GSIS vs Court of Appeals and Mr. & Mrs.

Racho, GR No. L-40824 February 23, 1989

Posted by Pius Morados on January 12, 2012

(Negotiable Instruments – payable to order or to bearer)

Facts: Spouses Racho together with Spouses Lagasca executed a deed of mortgage in favor of GSIS in connection
with 2 loans granted by the latter in the sums of p11,500.00 and p3,000.00, respectively. A parcel of land co-owned
by the mortgagor spouses was govern as security under the aforesaid deeds and executed a promissory note
promising to pay the said amounts to GSIS jointly, severally and solidarily.
The Lagasca spouses executed an instrument obligating themselves in the assumption of the aforesaid obligation
and to secure the release of the mortgage.

Failing to comply with the conditions of the mortgage, GSIS extrajudicially foreclosed the mortgage and caused the
property to be sold at public auction.

More than 2 years after, Spouses Racho filed a complaint against GSIS and Spouses Lagasca praying that the
extrajudicial foreclosure be declared null and void. They allege that they signed the mortgage contracts not as
sureties for the Lagasca spouses but merely as accommodation party

Issue: WON the promissory note and mortgage deeds are negotiable.
Held: No. Section 29 of the NIL provides that an accommodation party is one who has signed an instrument as
maker, drawer, acceptor of indorser without receiving value therefore, but is held liable on the instrument to a holder
for value although the latter knew him to be only an accommodation party.
Both parties appears to be misdirected and their reliance misplaced. The promissory note, as well as the mortgage
deeds subject of this case, are clearly not negotiable instrument because it did not comply with the fourth requisite to
be considered as such under Sec. 1 of the NIL – they are neither payable to order nor to bearer. The note is payable
to a specified party, the GSIS.

In 1975, a “Lease Contract with Option to Buy” was executed between Federico Serra and
the Rizal Commercial Banking Corporation (RCBC). It was agreed that Serra shall lease to
RCBC his land from the year 1975 to 2000. It was also agreed that within 10 years from
1975, RCBC shall exercise an option whether or not to buy the said lot at a price not
exceeding P210.00 per square meter. However, no option money was provided for in the
contract hence, RCBC did not pay any option money for the exercise of such option to buy.
What was provided, however, was a clause which states that in case RCBC fails to exercise
such option to buy, it shall forfeit all improvements it made (or will make) on said land in
favor of Serra.
In 1984, RCBC communicated to Serra that it now wants to buy the said land. Serra
however refused. RCBC sued Serra. Serra now contends that the option to buy
was ineffective because it was not supported by any consideration distinct from the price
hence, it is not binding upon him.
ISSUE: Whether or not there was no consideration distinct from the price.
HELD: No, there is a consideration here. The Supreme Court ruled that in this case, the
consideration which is distinct from the price was the agreement in the contract which
stated that if RCBC fails to exercise its option to buy, it shall transfer all improvements made
on the land [by RCBC] in favor of Serra. Such is an agreement more onerous than the
payment of option money. Since there is a consideration distinct from the price, Serra is
bound by the option contract. Therefore, he cannot refuse to sell the land to RCBC.