally, impugn the indorsement as being false. He admitted its existence, as stated in the
majority opinion itself, and did not disown his signature written in the indorsement. His denial to
the effect that the indorsement was wholly without consideration, aside from the fact that it is i
contradiction to the statements that he over his signature made in the instrument, does not allow
the supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to convey, in calling attention to the
difference between what, as it says, was the purpose of the evidence presented by the defendant
and what was sought to be proved thereby, is that the defendant does not endeavor to contradict
or alter the terms of the agreement, which is contained in the instrument and is admitted to exist
between the parties; but to deny the existence of such an agreement between them, that is, the
existence of any indorsement at all, and that any consideration ever passed to sustain the said
indorsement, or, in other words, that the defendant acknowledged the indorsement as regards the
form in which it appears to have been drawn up, but not with respect to its essence, that is, to the
truth of the particular facts set forth in the indorsement. It cannot be denied that the practical
result evidence is other than to contradict, modify, alter or even to annul the terms of the
agreement contained in the indorsement: so that, in reality, the distinction does not exist that is
mentioned as a ground of the decision of the majority of the court in support of the opinion that
the evidence in question might have been admitted, without violating the provisions of the
aforementioned section 285 of the Code of Civil Procedure. This section is based upon the same
principle which is taken into account in the Negotiable Instruments Law to write into it such
positive and definite provisions which purport, without possibility of discussion or doubt, the
uselessness of taking evidence when the capacity of the person who intervened in a negotiable
instrument or his intention of being bound in a particular way appears in the instrument itself or
has been fixed by statute, if it is not shown that he did so in some other capacity than that of
maker, drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with respect to this matter, as the
present case is governed by the Negotiable Instruments Law, we must abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration; and every person whose signature appears
thereon, to have become a party thereto for value. If the Act establishes this presumption for the
case where there might be doubt with respect to the existence of a valuable consideration, in
order to avoid the taking of evidence in the matter, when the consideration appears from the
instrument itself by the expression of the value, the introduction of evidence is entirely
unnecessary and improper.
According to section 25 of the same Act, value is any consideration sufficient to support a simple
contract, and so broad is the scope the law gives to the meaning of "value" in this kind of

instruments that it considers as such a prior of preexistent debt, whether the instrument be
payable on demand or at some future date.
Section 26 provides that where value has at any time been given for the instrument, the holder is
deemed a holder for value, both in respect to the maker and to the defendant indorser, it is
immaterial whether he did so directly to the person who appears in the promissory note as the
maker or whether he delivered the sum to the defendant in order that this latter might in turn
deliver it to the maker.
The defendant being the holder of the instrument, he is also unquestionably the holder in due
course. In the first place, in order to avoid doubts with respect to this matter which might require
the introduction of evidence, the Act before mentioned has provided, in section 59, that every
holder is deemed prima facie to be a holder in due course, and such is the weight it gives to this
presumption and to the consequences derived therefrom, that it imposes upon the holder the
burden to prove that he or some person under whom he claims acquired the title in due course,
only when it is shown that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not apply in favor of a party who
became bound on the instrument prior to the acquisition of such defective title, in which case the
defendant Serrano is not included, because, in the first place, he was not bound on the instrument
prior to the acquisition of the title by the plaintiff, but it was the maker of the promissory note
who was bound on the instrument executed in favor of the defendant or indorser prior to the
acquisition of the title by the plaintiff; and, in the second place, it does not appear, nor was it
proved, as will be seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in due course of the
instrument in question, that is, of the promissory note containing the obligation compliance with
which is demanded of him by the defendant, because he took the instrument under the condition:
(a) That it was 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; (c) that he took it in
good faith and for value; and (d) that at the time it was negotiated to him he had no notice of any
deficiency in the instrument or defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a deficiency in the instrument or
defect in the title of the person negotiating the same, the person to whom it is transferred must
have had actual knowledge of the deficiency or defect, or knowledge of such facts that his action
in taking the instrument amounted to bad faith.
In the present case it cannot be said, for it is not proven, that the plaintiff, upon accepting the
instrument from the defendant, had actual knowledge of any deficiency or defect in the same, for
the simple reason that it contains no deficiency or defect. Its terms are very clear and positive.
There is nothing ambiguous, concealed, or which might give rise to any doubt whatever with
respect to its terms or to the agreement made by the parties. Furthermore, as stated in the
majority opinion, the defendant did not intend to make the particular indorsement which he did
make in the terms, form and manner in which it was made, nor did he intend to change or alter
the terms of the agreement which is admitted to have existed between the parties. All of which
indicates that, neither as regards the plaintiff nor as regards the defendant, was there any

deficiency or defect in the title or in the instrument, and that the plaintiff, upon taking or
receiving the instrument from the defendant, had no knowledge of any fact from which bad faith
on his part might be implied. Besides, no evidence was produced of the existence of any such
bad faith, nor of the knowledge of any deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a person who negotiates an
instrument is defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud. As no evidence was taken on these points, the only ones that may be proven as regards
negotiable instruments, the defendant must be deemed to be the holder of the instrument in due
course, pursuant to the provisions of the aforecited section 59, and he cannot be required to prove
that he or his predecessor in interest acquired the title as such holder in due course.
Now then, according to section 28 of the same Act, as against the holder of the instrument in due
course absence or failure of consideration is not a matter of defense; and, pursuant to section 57,
a holder in due course holds 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. And the next section, No.
58 prescribes 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 nonnegotiable.
So it could not be clearer than that, pursuant to the provisions of the Negotiable Instrument Law,
which governs the case at bar, as the plaintiff is the holder in due course of the instrument in
question, no proof whatever from the defendant could be admitted, nor if admitted should be
taken into account, bearing on the lack of consideration in the indorsement, as alleged by him,
and for the purpose of denying the existence of any indorsement and that any relation whatever
was created or existed between him and the indorsee; likewise, that no defense of any kind could
have been admitted from the defendant in respect to the said instrument, and, finally, that the
defendant is obligated to pay the sum mentioned in the said indorsement, it being immaterial
whether or not he be deemed to be an accommodation party in the instrument, in order that
compliance with the said obligation may be required of him in his capacity of indorser.
Basing our conclusions on the foregoing grounds, and regretting to dissent from the opinion of
the majority of our colleagues, we believe that the judgment appealed from should be affirmed,
with the costs against the appellant.
Araullo, J., dissents.
The Lawphil Project - Arellano Law Foundation
G.R. No. 106011 June 17, 1993
TOWN SAVINGS AND LOAN BANK, INC., petitioner,
vs.
THE COURT OF APPEALS, SPOUSES MIGUELITO HIPOLITO AND ALICIA N. HIPOLITO, respondents.

Maximo H. Simbulan for petitioner.

Ma. Soledad Deriquito-Mawis for private respondents.

GRIO-AQUINO, J.:
This is a petition for review on certiorari to set aside the decision dated March 12, 1992, of the Court of Appeals in CA-G.R. CV No. 29475
entitled, "Town Savings and Loan Bank, Inc. vs. Spouses Miguel Hipolito and Alicia N. Hipolito" reversing the decision dated September 14,
1990 of the Regional Trial Court of Bulacan which declared that the Hipolitos were accommodation parties on the promissory note and
holding them liable to pay Town Savings And Loan Bank the sum of P1,392, 600.00.
On or about May 4, 1983, the Hipolitos applied for, and were granted, a loan in the amount of P700,000.00 with interest of 24% per annum
for which they executed and delivered to Town Savings and Loan Bank (or TSLB) a promissory note with a maturity period of three (3) years
and an acceleration clause upon default in the payment of any amortization, plus a penalty of 36% and 10% attorney's fees, if the note were
referred to an attorney for collection. For failure to keep current their monthly payments on the account, the obligors were deemed to have
defaulted on May 24, 1984. Notices of past due account and demands for payment were sent but ignored. At the time of the institution of the
action on March 12, 1986, the unpaid obligation amounted to P1,114,983.40.
The Hipolitos denied being personally liable on the P700,000.00 promissory note which they executed. The loan was allegedly for the
account of Pilarita H. Reyes, the sister of Miguel Hipolito. She was the real party-in-interest. The Hipolitos, not having received any part of
the loan, were mere guarantors for Pilarita. They allegedly signed the promissory note because they were persuaded to do so by Joey
Santos, President of TSLB. When they received the demand letters, they confronted him but they were told that the Bank had to observe the
formality of sending notices and demand letters. The real purpose was only to pressure Pilarita to comply with her undertaking.
Insisting that they were mere guarantors, the Hipolitos vehemently protested against being dragged into the litigation as principal parties. As
a result of the unfounded suit, they allegedly incurred actual damages estimated at P200,000.00 and attorney's fees of P30,000.00.
In a decision dated September 14, 1990, Judge Zotico A. Toleto of the RTC of Malolos, Branch 18, held the respondents (then defendants)
spouses Miguel and Alicia Hipolito, liable as accommodation parties on the promissory note.
The spouses appealed to the Court of Appeals. In a decision dated March 12, 1992, the Court of Appeals found that the Hipolitos did not
accommodate Pilarita but the TSLB, whose lending authority was restricted by the size of its loan portfolio. The Hipolitos were relieved from
any liability to TSLB.
Hence, this petition for review by TSLB.
The lone issue in this case is whether the Hipolitos are liable on the promissory note which they executed in favor of the petitioner.
We hold for the petitioner.
An accommodation party is one who has signed the instrument as marker, drawer, indorser, without receiving value
therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an
accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety
for the latter. He 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 parties thereto because he wants to
accommodate another. (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530, 539, 540.)
In this case, there is no question that the private respondents signed the promissory note in order to enable Pilarita H. Reyes, who is Miguel
Hipolito's sister, to borrow the total sum of P1.4 million from TSLB. As observed by both the trial court and the appellate court, the actual
beneficiary of the loan was Pilarita H. Reyes and no other. The Hipolitos accommodated her by signing a promissory note for half of the loan
that she applied for because TSLB may not lend any single borrower more than the authorized limit of its loan portfilio. Under Section 29 of
the Negotiable Instruments Law, the Hipolitos are liable to the bank on the promissory note that they signed to accommodate Pilarita.
Respondent appellate court erred in giving credence to Hipolito's allegation that it was the bank's president who induced him to sign the
promissory note so that the bank would not violate the Central Bank's regulation limiting the amount that TSLB could lend out. Besides being
self-serving, Hipolito's testimony was uncorroborated by any other evidence on record, therefore, it should have been received with extreme
caution. The Court is convinced that the intention of respondents Hipolitos in signing the promissory note was not so much to enable the
Bank to grant a loan to Pilarita but for the latter to be able to obtain the full amount of the loan that she needed at the time.
It is not credible that a Bank would want so much to lend money to a borrower that it would go out of its way to convince another person
(respondent Miguel Hipolito) to accommodate the borrower (Pilarita H. Reyes). In the ordinary course of things, the borrower, Pilarita, not the

Bank, would have requested her brother Miguel to accommodate her so she could have the P1.4 million that she wanted to borrow from the
Bank.
The case of Maulini vs. Serrano (28 Phil. 640), relied upon by the appellate court in reversing the decision of the trial court, is not applicable
to this case. In that case, the evidence showed that the indorser (the loan broker Serrano) in making the indorsement to the lender, Maulini,
was acting as agent for the latter or, as a mere vehicle for the transference of the naked title from the borrower or maker of the note
(Moreno). Furthermore, his indorsement was wholly without consideration. We ruled that Serrano was not an accommodation indorser; he
was not liable on the note.
. . . Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better to secure
payment, but to relieve himself from a distasteful situation, and where the only consideration for such indorsement
passes from the indorser to the indorsee, the situation does not present one creating an accommodation indorsement,
nor one where there is a consideration sufficient to sustain an action on the indorsement. (p. 644.)
Unlike the Maulini case, there was no agreement here, written or verbal, that in signing the promissory note, Miguel and Alicia Hipolito were
acting as agents for the money lender the Bank. The consideration of the note signed by the Hipolitos was received by them through Pilarita.
They acted as agents of Pilarita, not of the bank. They signed the promissory note as favor to Pilarita, to help her raise the funds that she
needed. It was Pilarita whom they accommodated, not the bank, contrary to the erroneous finding of the appellate court.
WHEREFORE, the petition for review is GRANTED. The appealed decision of the Court of Appeals is hereby REVERSED and that of the
trial court is REINSTATED. Costs against the private respondents.
SO ORDERED.
Cruz, Bellosillo and Quiason, JJ., concur.

The Lawphil Project - Arellano Law Foundation

G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises, Inc.,
respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.

REGALADO, J.:
1

of respondent Court of Appeals, promulgated on September 8, 1987,

which reversed the decision of the trial Court 2 dismissing the complaint for consignation filed by therein
plaintiff Ricardo S. Santos, Jr.
Petitioner seeks the annulment of the decision

The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc.
in-charge of marketing and sales; and the president of the said corporation was Atty.
Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the
spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal
Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant
Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises,
Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the

treasurer of the said corporation. However, since at that time, the treasurer of Mover
Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S.
Santos, Jr., to sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos,
Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in
consideration of the waiver or quitclaim by said defendant over a certain property which
the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty.
Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon
approval by the GSIS of the compromise agreement with the spouses Ong, the check will
be encashed accordingly. However, since the compromise agreement was not approved
within the expected period of time, the aforesaid check for P45,000.00 (Exh. '1') was
replaced by Atty. Benares with another Traders Royal Bank cheek bearing No. 379299
dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also
payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z.
Benares and by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. 'A' and '2') with her account at Family Savings Bank, Mayon
Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the
said check was likewise dishonored by the bank for the same reason. Hence, defendant
through counsel was constrained to file a criminal complaint for violation of Batas
Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares
and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso
Llamas, accordingly filed an amended information with the court charging both Oscar
Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as
Criminal Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge against Benares
and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S.
Santos, Jr. tendered cashier's check No. CC 160152 for P45,000.00 dated April 10, 1981
to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The
defendant refused to receive the cashier's check in payment of the dishonored check in
the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's check and
subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14,
1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check adverted to above was
purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in
payment of the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in
Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s
complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the
complaint for consignation, directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that private
respondent, one of the signatories of the check issued under the account of Mover

Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law and
a debtor of petitioner to the extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private
respondent who merely signed the check in question in a representative capacity, that is, as vicepresident of said corporation, hence he is not liable thereon under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one 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. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument,
signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose
of lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument. From the standpoint of contract law, he
differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable
consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract
was not for accommodation 5 in whatever capacity such accommodation party signed the instrument,
whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated
party, the accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner
suggests, the inevitable question is whether or not it may be held liable on the accommodation
instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable
on the instrument to a holder for value, although such holder at the time of taking the instrument knew him
to be only an accommodation party, does not include nor apply to corporations which are accommodation
parties. 7 This is because the issue or indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is ultra vires. 8 Hence, one who has taken the
instrument with knowledge of the accommodation nature thereof cannot recover against a corporation
where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is
such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the
corporation is for the accommodation of another, he cannot recover against the corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a
negotiable paper in the name of the corporation for the accommodation of a third person only if
specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-president,
have no power to execute for mere accommodation a negotiable instrument of the corporation for their
individual debts or transactions arising from or in relation to matters in which the corporation has no

legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as
the consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner
in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc.
the value of the check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper does not
thereby absolve, but should render personally liable, the signatories of said instrument where the facts
show that the accommodation involved was for their personal account, undertaking or purpose and the
creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was
issued at the instance and for the personal account of Atty. Benares who merely prevailed upon
respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its
depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner
by reason of her personal involvement in the financial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amount involved, she actually had no transaction
directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty.
Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president, respectively, of
Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of Appeals erred in
holding that the consignation of the sum of P45,000.00, made by private respondent after
his tender of payment was refused by petitioner, was proper under Article 1256 of the
Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence
consignation is not proper. Concomitantly, this argument was premised on the assumption that private
respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable
for the value of the check. The fact that he was only a co-signatory does not detract from his personal
liability. A co-maker or co-drawer under the circumstances in this case is as much an accommodation
party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument.
Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liability
ex lege for the debt involved. With the dishonor of the check, there was created a debtor-creditor
relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on the
other. This circumstance enables respondent Santos to resort to an action of consignation where his
tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is proper under the
given circumstances, we do not thereby rule that all the operative facts for consignation which would

produce the effect of payment are present in this case. Those are factual issues that are not clear in the
records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No.
Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the
complaint for consignation, and which would be subject to such issues or claims as may be raised by
defendant and the counterclaim filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional
Trial Court of Quezon City filed against private respondent for violation of Batas
Pambansa Blg. 22, by holding that no criminal liability had yet attached to private
respondent when he deposited with the court the amount of P45,000.00 is the final plaint
of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No.
05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of whether an
accommodation party can validly consign the amount of the debt due with the court after his tender of
payment was refused by the creditor." Yet, from the commercial and civil law aspects determinative of
said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such
insufficiency of funds or credit. Thus, the making, drawing and issuance of a check,
payment of which is refused by the drawee because of insufficient funds in or credit with
such bank is prima facie evidence of knowledge of insufficiency of funds or credit, when
the check is presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the element of
knowledge of insufficiency of funds or credit is not present and, therefore, the crime does
not exist, when the drawer pays the holder the amount due 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.
Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted
within Ms legal rights when he consigned the amount of P45,000.00 on August 14, 1981,
between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of nonpayment, and August 14, 1981, the date when the debt due was deposited with the Clerk
of Court (a Saturday and a Sunday which are not banking days) intervened. The fifth
banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to
plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on
August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of the criminal case
pending in another court are improper do not have to be belabored. In the latter case, the criminal trial
court has to grapple with such factual issues as, for instance, whether or not the period of five banking
days had expired, in the process determining whether notice of dishonor should be reckoned from any
prior notice if any has been given or from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual preliminary investigation; and whether there was
a justification for not making the requisite arrangements for payment in full of such check by the drawee

bank within the said period. These are matters alien to the present controversy on tender and
consignation of payment, where no such period and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal case is only a
presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of
funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of
criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867,
the resolution of which should not be interfered with by respondent Court of Appeals at the present
posture of said case, much less preempted by the inappropriate and unnecessary holdings in the
aforequoted portion of the decision of said respondent court. Consequently, we modify the decision of
respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force and effect its
pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the
accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals is
AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., took no part.
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.

KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated April 29, 1992 of respondent Court
of Appeals in CA-G.R. CV No. 24776 and its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion for
reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued by the Ministry of Education and
Culture (now Department of Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against Philippine
National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned check in its savings
account with said bank. In turn, Capitol deposited the same in its account with the Philippine Bank of Communications (PBCom) which, in
turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the amount stated in the check. However, on
October 19, 1981, petitioner returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason
being that there was a "material alteration" of the check number.

PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same amount, and subsequently, sent the check
back to petitioner. Petitioner, however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had already withdrawn the amount of the
check as of October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit
by requesting an explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila against PBCom which, in turn, filed
a third-party complaint against petitioner for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a
fourth-party complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-credit or reimburse plaintiff
Capitol City Development Bank the amount of P97,650.00, plus interest of 12 percent thereto from October 19, 1981
until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party defendant PNB is ordered to reimburse and
indemnify Philippine Bank of Communications for whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to reimburse and indemnify
PNB for whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City Development Bank attorney's
fees in the amount of Ten Thousand (P10,000.00) Pesos; but PBCom is entitled to reimbursement/indemnity from PNB;
and Philippine National Bank to be, in turn reimbursed or indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED.

An appeal was interposed before the respondent Court of Appeals which rendered its decision on April
29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from
liability to plaintiff-appellee for attorney's fees and ordering PNB to honor the check for
P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee
attorney's fees of P10,000.00. After the check shall have been honored by PNB, PBCom
shall re-credit plaintiff-appellee's account with it with the amount. No pronouncement as
to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated
September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I

WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A

MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF
EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN
THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF
THE CHECK FROM THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB
MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of the check in
question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031) 5 which
provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or 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, is a
material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of
the Negotiable Instruments Law. It maintains that under Section 125(f), any change that alters the effect
of the instrument is a material alteration. 6
We do not agree.

An alteration is said to be material if it alters the effect of the

instrument. 7 It means an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. 8 In other words, a material alteration is one which changes
the items which are required to be stated under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform
to the following requirements:
(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.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that
"an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1,
N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may
enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug.
5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5 before the
figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby
curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."

(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in
blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in the
body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for "interest at
_______ per cent."
(7) A printed form of promissory note had on the margin the printed words, "Extended to
________." The holder on or after maturity wrote in the blank space the words "May 1,
1913," as a reference memorandum of a promise made by him to the principal maker at
the time the words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place
desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that
the draft should be discounted by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the
note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the
consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations
between the parties. The name of the drawer and the drawee were not altered. The intended payee was
the same. The sum of money due to the payee remained the same. Despite these findings, however,
petitioner insists, that:

xxx xxx xxx

It is an accepted concept, besides being a negotiable instrument itself, that a TCAA check
by its very nature is the medium of exchange of governments (sic) instrumentalities of
agencies. And as (a) safety measure, every government office o(r) agency (is) assigned
TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and Culture.
It is issued by the Bureau of Treasury sizeable bundles of checks in booklet form with
serial numbers different from other government office or agency. Now, for fictitious payee
to succeed in its malicious intentions to defraud the government, all it need do is to get
hold of a TCAA Check and have the serial numbers of portion (sic) thereof changed or
altered to make it appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to
have been issued by a particular office or agency of the government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin..
As succinctly found by the Court of Appeals, the name of the government agency which issued the
subject check was prominently printed therein. The check's issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor the
findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing government office or
agency, its alteration in this case had no material effect whatsoever on the integrity of the
check. The identity of the issuing government office or agency was not changed thereby
and the amount of the check was not charged against the account of another government
office or agency which had no liability under the check. The owner and issuer of the
check is boldly and clearly printed on its face, second line from the top: "MINISTRY OF
EDUCATION AND CULTURE," and below the name of the payee are the rubber-stamped
words: "Ministry of Educ. & Culture." These words are not alleged to have been falsely or
fraudulently intercalated into the check. The ownership of the check is established
without the necessity of recourse to the serial number. Neither there any proof that the
amount of the check was erroneously charged against the account of a government office
or agency other than the Ministry of Education and Culture. Hence, the alteration in the
number of the check did not affect or change the liability of the Ministry of Education and
Culture under the check and, therefore, is immaterial. The genuineness of the amount
and the signatures therein of then Deputy Minister of Education Hermenegildo C. Dumlao
and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the
authenticity of the different codes appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.

We now go to the second issue. It is petitioner's submission that the certification issued by Minrado C.
Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN73666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the amount of
NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00) was
not issued by this Office nor released to the payee concerned. The series number of said
check was not included among those requisition by this Office from the Bureau of
Treasury.
Very
truly
yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier
III 14
Petitioner claims that even if the author of the certification issued by the Ministry of Education and Culture
(MEG) was not presented, still the best evidence of the material alteration would be the disputed check
itself and the serial number thereon. Petitioner thus assails the refusal of respondent court to give weight
to the certification because the author thereof was not presented to identify it and to be cross-examined
thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the said
document was really the document he prepared and that the signature below the said document is his
own signature. Neither did petitioner present an eyewitness to the execution of the questioned document
who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of the contents of the
certification. Moreover, as we previously emphasized, there was no material alteration on the check, the
change of its serial number not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still recover the value of the check from the
collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period because
the check was tampered suffice it to state that since there is no material alteration in the check,
petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective decisions, the
trial court and the Court of Appeals failed to explicitly state the rationale for the said award. The trial court
merely ruled as follows:

With respect to Capitol's claim for damages consisting of alleged loss of opportunity, this
Court finds that Capitol failed to adequately substantiate its claim. What Capitol had
presented was a self-serving, unsubstantiated and speculative computation of what it
allegedly could have earned or realized were it not for the debit made by PBCom which
was triggered by the return and debit made by PNB. However, this Court finds that it
would be fair and reasonable to impose interest at 12% per annum on the principal
amount of the check computed from October 19, 1981 (the date PBCom debited Capitol's
account) until the amount is fully paid and reasonable attorney's fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the award
of attorney's fees, assigning the latter as one of the errors committed by the trial court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated
recently in Consolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals: 19
The award of attorney's fees lies within the discretion of the court and depends upon the
circumstances of each case. However, the discretion of the court to award attorney's fees
under Article 2208 of the Civil Code of the Philippines demands factual, legal and
equitable justification, without which the award is a conclusion without a premise and
improperly left to speculation and conjecture. It becomes a violation of the proscription
against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v.
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be
stated in the text of the court's decision. If it is stated only in the dispositive portion of the
decision, the same shall be disallowed. As to the award of attorney's fees being an
exception rather than the rule, it is necessary for the court to make findings of fact and
law that would bring the case within the exception and justify the grant of the award
(Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the decision
of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.

G.R. No. L-11526

January 2, 1917

B. A. GREEN, ET AL., plaintiffs-appellees,

vs.
M. LOPEZ, ET AL., defendants-appellants.
Delgado & Delgado for appellants.
Crossfield & O'Brien for appellees.
CARSON, J.:
This is an appeal from a judgment for the face value of a negotiable note, in favor of the
plaintiffs who purchased the note, and against the makers, with a declaration of the subsidiary

liability of the payee, from whom the note was purchased and by whom it was indorsed to the
plaintiffs.
The complaint alleged that the note was indorsed by the payee to the plaintiffs "for value
received," and this allegation was conclusively established by the evidence adduced at the trial.
We are of opinion that this allegation was substantially equivalent to a formal allegation that the
indorsement was made for a valuable consideration, and that the truth of this allegation having
been established by the introduction of competent evidence establishing the fact that the
indorsement was made for a valuable consideration, the purchasers were clearly entitled to
judgment for the face value of the note.
By the decisive weight of authority in this country, where negotiable paper has been put
in circulation, and there is no infirmity or defense between the antecedent parties thereto,
a purchaser of such security is entitled to recover thereon, as against the maker, the whole
amount, irrespective of what he may have paid therefor. (146 U. S., 327.1)
It follows that any allegation which sets forth the existence of a valuable consideration for the
transfer by indorsement is sufficient, notwithstanding the failure to allege expressly the amount
which was in fact paid by the indorser.
What has been said disposes of the various contentions of appellants based upon the failure of
the court below to sustain a demurrer to the complaint because of the lack of an allegation setting
forth specifically the nature and amount of the consideration paid by the plaintiffs to the payee of
the note, by whom it was indoresed in their favor.
The real defense relied upon in the court below by the makers of the note was that the plaintiffs
were not bona fide holders of the note by indorsement, in that they had knowledge of the
existence of certain equitable defenses which the maker were entitled to set us against the payee
of the note, before they acquired it by indorsement from the payee.
But there was nothing on the face of the note to put the purchasers on notice of the existence of
such equitable defenses. It was entirely regular in form and came into their possession in the
usual course of business. Under these circumstances the burden of proof was manifestly upon the
makers of the note to establish the fact of knowledge of these equitable defenses before they
could be permitted to rely upon such defenses as against the purchasers.
The only evidence tending to establish such knowledge was the testimony of Lopez, one of the
maker of the note, that a person unknown to him and representing himself to be an employee of
Green, one of the plaintiffs, came to him, and made inquiries as to the validity and genuineness
of the note, stating that his principal desired this information because he was contemplating its
purchase; and that he then and there explained the nature of his equitable defenses ad against the
payee, and repudiated any obligation to meet the note.
There is no evidence of record upon which to base a finding that these alleged disclosures were
in truth and in fact made to an employee of either of the plaintiffs other than the testimony of
Lopez to the effect that these alleged disclosures were made to a person unknown to him, who

represented himself to be an employee of one of the plaintiffs; and the testimony of Green, one
of the plaintiffs who stated that before purchasing the note he sent an employed to call upon the
makers of the note to inquire whether it was a good note which would be paid at maturity, and
that upon his return this employee stated that he had been informed by the makers of the note
that it was a good note duly executed by them and that it would be paid when due. We do not
stop to consider whether this evidence is sufficient to establish the fact that the person to whom
the maker of the note claims to have disclosed the alleged equitable defenses was in truth and in
fact the employee sent by the plaintiffs to the makers of the note for the purpose of inquiring as
to is validity, because we are satisfied that, admitting that the person with whom Lopez claims to
have had the interview was an employee of one or both of the purchasers, we do not think that
the evidence sustains an affirmative finding that the plaintiffs had knowledge of the alleged
equitable defenses when they purchased the note. One of the purchasers of the note is a broker,
engaged in business in the city of Manila, and the other is an attorney, licensed to practice in the
courts of these Islands, and it would require stronger and more convincing evidence than the
interested testimony of one of the makers of the note to satisfy us, as against their testimony to
the contrary, that these gentlemen were so imprudent as to discount negotiable paper, in the
ordinary course of business, after having received formal notice of the existence of equitable
defenses against the payee; and our opinion in this regard is strengthened by the undoubted fact
that they took the precaution before purchasing the note to send an agent to make inquiries as to
its validity. We are forced to conclude with the trial judge that the testimony of the maker of the
note as to the disclosures made to the purchasers' agent must be rejected, either on the ground
that it is wholly false, or upon the ground that he failed to make himself understood in the course
of his alleged interview with the plaintiffs' agent, with the result in either event that knowledge
of the existence of equitable defenses was not brought home to the purchasers of the note.
Equitable defenses of this nature can in no event defeat the right of the holders of a negotiable
note by indorsement and for valuable consideration until and unless knowledged of the existence
of such equitable defenses is brought home to them, or until it appears that the holders had such
knowledged of the existence of defects in the instrument as to charge them with bad faith in
acquiring it under all the attendant circumstances. (Confer numerous cases cited in notes, 7 Cyc.,
p. 945.)
The judgment entered in the court below should be affirmed, with the costs of this instance
against the appellants. So ordered.
Torres, Moreland, Trent and Araullo, JJ., concur.

Footnotes
1

Wade vs. Chicago, etc., L. R. Co.

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