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

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date,
1. CALTEX (PHILIPPINES), INC., petitioner, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which
vs. stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondent indicated time deposits from and after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2which dismissed the complaint filed therein 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
by herein petitioner against respondent bank. went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-
The undisputed background of this case, as found by the court a quo and adopted by respondent court, 68).
appears of record:
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited terminate the same.
with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280); 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a
copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time
CTDCTD deposits (Defendant's Exhibit 564).
DatesSerial Nos.QuantityAmount
9. No copy of the requested documents was furnished herein defendant.
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the
4 Mar. 82 90127 to 90146 20 80,000 value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and
5 Mar. 82 70147 to 90150 4 16,000 on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of
8 Mar. 82 90001 to 90020 20 80,000 the matured loan (TSN, February 9, 1987, pp. 130-131).
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
9 Mar. 82 90251 to 90272 22 88,000 ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus
——— ———— accrued interest and compounded interest therein at 16% per annum, moral and exemplary
Total 280 P1,120,000 damages as well as attorney's fees.
===== ========
3
After trial, the court a quo rendered its decision dismissing the instant complaint.
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's provisions of the Code of Commerce relating to lost instruments payable to bearer. 4
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
The instant petition is bereft of merit.
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of
the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of
this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain amount follows. The document
further provides that the amount deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are
payable, not to whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz
as the person who made the deposit and further engages itself to pay said depositor the
amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone
of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to
in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida: In other words Mr. Witness, you are saying that per books of the bank, the depositor
referred (sic) in these certificates states that it was Angel dela Cruz?
witness: Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida: And no other person or entity or company, Mr. Witness?
witness: None, your Honor. 7
xxx xxx xxx
Atty. Calida: Mr. Witness, who is the depositor identified in all of these certificates of time deposit
insofar as the bank is concerned?
witness: Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9In the construction of a bill or
note, the intention of the parties is to control, if it can be legally ascertained. 10While the writing may be
read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have
with facility so expressed that fact in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the
wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what
is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls
for the application of the elementary rule that the interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz
to guarantee his purchases of fuel products" (Emphasis ours.) 13This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to
the prejudice of the other party who relied upon them. 15In the law of evidence, whenever a party has,
by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity therein
17praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or
particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to
plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la
Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion.
18Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion, petitioner now labors under
the presumption that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al.20is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be construed as a pledge; but if there
was some other intention, it is not a pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have been a deposit of the property
as collateral security. It has been said that a transfer of property by the debtor to a creditor,
even if sufficient on its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute ownership will
not be given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in
the absence of clear and unambiguous language or other circumstances excluding an
intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a
holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23As such holder of collateral security,
he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by
the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights, 24which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any document
evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz.
25Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry
of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in
the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the
CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can
be premised on a multitude of other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge
or court of competent jurisdiction, asking that the principal, interest or dividends due or about
to become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35It is an auxiliary
verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on
the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so
that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable
thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans compliance with the procedure outlined therein, and none
establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIEDand the appealed
decision is hereby AFFIRMED.
SO ORDERED.
2. Consolidated Plywood vs. IFC Leasing, 149 SCRA 448
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a
decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as
its resolution dated October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging
activities for the year 1978 the opening of additional roads, and simultaneous logging operations along
the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila,
through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a
corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980,
p. 44) and to determine the capability of the "Used" tractors being offered, petitioner-corporation
requested the seller-assignor to inspect the job site. After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were fit
for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-
corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to
purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A").
At the same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the
seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the
petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after
another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the
tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty
(E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to
the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-
D," and "6-E"), but the tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations of
petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would likewise be delayed until the seller-
assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor
to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds
were to be given to the respondent and the excess, if any, to be divided between the seller-assignor
and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several
follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case
was filed by the respondent against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the principal sum
of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71),
accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial
court to order the respondent to pay the petitioners damages in an amount at the sound discretion of
the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as
would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY
ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August
15, 1979 and accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent
(10%) of the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the
petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following
errors:
I THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND
PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
II THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN
DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER
THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the
decision of the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the considered
opinion that aside from the fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary
intention appears, there is an implied warranty, the defense of breach of warranty, if there is
any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee
who is the assignee of the promissory note and a holder of the same in due course. Warranty
lies in this case only between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted
financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants either to
withdraw from the contract and/or demand a proportionate reduction of the price with damages
in either case (Art. 1567, New Civil Code). We now come to the issue as to whether the
plaintiff-appellee is a holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting or factoring commercial papers
or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the
Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing 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 SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.
V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF
THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A
SALE ON INSTALLMENTS TO A PURE LOAN.
VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT
BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as
well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally,
that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as
to bar completely all the available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed
on time because the petitioners' motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the
first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by
the records. The petitioner was clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the
thing sold may have, should they render it unfit for the use for which it is intended, or should
they diminish its fitness for such use to such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have given a lower price for it; but said vendor
shall not be answerable for patent defects or those which may be visible, or for those which
are not visible if the vendee is an expert who, by reason of his trade or profession, should have
known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or
fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular
purpose for which the goods are acquired, and it appears that the buyer relies on the sellers
skill or judge judgment (whether he be the grower or manufacturer or not), there is an implied
warranty that the goods shall be reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose
may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the
thing sold even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This
liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless
the assignee is a holder in due course of the promissory note in question, assuming the note is
negotiable, in which case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-
corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the
seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics.
However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with
the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor
sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party
injured by the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the law
itself requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month thereafter
until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory
note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is
not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called
'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument than
under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it
is drawn payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the words "or order" or"to the
order of, "the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the
respondent can never be a holder in due course but remains a mere assignee of the note in question.
Thus, the petitioner may raise against the respondent all defenses available to it as against the seller-
assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by
the respondent-assignee because the petitioner's defenses apply to both or either of either of them.
Actually, the records show that even the respondent itself admitted to being a mere assignee of the
promissory note in question, to wit:
ATTY. PALACA: Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions on
cross,
COURT: You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN: The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the mortgagee were assigned
to the IFC Leasing & Acceptance Corporation.
COURT: He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; .
. . you want to make a distinction, one is an assignment of mortgage right and the other one is
indorsement of the promissory note. What counsel for defendants wants is that you stipulate
that it is contained in one single transaction?
ATTY. ILAGAN: We stipulate it is one single transaction. (pp. 27-29, TSN., February 13,
1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a
negotiable instrument, the respondent cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors,
there was an arrangement between the seller-assignor, Industrial Products Marketing, and the
respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price
from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the
sale on installment of the tractors were all executed on the same day by and among the buyer, which is
herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the
respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price
was not unconditional, and that it was subject to the condition that the tractors -sold were not defective.
The respondent knew that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price from the petitioners. Even
assuming for the sake of argument that the promissory note is negotiable, the respondent, which took
the same with actual knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other interpretation would be most
inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face
a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact,
which would justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
 xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity
in the instrument or defect in the title of the person negotiating the same, the person to whom it
is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith
as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase
price. Many times, in pursuance of a previous arrangement with the seller, a finance company
pays the full price and the note is indorsed to it, subrogating it to the right to collect the price
from the buyer, with interest. With the increasing frequency of installment buying in this
country, it is most probable that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will be subject to the defense of
failure of consideration and cannot recover the purchase price from the buyer. As against the
argument that such a rule would seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and will impose
a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-
should have some protection somewhere along the line. We believe the finance company is
better able to bear the risk of the dealer's insolvency than the buyer and in a far better position
to protect his interests against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in favor of
a rule which win afford public protection to the general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766)
involving similar facts, it was held that in a very real sense, the finance company was a moving force in
the transaction from its very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent,
a financing company which actively participated in the sale on installment of the subject two Allis
Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this case are subject to all defenses that the
petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and
respondent appellate court erred in holding the promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17,
1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The
complaint against the petitioner before the trial court is DISMISSED. SO ORDERED.
3. Garcia vs. Llamas, 417 SCRA 292
Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by
the complete incompatibility between the old and the new agreements. Petitioner herein fails to show
either requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary
debtor stands.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the November
26, 2001 Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in CA-GR CV No.
60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains
to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the
award for attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x
Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus
is REMANDED to the court of origin for purposes of receiving ex parte [Respondent] Dionisio Llamas
evidence against x x x Eduardo de Jesus.
The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio
Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No.
Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
P400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they
bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest
per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent]
was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be
recovered from [petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the
complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under
the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been
paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of
the check and [respondents] acceptance thereof novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the
reply were the face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed
P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon
for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of P120,000.00
by way of interests; that this was made when [respondents] daughter, one Nits Llamas-Quijencio,
received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de
Jesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated leave
credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the months
of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed
to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed
the instant case while his retirement was being processed; and that, in defense of his rights, he agreed
to pay his counsel P20,000.00 [as] attorneys fees, plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-
trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he
would no [longer] present evidence. Given this development, the trial court gave [respondent]
permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia,
the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner]
Garcia to file his comment or opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present
his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the
case for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he
asserted that [petitioners and de Jesus] solidary liability under the promissory note cannot be any
clearer, and that the check issued by de Jesus did not discharge the loan since the check bounced.
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as
follows:
WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon per month from
January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00
representing interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt
appearance, and;
3) Cost of this suit.
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he
was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the
RTC judgment, even though De Jesus had been declared in default.The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor because,
first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which
had been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.
Issues
Petitioner submits the following issues for our consideration:
I. Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in
the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the
loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of
P400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the]
substitution by x x x de Jesus or [the superseding of] the promissory note;
 c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to
financial difficulties, he be given an extension of time to pay his loan obligation and that
his retirement benefits from the Philippine National Police will answer for said obligation.
II. Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given weight and credence considering that
subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption of sole liability over the loan
obligation.
III. Whether or not judgment on the pleadings or summary judgment was properly availed of by
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of
Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-blown trial.
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the
defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that
novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the
debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For novation
to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two obligations can stand together,
each one with its own independent existence.
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check, or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also constitutes novation-- change
the terms and conditions of the obligation. Such payment was already provided for in the promissory
note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the formers place in the relation. Well-
settled is the rule that novation is never presumed. Consequently, that which arises from a purported
change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show
clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the obligation, that a
third person was substituted in his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature
of the obligation being solidary due to the fact that the promissory note expressly declared that the
liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand
payment or performance from one of the solidary debtors or some or all of them simultaneously, and
payment made by one of them extinguishes the obligation. It therefore follows that in case the creditor
fails to collect from one of the solidary debtors, he may still proceed against the other or others. x x x
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor.] Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express. It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact fulfillment from either of the
solidary debtors.
More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint
and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment.
Respondents acceptance of his check did not change the person of the debtor, because a joint and
solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. It is up to the former to determine against whom to
enforce collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore
liable for the entire obligation.
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.
It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December, 1996.
By its terms, the note was made payable to a specific person rather than to bearer or to order -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner
cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation party.
Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangible
rights as may have been created by the assent of the parties. The promissory note is thus covered by
the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for
value even if, at the time of its taking, the latter knew the former to be only an accommodation party.
The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety -- the accommodation party being the surety. It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original promissor and debtor from
the beginning. The liability is immediate and direct.
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show
that (1) except as to the amount of damages, there is no genuine issue regarding any material fact; and
(2) the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which the
pleadings raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are
asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or
specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown
by the pleadings, depositions or admissions. A summary judgment may be applied for by either a
claimant or a defending party.
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse partys pleading. The essential question is whether there are issues generated by the
pleadings. A judgment on the pleadings may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief.
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer apparently raised several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid
issues. Firstly, Garcias claim that he was merely an accommodation party is belied by the promissory
note that he signed. Nothing in the note indicates that he was only an accommodation party as he
claimed to be. Quite the contrary, the promissory note bears the statement: It is understood that our
liability under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de Jesus
already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check.
From the records, it also appears that petitioner himself moved to submit the case for judgment on the
basis of the pleadings and documents. In a written Manifestation, he stated that judgment on the
pleadings may now be rendered without further evidence, considering the allegations and admissions of
the parties.

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

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

SO ORDERED.
 -DIGESTS NEGOTIN-
1. CALTEX (PHILS.), INC. VS. CA
Lessons Applicable: Requisites of negotiability to antedated and postdated instruments (Negotiable
Instrument Law)
FACTS:
 Security Bank and Trust Company (Security Bank), a commercial banking institution, through
its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who
deposited with Security Bank the total amount of P1,120,000
 Angel delivered the CTDs to Caltex for his purchase of fuel products
 March 18, 1982: Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost all CTDs,
submitted the required Affidavit of Loss and received the replacement
 March 25, 1982: Angel dela Cruz negotiated and obtained a loan from Security Bank in the
amount of P875,000 and executed a notarized Deed of Assignment of Time Deposit
 November, 1982: Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to verify the
CTDs declared lost by Angel
 November 26, 1982: Security Bank received a letter from Caltex formally informing it of its
possession of the CTDs in question and of its decision to pre-terminate the same.
 December 8, 1982: Caltex was requested by Security Bank to furnish:
o a copy of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz
o the details of Mr. Angel's obligation against which Caltex proposed to apply the time
deposits
 Security Bank rejected Caltex demand for payment bec. it failed to furnish a copy of its
agreement w/ Angel
 April 1983, the loan of Angel dela Cruz with Security Bank matured
 August 5, 1983: CTD were set-off w/ the matured loan
 Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest
 CA affirmed RTC to dismiss complaint
ISSUE:
W/N the CTDs are negotiable
W/N Caltex as holder in due course can rightfully recover on the CTDs
HELD: Petition is Denied and appealed decision is affirmed.
1. YES.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites
for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and -check
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
 The documents provide that the amounts deposited shall be repayable to the depositor
o depositor = bearer
 If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only,
it could have with facility so expressed that fact in clear and categorical terms in the
documents, instead of having the word "BEARER" stamped on the space provided for the
name of the depositor in each CTD
 negotiability or non-negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself
2. NO.
 although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement
o CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products
o There was no negotiation in the sense of a transfer of the legal title to the CTDs in
favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer
CTDs would have sufficed.
 Where the holder has a lien on the instrument arising from contract, he is deemed a holder for
value to the extent of his lien.
o As such holder of collateral security, he would be a pledgee but the requirements
therefor and the effects thereof, not being provided for by the Negotiable Instruments
Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property.
2. CONSOLIDATED PLYWOOD VS. IFC LEASING
Lessons Applicable: Requisites of negotiability to antedated and postdated instruments (Negotiable
Instruments Law)
FACTS: Consolidated (buyer pays promossor note) > IPM (seller-assignor who violated warranty) > IFC
(holder in due course or merely an assignee?)
 Consolidated Plywood Industries, Inc (Consolidated) is a corporation engaged in the logging
business
o For the purpose of opening of additional roads and simultaneous logging operations
along the route of roads, it needed 2 additional units of tractors
  Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (IPM) (seller-assignor) offered to sell 2 "Used" Allis Crawler
Tractors
o IPM inspected the job site and assured that the tractors were fit for the job and gave a
90-days performance warranty of the machines and availability of parts.
 Consolidated purchased on installment.
o It paid the down payment of P210,000
 April 5, 1978: IPM issued the sales invoice and the deed of sale with chattel mortgage with
promissory note was executed
o IPM, by means of a deed of assignment, assigned its rights and interest in the chattel
mortgage in favor of IFC Leasing and Acceptance Corp. (IFC)
 After 14 days, one of the tractors broke down and after another 9 days, the other tractor too
 Because of the breaking down of the tractors, the road building and simultaneous logging
operations were delayed
 Consolidated unilaterally rescinded the contract w/ IPM
 April 7, 1979: Wee of Consolidated asked IPM to pull out the units and have them
reconditioned, and thereafter to offer them for sale.
o The proceeds were to be given to IFC and the excess will be divided between:
 IPM
 Consolidated which offered to bear one-half 1/2 of the reconditioning cost
 IPM didn't do anything
 IFC filed against Consolidated for the recovery of the principal sum P1,093,789.71, interest
and attorney's fees
 RTC and CA: favored IFC
 breach of warranty if any, is not a defense available to Consolidated either to withdraw from
the contract and/or demand a proportionate reduction of the price with damages in either case
ISSUE: W/N IFC is a holder in due course of the negotiable promissory note so as to bar completely all
the available defenses of the Consolidated against IPM
HELD: CA reversed and set aside
 Consolidated is a victim of warranrty
o 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.chanroblesvirtualawlibrary chanrobles
virtual law library
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 chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
xxx xxx xxx chanrobles virtual law library
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).
 GR: extends to the corporation to whom it assigned its rights and interests
 EX: assignee is a holder in due course of the promissory note
o assuming the note is negotiable
 Consolidated's defenses may not prevail against
it.chanroblesvirtualawlibrary chanrobles virtual law library
 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.chanroblesvirtualawlibrary chanrobles virtual law library
xxx xxx xxx chanrobles virtual law library
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)
 Consolidated, having unilaterally and extrajudicially rescinded its contract with the seller-
assignor, can no longer sue IPM except by way of counterclaim if IPM sues it because of the
rescission
 Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer" - in this case it is non-negotiable
o = expression of consent that the instrument may be transferred
 consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one
 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. . . .
  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
 Even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the IFC cannot be a holder in due course due to absence of GF for knowing that
the tractors were defective
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:
(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
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 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. . .
3. ROMEO GARCIA VS. DIONISIO LLAMAS
G.R. No. 154127. December 8, 2003
Facts: A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner Romeo
Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him. They bound
themselves jointly and severally to pay the loan on or before January 23, 1997 with a 15% interest per
month. The loan remained unpaid despite repeated demands by respondent.
Petitioner resisted the complaint alleging that he signed the promissory note merely as an
accommodation party for de Jesus and the latter had already paid the loan by means of a check and
that the issuance of the check and acceptance thereof novated or superseded the note.
The trial court rendered a judgment on the pleadings in favor of the respondent and directed petitioner
to pay jointly and severally respondent the amounts of Php 400, 000 representing the principal amount
plus interest at 15% per month from January 23, 1997 until the same shall have been fully paid, less the
amount of Php 120,000 representing interests already paid.
The Court of Appeals ruled that no novation, express or implied, had taken place when respondent
accepted the check from de Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and de
Jesus. Respondent’s acceptance of the check did not serve to make de Jesus the sole debtor because
first, the obligation incurred by him and petitioner was joint and several; and second, the check which
had been intended to extinguish the obligation bounced upon its presentment.
Issues: (1) Whether or not there was novation of the obligation
(2) Whether or not the defense that petitioner was only an accommodation party had any basis.
Held: For novation to take place, the following requisites must concur: (1) There must be a previous
valid obligation; (2) the parties concerned must agree to a new contract; (3) the old contract must be
extinguished; and (4) there must be a valid new contract.
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check.
Neither could the payment of interests, which in petitioner’s view also constitutes novation, change the
terms and conditions of the obligation. Such payment was already provided for in the promissory note
and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old must be expressly released from the
obligation, and the third person or new debtor must assume the former’s place in the relation. Well-
settled is the rule that novation is never presumed. Consequently, that which arises from a purported
change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show
clearly and unequivocally that novation has indeed taken place. Note also that for novation to be valid
and legal, the law requires that the creditor expressly consent to the substitution of a new debtor.
In a solidary obligation, the creditor is entitled to demand the satisfaction of the whole obligation from
any or all of the debtors. It is up to the former to determine against whom to enforce collection. Having
made himself jointly and severally liable with de Jesus, petitioner is therefore liable for the entire
obligation.
(2) By its terms, the note was made payable to a specific person rather than bearer to or order—a
requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities
and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in
writing and evidence of such intangible rights as may have been created by the assent of the parties.
The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
Even granting that the NIL was applicable, still petitioner would be liable for the note. An
accommodation party is liable for the instrument to a holder for value even if, at the time of its taking,
the latter knew the former to be only an accommodation party. The relation between an accommodation
party and the party accommodated is, in effect, one of principal and surety. It is a settled rule that a
surety is bound equally and absolutely with the principal and is deemed an original promissory debtor
from the beginning. The liability is immediate and direct.
--END OF FIRST BATCH--