ACCOMMODATION PARTY

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

April 27, 1967

G.R. No. L-17845

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner,
vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the Bank of the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of
P15,000.00, proceeds of the promissory note, was received from the bank by Oscar Varona alone.
Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a favor to
Oscar Varona. Payments were made on account. As of June 15, 1950, the outstanding balance
stood P4,850.00. No payment thereafter made.

On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together with
interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated demands.

Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of
Rizal, Special Proceeding No. 1518. Francisco Sevilla was named administrator.

In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of P5,746.12,
plus attorneys fees in the sum of P1,500.00. The administrator resisted the claim upon the
averment that the deceased Victor Sevilla "did not receive any amount as consideration for the
promissory note," but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the
amount of P5,746.12, and directing the administrator to pay the same from any available funds
belonging to the estate of the deceased Victor Sevilla.

The motion to reconsider having been overruled, the administrator appealed.[[1]] The Court of
Appeals, in a decision promulgated on July, 15, 1960, voted to set aside the order appealed from
and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate estate."
The case is now before this Court on certiorari to review the judgment of the Court of Appeals.

Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim "in the
amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the deceased Victor
Sevilla," be approved.

1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of the
15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not be
essayed. As such accommodation the makers, the individual obligation of each of them to the
bank is no different from, and no greater and no less than, that contract by Oscar Varona. For,
while these two did not receive value on the promissory note, they executed the same with, and
for the purpose of lending their names to, Oscar Varona. Their liability to the bank upon the
explicit terms of the promissory note is joint and several.[[2]] Better yet, the bank could have
pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the fact is
that one of the last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total amount
paid from Oscar Varona. This is but right and just. Varona received full value of the promissory
note.[[3]] Sadaya received nothing therefrom. He paid the bank because he was a joint and
several obligor. The least that can be said is that, as between Varona and Sadaya, there is an
implied contract of indemnity. And Varona is bound by the obligation to reimburse Sadaya.[[4]]
3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look
into the relations inter se amongst the three consigners of the promissory note. Their
relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same
thing be said about the relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who paid
can not be joint and several. For, indeed, had payment been made by Oscar Varona, instead of
Simeon Sadaya, Varona could not have had reason to seek reimbursement from either Sevilla or
Sadaya, or both. After all, the proceeds of the loan went to Varona and the other two received
nothing therefrom.

4. On principle, a solidary accommodation maker — who made payment — has the right to
contribution, from his co-accommodation maker, in the absence of agreement to the contrary
between them, and subject to conditions imposed by law. This right springs from an implied
promise between the accommodation makers to share equallythe burdens that may ensue from
their having consented to stamp their signatures on the promissory note.[[5]] For having lent their
signatures to the principal debtor, they clearly placed themselves — in so far as payment made
by one may create liability on the other — in the category of mere joint grantors of the former.
6]] This is as it should be. Not one of them benefited by the promissory note. They stand on the
[[

same footing. In misfortune, their burdens should be equally spread.

Manresa, commenting on Article 1844 of the Civil Code of Spain,[[7]] which is substantially
reproduced in Article 2073[[8]] of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente enestricto concepto juridico,
se han extremado sus consecuencias hasta el punto de que estas son contrarias, no solo a la
logica, sino tambien a la equidad, que debe ser el alma del Derecho, como ha dicho Laurent.
Esa accion — sostienen — no nace de la fianza, pues, en efecto, el hecho de afianzar una misma
deuda no crea ningun vinculo juridico, ni ninguna razon de obligar entre los fiadores, sino que
trae, por el contrario, su origen de una acto posterior, cual es el pago de toda la deuda realizado
por uno de ellos, y la equdad, no permite que los denias fiadores, que
igualmente estaban estaban obligos a dicho pago, se aprovenchen de ese
acto en perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es
consecuencia del beneficio o del derecho de division, como tenemos ya dicho. En
efecto, por virtud de esta todos los cofiadores vienen obligados a contribuir al pago de parte que
a cada uno corresponde. De ese obligacion, contraida por todos ellos, se libran los que no han
pagado por consecuencia del acto realizado por el que pago, y si bien este no hizo mas
que cumplir el deber que el contracto de fianza le imponia de responder de
todo el debito cuando no limito su obligacion a parte alguna del mismo,dicho acto
redunda en beneficio de los otros cofiadores los cuales se aprovechan de el
para quedar desligados de todo compromiso con el acreedor.[[9]]
5. And now, to the requisites before one accommodation maker can seek reimbursement from a
co-accommodation maker.

By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency shall
be supplied by the provisions of this Code". Nothing extant in the Negotiable Instruments Law
would define the right of one accommodation maker to seek reimbursement from another.
Perforce, we must go to the Civil Code.

Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case comes
within the ambit of Article 2073 of the Civil Code which reads:

ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the
one among them who has paid may demand of each of the others the share which is
proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by the others, including the
payer, in the same proportion.

The provisions of this article shall not be applicable, unless the payment has
been made in virtue of a judicial demand or unless the principal debtor is
insolvent.[[10]]
As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one surety
has paid the debt to the creditor and is seeking contribution from his cosureties."[[11]]
Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent reason.
Says Manresa:[[12]]
c) Requisitos para el ejercicio del derecho de reintegro o de reembolso
derivado de la corresponsabilidad de los cofiadores.
— La tercera de las prescripciones que comprende el articulo se refiere a los requisitos que
deben concurrir para que pueda tener lugar lo dispuesto en el mismo. Ese derecho que concede al
fiador para reintegrarse directamente de los fiadores de lo que pago por ellos en vez de
dirigir su reclamacion contra el deudor, es un beneficio otorgado por la ley solo ell dos
casos determinados, cuya justificacion resulta evidenciada desde luego; y esa limitacion este
debidamente aconsejada por una razon de prudencia que no puede desconocerse, cual es la
de evitar que por la mera voluntad de uno de los cofiadores pueda hacerse surgir la accion de
reintegro contra los demas en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues teniendo en
primer termino el fiador que paga por el deudor el derecho de indemnizacion contra este,
sancionado por el art. 1,838, es de todo punto indudable que ejercitando esta accion pueden
quedar libres de toda responsabilidad los demas cofiadores si, a consecuencia de ella,
indemniza el fiado a aquel en los terminos establecidos en el expresado articulo. Por el contrario
de prescindir de dicho derecho el fiador, reclamando de los confiadores en primer lugar el
oportuno reintegro, estos en tendrian mas remedio que satisfacer sus ductares
respectivas, repitiendo despues por ellas contra el deudor con la imposicion
de las molestias y gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno u otro de
dichos derechos, el de indemnizacion por el deudor y el del reintegro por los cofiadores,
indudablemente optaria siempre y en todo caso por el segundo, puesto que mucha mas
garantias de solvencia y mucha mas seguridad del cobro ha de encontrar en los fiadores que en el
deudor; y en la practica quedaria reducido el primero a la indemnizacion por el deudor a los
confiadores que hubieran hecho el reintegro, obligando a estos, sin excepcion alguna, a soportar
siempre los gastos y las molestias que anteriormente homos indicado. Y para evitar estos
perjuicios, la ley no ha podido menos de reducir el ejercicio de ese derecho a los casos en que
absolutamente sea indispensable.[[13]]
6. All of the foregoing postulate the following rules: (1) A joint and several accommodation
maker of a negotiable promissory note may demand from the principal debtor reimbursement for
the amount that he paid to the payee; and (2) a joint and several accommodation maker who pays
on the said promissory note may directly demand reimbursement from his co-accommodation
maker without first directing his action against the principal debtor provided that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and
without any judicial demand," and that "there is an absolute absence of evidence showing that
Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal distance
between payment by Sadaya and Sadaya's right to demand of Sevilla "the share which is
proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed. No
costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P.,

Zaldivar and Castro, JJ., concur.
 epublic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,

vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as
Vice-President for Sales of Mover Enterprises, Inc., respondents.

Melquiades P. de Leon for petitioner.

Rogelio A. Ajes for private respondent.

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals,

promulgated on September 8, 1987, which reversed the decision of the trial
Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S.
Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower
courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover

Enterprises, Inc. in-charge of marketing and sales; and the president of
the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to
defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its
president, Atty. Oscar Z. Benares, and the treasurer of the said
corporation. However, since at that time, the treasurer of Mover
Enterprises was not available, Atty. Benares prevailed upon the plaintiff,
Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story.
Plaintiff Ricardo S. Santos, Jr. did sign the check.
 It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said
defendant over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar
Benares, the spouses Jaime and Clarita Ong, with the understanding that
upon approval by the GSIS of the compromise agreement with the
spouses Ong, the check will be encashed accordingly. However, since the
compromise agreement was not approved within the expected period of
time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by Atty.
Benares with another Traders Royal Bank cheek bearing No. 379299
dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and
'2'), also payable to the defendant Jose. This replacement check was also
signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr.
When defendant deposited this replacement check (Exhs. 'A' and '2') with
her account at Family Savings Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent redepositing of the said check was
likewise dishonored by the bank for the same reason. Hence, defendant
through counsel was constrained to file a criminal complaint for violation of
Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty.
Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The investigating
Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended
information with the court charging both Oscar Benares and Ricardo S.
Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City.

Meanwhile, during the preliminary investigation of the criminal charge

against Benares and the plaintiff herein, before Assistant City Fiscal
Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check
No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant
Ernestina Crisologo-Jose, the complainant in that criminal case. The
defendant refused to receive the cashier's check in payment of the
dishonored check in the amount of P45,000.00. Hence, plaintiff encashed
the aforesaid cashier's check and subsequently deposited said amount of
P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').
Incidentally, the cashier's check adverted to above was purchased by Atty.
Oscar Z. Benares and given to the plaintiff herein to be applied in payment
of the dishonored check. 3

After trial, the court a quo, holding that it was "not persuaded to believe that
consignation referred to in Article 1256 of the Civil Code is applicable to this case,"
rendered judgment dismissing plaintiff s complaint and defendant's counterclaim. 4

As earlier stated, respondent court reversed and set aside said judgment of dismissal
and revived the complaint for consignation, directing the trial court to give due course
thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.

1. Petitioner contends that respondent Court of Appeals erred in holding

that private respondent, one of the signatories of the check issued under
the account of Mover Enterprises, Inc., is an accommodation party under
the Negotiable Instruments Law and a debtor of petitioner to the extent of
the amount of said check.

Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc.
and not private respondent who merely signed the check in question in a representative
capacity, that is, as vice-president of said corporation, hence he is not liable thereon
under the Negotiable Instruments Law.

The pertinent provision of said law referred to provides:

Sec. 29. Liability of accommodation party an accommodation party is one

who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name
to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.

Consequently, to be considered an accommodation party, a person must (1) be a party

to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for the credit of some other
person.

Based on the foregoing requisites, it is not a valid defense that the accommodation
party did not receive any valuable consideration when he executed the instrument.
From the standpoint of contract law, he differs from the ordinary concept of a debtor
therein in the sense that he has not received any valuable consideration for the
instrument he signs. Nevertheless, he is liable to a holder for value as if the contract
was not for accommodation 5in whatever capacity such accommodation party signed
the instrument, whether primarily or secondarily. Thus, it has been held that in lending
his name to the accommodated party, the accommodation party is in effect a surety for
the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this
case, as petitioner suggests, the inevitable question is whether or not it may be held
liable on the accommodation instrument, that is, the check issued in favor of herein
petitioner.

We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value, although such
holder at the time of taking the instrument knew him to be only an accommodation party,
does not include nor apply to corporations which are accommodation parties. 7 This is
because the issue or indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is ultra vires. 8 Hence, one who
has taken the instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. If the form of the
instrument, or the nature of the transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the corporation thereon. 9

By way of exception, an officer or agent of a corporation shall have the power to

execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so. 10 Corollarily,
corporate officers, such as the president and vice-president, have no power to execute
for mere accommodation a negotiable instrument of the corporation for their individual
debts or transactions arising from or in relation to matters in which the corporation has
no legitimate concern. Since such accommodation paper cannot thus be enforced
against the corporation, especially since it is not involved in any aspect of the corporate
business or operations, the inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as well as the consequences
arising from their acts in connection therewith.

The instant case falls squarely within the purview of the aforesaid decisional rules. If we
indulge petitioner in her aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the check. Be that as it may,
petitioner is not without recourse.

The fact that for lack of capacity the corporation is not bound by an accommodation
paper does not thereby absolve, but should render personally liable, the signatories of
said instrument where the facts show that the accommodation involved was for their
personal account, undertaking or purpose and the creditor was aware thereof.

Petitioner, as hereinbefore explained, was evidently charged with the knowledge that
the cheek was issued at the instance and for the personal account of Atty. Benares who
merely prevailed upon respondent Santos to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to petitioner by reason of her
personal involvement in the financial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amount involved, she actually had
no transaction directly with said corporation.

There should be no legal obstacle, therefore, to petitioner's claims being directed

personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr.,
president and vice-president, respectively, of Mover Enterprises, Inc.
 2. On her second assignment of error, petitioner argues that the Court of
Appeals erred in holding that the consignation of the sum of P45,000.00,
made by private respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.

Petitioner's submission is that no creditor-debtor relationship exists between the parties,

hence consignation is not proper. Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an accommodation party.

As previously discussed, however, respondent Santos is an accommodation party and

is, therefore, liable for the value of the check. The fact that he was only a co-signatory
does not detract from his personal liability. A co-maker or co-drawer under the
circumstances in this case is as much an accommodation party as the other co-
signatory or, for that matter, as a lone signatory in an accommodation instrument. Under
the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-
surety for the accommodated party with whom he and his co-signatory, as the other co-
surety, assume solidary liability ex lege for the debt involved. With the dishonor of the
check, there was created a debtor-creditor relationship, as between Atty. Benares and
respondent Santos, on the one hand, and petitioner, on the other. This circumstance
enables respondent Santos to resort to an action of consignation where his tender of
payment had been refused by petitioner.

We interpose the caveat, however, that by holding that the remedy of consignation is
proper under the given circumstances, we do not thereby rule that all the operative facts
for consignation which would produce the effect of payment are present in this case.
Those are factual issues that are not clear in the records before us and which are for
the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for
which reason it has advisedly been directed by respondent court to give due course to
the complaint for consignation, and which would be subject to such issues or claims as
may be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.

3. That respondent court virtually prejudged Criminal Case No. Q-14687 of

the Regional Trial Court of Quezon City filed against private respondent
for violation of Batas Pambansa Blg. 22, by holding that no criminal liability
had yet attached to private respondent when he deposited with the court
the amount of P45,000.00 is the final plaint of petitioner.

We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called for in the appeal to it in
CA-G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue
dwells in the question of whether an accommodation party can validly consign the
amount of the debt due with the court after his tender of payment was refused by the
creditor." Yet, from the commercial and civil law aspects determinative of said issue, it
digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:
 Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of
such insufficiency of funds or credit. Thus, the making, drawing and
issuance of a check, payment of which is refused by the drawee because
of insufficient funds in or credit with such bank is prima facie evidence of
knowledge of insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.

It will be noted that the last part of Section 2 of B.P. 22 provides that the
element of knowledge of insufficiency of funds or credit is not present and,
therefore, the crime does not exist, when the drawer pays the holder the
amount due or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.

Based on the foregoing consideration, this Court finds that the plaintiff-
appellant acted within Ms legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date when
plaintiff-appellant receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the Clerk of Court (a
Saturday and a Sunday which are not banking days) intervened. The fifth
banking day fell on August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981. 11

That said observations made in the civil case at bar and the intrusion into the merits of
the criminal case pending in another court are improper do not have to be belabored. In
the latter case, the criminal trial court has to grapple with such factual issues as, for
instance, whether or not the period of five banking days had expired, in the process
determining whether notice of dishonor should be reckoned from any prior notice if any
has been given or from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual preliminary investigation; and
whether there was a justification for not making the requisite arrangements for payment
in full of such check by the drawee bank within the said period. These are matters alien
to the present controversy on tender and consignation of payment, where no such
period and its legal effects are involved.

These are aside from the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether or not there
was knowledge of insufficiency of funds in or credit with the drawee bank; that payment
of civil liability is not a mode for extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the same.

To repeat, the foregoing matters are properly addressed to the trial court in Criminal
Case No. Q-14867, the resolution of which should not be interfered with by respondent
Court of Appeals at the present posture of said case, much less preempted by the
inappropriate and unnecessary holdings in the aforequoted portion of the decision of
said respondent court. Consequently, we modify the decision of respondent court in CA-
G.R. CV No. 05464 by setting aside and declaring without force and effect its
pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and
the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court

of Appeals is AFFIRMED.

SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur.

Melencio-Herrera J., took no part.

G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE
PHILIPPINES, INC., respondent.

NARVASA, c.J.:

Stelco Marketing Corporation is engaged in the distribution and sale to the public of
structural steel bars. 1 On seven (7) different occasions in September and October,
1980, it sold to RYL Construction, Inc. quantities of steels bars of various sizes and rolls
of G.I. wire. These bars and wire were delivered at different places at the indication of
RYL Construction, Inc. The aggregate price for the purchases was P126,859.61.

Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD"
(cash on delivery), the latter made no payments for the construction materials thus
ordered and delivered despite insistent demands for payment by the former.

On April 4, 1981, RYL gave to Armstrong, Industries — described by STELCO as its

"sister corporation" and "manufacturing arm" 2 — a check drawn against Metrobank in
the amount of P126,129.86, numbered 765380 and dated April 4, 1981. That check was
a company check of another corporation, Steelweld Corporation of the Philippines,
signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres.

The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of
RYL. Romeo Lim had asked Limson, for financial assistance, and the latter had agreed
to give Lim a check only by way of accommodation, "only as guaranty but not to pay for
anything." 3 Why the check was made out in the amount of P126,129.86 is not
explained. Anyway, the check was actually issued in said amount of P126, 129.86, and
as already stated, was given by R.Y. Lim to Armstrong Industries, 4 in payment of an
obligation. When the latter deposited the check at its bank, it was dishonored because
"drawn against insufficient funds." 5 When so deposited, the check bore two(2)
endorsements, that of "RYL Construction," followed by that of "Armstrong Industries." 6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of

Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were
charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang
22. 7 They were acquitted in a decision rendered on June 28, 1984 "on the ground that
the check in question was not issued by the drawer "to apply on account for value," it
being merely for accommodation purposes. 8 The judgment however conditioned the
acquittal with the following pronouncement:
 This is not however to release Steelweld Corporation from its liability
under Sec. 29 of the Negotiable Instruments Law for having issued it for
the accommodation of Romeo Lim.

Eleven months or so later — and some four (4) years after issuance of the check in
question — in May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a
civil complaint 9 against both RYL and STEELWELD for the recovery of the valued of the
steel bars and wire sold to and delivered to RYL (as already narrated) in the amount of
P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total
amount sought to be recovered as and by way of attorney's fees . . . ." 10 Among the
allegations of its complaint was that Metrobank Check No. 765380 above mentioned
had been given to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A
preliminary attachment was issued by the trial court on the basis of the averments of the
complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD.

RYL could no longer be located and could not be served with

summons. 12 It never appeared. Only STEELWELD filed an answer, under date of July
16, 1985. 13 In said pleading, it specifically denied the facts alleged in the complaint, the
truth, according to Steelweld, being basically that —

1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or
business dealing of any kind" with STELCO, the transactions described in the complaint
having been solely and exclusively between the plaintiff and RYL Construction;

2) the check in question was "only given to a certain R. Lim to be used as collateral for
another obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the
check for another purpose. . . .;

3) nevertheless, the check "is wholly inoperative since . . . Steelweld

. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to
mention also the fact that the said plaintiff failed to comply with the requirements of the
law to hold the said defendant (STEELWELD) liable
. . ."

Trial ensued upon these issues, after which judgment was rendered on June 26,
1986. 14 The judgment sentenced "the defendant Steelweld Corporation to pay to . . .
(Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest
from May 9, 1985, when this case was instituted until fully paid, plus another sum
equivalent to 25% of the total amount due as and for attorney's fees . . . 15 That
disposition was justified in the judgment as follows: 16

There is no question, then, that as far as any commercial transaction is

concerned between plaintiff and defendant Steelweld no such transaction
ever occurred. Ordinarily, under civil law rules, there having been no
transaction between them involving the purchase of certain merchandise
there would be no privity of contract between them, and plaintiff will have
 no right to sue the defendant for payment of said merchandise for the
simple reason that the defendant did not order them, such less receive
them.

But we have here a case where the defendant Steelweld thru its President
Peter Rafael Limson admitted to have issued a check payable to cash in
favor of his friend Romeo Lim who was the President of RYL Construction
by way of accommodation. Under the Negotiable Instruments Law an
accommodation party is liable.

Sec. 29. Liability of an accommodation party. — An

accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument
to a holder for value notwithstanding such holder at the time
of taking the instrument knew him to be only an
accommodation party.

From this adverse judgment STEELWELD appealed to the Court of Appeals 17 and there
succeeded in reversing the judgment. By Decision promulgated on May 29, 1990, 18 the
Court of Appeals 19 ordered "the complaint against appellant (STEELWELD)
DISMISSED; (and the appellee, STELCO) to pay appellant the sum of P15,000.00 as
attorney's fees and cost of litigation, the suit . . . (being) a baseless one that dragged
appellant in court and caused it to incur attorney's fees and expense of litigation.

STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution
dated November 13, 1990. 20 The Court stressed that —

. . . as far as Steelweld is concerned, there was no commercial transaction

between said appellant and appellee. Moreover, there is no evidence that
appellee Stelco Marketing became a holder for value. Nowhere in the
check itself does the name of Stelco Marketing appear as payee, indorsee
or depositor thereof. Finally, appellee's complaint is for the collection of the
unpaid accounts for delivery of steels bars and construction materials. It
having been established that appellee had no commercial transaction with
appellant Stelco, appellee had no cause of action against said appellant.

STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In
this Court it seeks to make the following points in connection with its plea for the
overthrow of the Appellate Tribunal's aforesaid decision, viz.:

1) said decision is "not in accord with law and jurisprudence;"

2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"

3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence)
holds the same free from personal or equitable defense;" and

4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as

against a holder in due course."

The points are not well taken.

The crucial question is whether or not STELCO ever became a holder in due course of
Check No. 765380, a bearer instrument, within the contemplation of the Negotiable
Instruments Law. It never did.

STELCO evidently places much reliance on the pronouncement of the Regional Trial
Court in Criminal Case No. 66571, 21 that the acquittal of the two (2) accused (Limson
and Torres) did not operate "to release Steelweld Corporation from its liability under
Sec. 29 of the Negotiable Instruments Law for having issued . . . (the check) for the
accommodation of Romeo Lim." The cited provision reads as follows:

Sec. 29. Liability of accommodation party. — An accommodation party is

one who has singed the instrument as maker, drawer, acceptor, or
indorser, without receiving valued therefor, and for the purpose of lending
his name to some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.

It is noteworthy that the Trial Court's pronouncement containing reference to said

Section 29 did not specify to whom STEELWELD, as accommodation party, is supposed
to be liable; and certain it is that neither said pronouncement nor any other part of the
judgment of acquittal declared it liable to STELCO.

"A holder in due course," says the law, 22 "is a holder who has taken the
instrument under the following conditions:

(a) That is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the persons negotiating it.

To be sure, as regards an accommodation party (such as STEELWELD), the fourth

condition, i.e., lack of notice of any infirmity in the instruments or defect in title of the
persons negotiating it, has no application. This is because Section 29 of the law above
quoted preserves the right of recourse of a "holder for value" against the
accommodation party notwithstanding that "such holder, at the time of taking the
instrument, knew him to be only an accommodation
party." 23

Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's
Check No. 765380 because the record shows it to have been in "actual possession"
thereof; otherwise, it "could not have presented, marked and introduced (said check) in
evidence . . . before the court a quo." "Besides," it adds, the check in question was
presented by STELCO to the drawee bank for payment through Armstrong Industries,
the manufacturing arm of STELCO and its sister company." 24

The trouble is, there is no evidence whatever that STELCO's possession of Check No.
765380 ever dated back to nay time before the instrument's presentment and dishonor.
There is no evidence whatsoever that the check was ever given to it, or indorsed to it in
any manner or form in payment of an obligation or as security for an obligation, or for
any other purpose before it was presented for payment. On the contrary, the factual
finding of the Court of Appeals, which by traditional precept is normally conclusive on
this Court, is that STELCO never became a holder for value and that "(n)owhere in the
check itself does the name of Stelco Marketing appear as payee, indorsee or depositor
thereof." 25

What the record shows is that: (1) the STEELWELD company check in question was
given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be
"used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y.
Lim indorsed the check to Armstrong in payment of obligation; (4) Armstrong deposited
the check to its account, after indorsing it; (5) the check was dishonored. The record
does not show any intervention or participation by STELCO in any manner of form
whatsoever in these transactions, or any communication of any sort between
STEELWELD and STELCO, or between either of them and Armstrong Industries, at any
time before the dishonor of the check.

The record does show that after the check had been deposited and dishonored,
STELCO came into possession of it in some way, and was able, several years after the
dishonor of the check, to give it in evidence at the trial of the civil case it had instituted
against the drawers of the check (Limson and Torres) and RYL. But, as already pointed
out, possession of a negotiable instrument after presentment and dishonor, or payment,
is utterly inconsequential; it does not make the possessor a holder for value within the
meaning of the law; it gives rise to no liability on the part of the maker or drawer and
indorsers.

It is clear from the relevant circumstances that STELCO cannot be deemed a holder of
the check for value. It does not meet two of the essential requisites prescribed by the
statute. It did not become "the holder of it before it was overdue, and without notice that
it had been previously dishonored," and it did not take the check "in good faith and for
value." 26
Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim
negotiated the check accepted the instrument and attempted to encash it in behalf, and
as agent of STELCO. On the contrary, the indications are that Armstrong was really the
intended payee of the check and was the party actually injured by its dishonor; it was
after all its representative (a Mr. Young) who instituted the criminal prosecution of the
drawers, Limson and Torres, albeit unsuccessfully.

The petitioner has failed to show any sufficient cause for modification or reversal of the
challenged judgment of the Court of Appeals which, on the contrary, appears to be
entirely in accord with the facts and the applicable law.

WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-
G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner.

SO ORDERED

Paras, Padilla and Regalado, JJ., concur.

Nocon., J., is on leave.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner,

vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.

RESOLUTION

FELICIANO, J.:

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis
for and in behalf of different airline companies. Private respondent Arturo S. Miranda had a revolving
credit line with petitioner. He procured tickets from petitioner on behalf of airline passengers and
derived commissions therefrom.

On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect
on six (6) checks issued by private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees,
averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent
paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting
to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in
March 1972, private respondent made another payment of P10,000.00 reducing his indebtedness to
P105,000.00. The writ of attachment was granted by the court a quo.

In his answer, private respondent admitted having had transactions with Travel-On during the period
stipulated in the complaint. Private respondent, however, claimed that he had already fully paid and
even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued
the postdated checks for purposes of accommodation, as he had in the past accorded similar favors
to petitioner. During the proceedings, private respondent contested several tickets alleged to have
been erroneously debited to his account. He claimed reimbursement of his alleged over payments,
plus litigation expenses, and exemplary and moral damages by reason of the allegedly improper
attachment of his properties.

In support of his theory that the checks were issued for accommodation, private respondent testified
that he bad issued the checks in the name of Travel-On in order that its General Manager, Elita
Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the company
were still good. He further stated that Elita Montilla tried to encash the same, but that these were
dishonored and were subsequently returned to him after the accommodation purpose had been
attained.
Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended
to Travel-On by private respondent related to situations where one or more of its passengers needed
money in Hongkong, and upon request of Travel-On respondent would contact his friends in
Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon
his return to Manila and which payment would be credited by Travel-On to respondent's running
account with it.

In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent
the amount of P8,894.91 representing net overpayments by private respondent, moral damages of
P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of the suit.

The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued not for the purpose of encashment to pay his
indebtedness but to accommodate the General Manager of Travel-On to enable her to show to the
Board of Directors that Travel-On was financially stable.

Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact
then increased the award of moral damages to P50,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of
moral damages to P20,000.00, with interest at the legal rate from the date of the filing of the Answer
on 28 August 1972.

Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.

In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability
on the part of private respondent. Petitioner further argues that even assuming that the checks were
for accommodation, private respondent is still liable thereunder considering that petitioner is a holder
for value.

Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the
ground that the various statements of account prepared by petitioner did not show that Private
respondent had an outstanding balance of P115,000.00 which is the total amount of the checks he
issued. It was pointed out that while the various exhibits of petitioner showed various accountabilities
of private respondent, they did not satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court made much of the fact that the figures
representing private respondent's unpaid accounts found in the "Schedule of Outstanding Account"
dated 31 January 1970 did not tally with the figures found in the statement which showed private
respondent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory
explanation as to why the total outstanding amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted to P239,794.57.

We have, however, examined the record and it shows that the 7 April 1972 Statement of Account
had simply not been updated; that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently
made by private respondent, the figure — P239,794.57 will be obtained.

Also, the fact alone that the various statements of account had variances in figures, simply did not
mean that private respondent had no more financial obligations to petitioner. It must be stressed that
private respondent's account with petitioner was a running or open one, which explains the varying
figures in each of the statements rendered as of a given date.

The appellate court erred in considering only the statements of account in determining whether
private respondent was indebted to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private respondent's indebtedness — the checks
themselves which he had issued.

Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all
important evidence of petitioner's case; that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable thereunder.

It is important to stress that a check which is regular on its face is deemed prima facie to have been
issued for a valuable consideration and every person whose signature appears thereon is deemed to
have become a party thereto for value. 1 Thus, the mere introduction of the instrument sued on in
evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable
instrument is presumed to have been given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2

In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of
proving the existence of valuable consideration upon petitioner. This cannot be countenanced; it was
up to private respondent to show that he had indeed issued the checks without sufficient
consideration. The Court considers that Private respondent was unable to rebut satisfactorily this
legal presumption. It must also be noted that those checks were issued immediately after a letter
demanding payment had been sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to petitioner were presented for payment by
the latter would lead to no other conclusion than that these checks were intended for encashment.
There is nothing in the checks themselves (or in any other document for that matter) that states
otherwise.

We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued
for "accommodation" and that accordingly private respondent maker of those checks was not liable
thereon to petitioner payee of those checks.

In the first place, while the Negotiable Instruments Law does refer to accommodation transactions,
no such transaction was here shown. Section 29 of the Negotiable Instruments Law provides as
follows:

Sec. 29. Liability of accommodation party. — An accommodation party is one who

has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.

In accommodation transactions recognized by the Negotiable Instruments Law, an

accommodating party lends his credit to the accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, in other words, receives or realizes full value
which the accommodated party then must repay to the accommodating party, unless of
course the accommodating party intended to make a donation to the accommodated
party. But the accommodating party is bound on the check to the holder in due course who is
 necessarily a third party and is not the accommodated party. Having issued or indorsed the
check, the accommodating party has warranted to the holder in due course that he will pay
the same according to its tenor. 3

In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment
at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated party;
it realized no value on the checks which bounced.

Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due
course, 4 that the checks were supported by valuable consideration. 5 Private respondent maker of the
checks did not successfully rebut these presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He claimed that he had issued the checks to
Travel-On as payee to "accommodate" its General Manager who allegedly wished to show those checks
to the Board of Directors of Travel-On to "prove" that Travel-On's account receivables were somehow "still
good." It will be seen that this claim was in fact a claim that the checks were merely simulated, that
private respondent did not intend to bind himself thereon. Only evidence of the clearest and most
convincing kind will suffice for that purpose; 6 no such evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General Manager; that explanation, in any case, appears
merely contrived and quite hollow to us. Upon the other hand, the "accommodation" or assistance
extended to Travel-On's passengers abroad as testified by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but rather the circumvention of then existing foreign
exchange regulations by passengers booked by Travel-On, which incidentally involved receipt of full
consideration by private respondent.

Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here
involved. Those checks in themselves constituted evidence of indebtedness of private respondent,
evidence not successfully overturned or rebutted by private respondent.

Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On,
the amount of such liability is the face amount of the checks, reduced only by the P10,000.00 which
Travel-On admitted in its complaint to have been paid by private respondent sometime in March
1992.

The award of moral damages to Private respondent must be set aside, for the reason that
Petitioner's application for the writ of attachment rested on sufficient basis and no bad faith was
shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued bad
checks and then pretended to have "accommodated" petitioner's General Manager by assisting her
in a supposed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-On's
financial condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review
on Certiorari and to REVERSE and SET ASIDE the Decision dated 22 October 1980 and the
Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January
1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June
1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private
respondent.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

 FIRST DIVISION

[G.R. No. 112392. February 29, 2000]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF

APPEALS and BENJAMIN C. NAPIZA, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the Decision of the Court of

[1]

Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial
Court of Makati, Branch 139, which dismissed the complaint filed by
[2]

petitioner Bank of the Philippine Islands against private respondent Benjamin

C. Napiza for sum of money. Sdaad

On September 3, 1987, private respondent deposited in Foreign Currency

Deposit Unit (FCDU) Savings Account No. 028-187 which he maintained in
[3]

petitioner banks Buendia Avenue Extension Branch, Continental Bank

Managers Check No. 00014757 dated August 17, 1984, payable to "cash" in
[4]

the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly
endorsed by private respondent on its dorsal side. It appears that the check
[5]

belonged to a certain Henry Chan who went to the office of private respondent
and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private respondent
acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with
the understanding that as soon as the check is cleared, both of them would go
to the bank to withdraw the amount of the check upon private respondents
presentation to the bank of his passbook.

Using the blank withdrawal slip given by private respondent to Chan, on

October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal
slip shows that the amount was payable to Ramon A. de Guzman and Agnes
C. de Guzman and was duly initialed by the branch assistant manager,
Teresita Lindo.
[6]

On November 20, 1984, petitioner received communication from the Wells

Fargo Bank International of New York that the said check deposited by private
respondent was a counterfeit check because it was "not of the type or style of
[7]
checks issued by Continental Bank International." Consequently, Mr. Ariel
[8]

Reyes, the manager of petitioners Buendia Avenue Extension Branch,

instructed one of its employees, Benjamin D. Napiza IV, who is private
respondents son, to inform his father that the check bounced. Reyes himself [9]

sent a telegram to private respondent regarding the dishonor of the check. In

turn, private respondents son wrote to Reyes stating that the check had been
assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de
Guzman after it shall have been cleared upon instruction of Chan. He also
said that upon learning of the dishonor of the check, his father immediately
tried to contact Chan but the latter was out of town. [10]

Private respondents son undertook to return the amount of $2,500.00 to

petitioner bank. On December 18, 1984, Reyes reminded private respondent
of his sons promise and warned that should he fail to return that amount within
seven (7) days, the matter would be referred to the banks lawyers for
appropriate action to protect the banks interest. This was followed by a letter
[11]

of the banks lawyer dated April 8, 1985 demanding the return of the
$2,500.00. [12]

In reply, private respondent wrote petitioners counsel on April 20,

1985 stating that he deposited the check "for clearing purposes" only to
[13]

accommodate Chan. He added:

"Further, please take notice that said check was deposited on

September 3, 1984 and withdrawn on October 23, 1984, or a total
period of fifty (50) days had elapsed at the time of withdrawal.
Also, it may not be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its clearing, the
reason why the transaction is not reflected in the passbook of the
account. Besides, I did not receive its proceeds as may be
gleaned from the withdrawal slip under the captioned signature of
recipient.

If at all, my obligation on the transaction is moral in nature, which

(sic) I have been and is (sic) still exerting utmost and maximum
efforts to collect from Mr. Henry Chan who is directly liable under
the circumstances. Scsdaad

xxx......xxx......xxx."

On August 12, 1986, petitioner filed a complaint against private respondent,

praying for the return of the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to date of full payment, a
sum equivalent to 20% of the total amount due as attorney's fees, and
litigation and/or costs of suit.

Private respondent filed his answer, admitting that he indeed signed a "blank"
withdrawal slip with the understanding that the amount deposited would be
withdrawn only after the check in question has been cleared. He likewise
alleged that he instructed the party to whom he issued the signed blank
withdrawal slip to return it to him after the bank drafts clearance so that he
could lend that party his passbook for the purpose of withdrawing the amount
of $2,500.00. However, without his knowledge, said party was able to
withdraw the amount of $2,541.67 from his dollar savings account through
collusion with one of petitioners employees. Private respondent added that he
had "given the Plaintiff fifty one (51) days with which to clear the bank draft in
question." Petitioner should have disallowed the withdrawal because his
passbook was not presented. He claimed that petitioner had no one to blame
except itself "for being grossly negligent;" in fact, it had allegedly admitted
having paid the amount in the check "by mistake" x x x "if not altogether due
to collusion and/or bad faith on the part of (its) employees." Charging
petitioner with "apparent ignorance of routine bank procedures," by way of
counterclaim, private respondent prayed for moral damages of P100,000.00,
exemplary damages of P50,000.00 and attorneys fees of 30% of whatever
amount that would be awarded to him plus an honorarium of P500.00 per
appearance in court.

Private respondent also filed a motion for admission of a third party complaint
against Chan. He alleged that "thru strategem and/or manipulation," Chan
was able to withdraw the amount of $2,500.00 even without private
respondents passbook. Thus, private respondent prayed that third party
defendant Chan be made to refund to him the amount withdrawn and to pay
attorneys fees of P5,000.00 plus P300.00 honorarium per appearance.

Petitioner filed a comment on the motion for leave of court to admit the third
party complaint, wherein it asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private respondent alone was
liable "for the value of the credit given on account of the draft or check
deposited." It contended that private respondent was estopped from
disclaiming liability because he himself authorized the withdrawal of the
amount by signing the withdrawal slip. Petitioner prayed for the denial of the
said motion so as not to unduly delay the disposition of the main case
asserting that private respondents claim could be ventilated in another case.
Private respondent replied that for the parties to obtain complete relief and to
avoid multiplicity of suits, the motion to admit third party complaint should be
granted. Meanwhile, the trial court issued orders on August 25, 1987 and
October 28, 1987 directing private respondent to actively participate in
locating Chan. After private respondent failed to comply, the trial court, on May
18, 1988, dismissed the third party complaint without prejudice.

On November 4, 1991, a decision was rendered dismissing the complaint. The

lower court held that petitioner could not hold private respondent liable based
on the checks face value alone. To so hold him liable "would render inutile the
requirement of clearance from the drawee bank before the value of a
particular foreign check or draft can be credited to the account of a depositor
making such deposit." The lower court further held that "it was incumbent
upon the petitioner to credit the value of the check in question to the account
of the private respondentonly upon receipt of the notice of final payment and
should not have authorized the withdrawal from the latters account of the
value or proceeds of the check." Having admitted that it committed a "mistake"
in not waiting for the clearance of the check before authorizing the withdrawal
of its value or proceeds, petitioner should suffer the resultant loss. Supremax

On appeal, the Court of Appeals affirmed the lower courts decision. The
appellate court held that petitioner committed "clear gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money without presenting private
respondents passbook and, before the check was cleared and in crediting the
amount indicated therein in private respondents account. It stressed that the
mere deposit of a check in private respondents account did not mean that the
check was already private respondents property. The check still had to be
cleared and its proceeds can only be withdrawn upon presentation of a
passbook in accordance with the banks rules and regulations. Furthermore,
petitioners contention that private respondent warranted the checks
genuineness by endorsing it is untenable for it would render useless the
clearance requirement. Likewise, the requirement of presentation of a
passbook to ascertain the propriety of the accounting reflected would be a
meaningless exercise. After all, these requirements are designed to protect
the bank from deception or fraud.

The Court of Appeals cited the case of Roman Catholic Bishop of Malolos,
Inc. v. IAC, where this Court stated that a personal check is not legal tender
[14]

or money, and held that the check deposited in this case must be cleared
before its value could be properly transferred to private respondent's account.
Without filing a motion for the reconsideration of the Court of Appeals
Decision, petitioner filed this petition for review on certiorari, raising the
following issues:

1.......WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE

UNDER HIS WARRANTIES AS A GENERAL INDORSER.

2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS

CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN
GAYON.

3.......WHETHER OR NOT PETITIONER WAS GROSSLY

NEGLIGENT IN ALLOWING THE WITHDRAWAL.

Petitioner claims that private respondent, having affixed his signature at the
dorsal side of the check, should be liable for the amount stated therein in
accordance with the following provision of the Negotiable Instruments Law
(Act No. 2031):

"SEC. 66. Liability of general indorser. Every indorser who

indorses without qualification, warrants to all subsequent holders
in due course

(a)......The matters and things mentioned in subdivisions (a), (b),

and (c) of the next preceding section; and

(b)......That the instrument is at the time of his indorsement, valid

and subsisting.

And, in addition, he engages that on due presentment, it shall be

accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored, and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to
pay it."

Section 65, on the other hand, provides for the following warranties of a
person negotiating an instrument by delivery or by qualified indorsement: (a)
that the instrument is genuine and in all respects what it purports to be; (b)
that he has a good title to it, and (c) that all prior parties had capacity to
contract. In People v. Maniego, this Court described the liabilities of an
[15] [16]

indorser as follows: Juris

 "Appellants contention that as mere indorser, she may not be
liable on account of the dishonor of the checks indorsed by her, is
likewise untenable. Under the law, the holder or last indorsee of a
negotiable instrument has the right to enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. Among the parties liable thereon is an indorser of the
instrument, i.e., a person placing his signature upon an instrument
otherwise than as a maker, drawer or acceptor * * unless he
clearly indicated by appropriate words his intention to be bound in
some other capacity. Such an indorser who indorses without
qualification, inter alia engages that on due presentment, * * (the
instrument) shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder, or any subsequent indorser who
may be compelled to pay it. Maniego may also be deemed an
accommodation party in the light of the facts, i.e., a person who
has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his
name to some other person. As such, she is under the law liable
on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew * * (her) to be
only an accommodation party, although she has the right, after
paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them is in effect that of
principal and surety, the accommodation party being the surety."

It is thus clear that ordinarily private respondent may be held liable as an

indorser of the check or even as an accommodation party. However, to hold
[17]

private respondent liable for the amount of the check he deposited by the
strict application of the law and without considering the attending
circumstances in the case would result in an injustice and in the erosion of the
public trust in the banking system. The interest of justice thus demands
looking into the events that led to the encashment of the check.

Petitioner asserts that by signing the withdrawal slip, private respondent

"presented the opportunity for the withdrawal of the amount in question."
Petitioner relied "on the genuine signature on the withdrawal slip, the
personality of private respondents son and the lapse of more than fifty (50)
days from date of deposit of the Continental Bank draft, without the same
being returned yet." We hold, however, that the propriety of the withdrawal
[18]
should be gauged by compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.

In the passbook that petitioner issued to private respondent, the following

rules on withdrawal of deposits appear:

"4.......Withdrawals must be made by the depositor personally but

in some exceptional circumstances, the Bank may allow
withdrawal by another upon the depositors written authority duly
authenticated; and neither a deposit nor a withdrawal will be
permitted except upon the presentation of the depositors savings
passbook, in which the amount deposited withdrawn shall be
entered only by the Bank.

5.......Withdrawals may be made by draft, mail or telegraphic

transfer in currency of the account at the request of the depositor
in writing on the withdrawal slip or by authenticated cable. Such
request must indicate the name of the payee/s, amount and the
place where the funds are to be paid. Any stamp, transmission
and other charges related to such withdrawals shall be for the
account of the depositor and shall be paid by him/her upon
demand. Withdrawals may also be made in the form of travellers
checks and in pesos. Withdrawals in the form of notes/bills are
allowed subject however, to their (availability).

6.......Deposits shall not be subject to withdrawal by check, and

may be withdrawn only in the manner above provided, upon
presentation of the depositors savings passbook and with the
withdrawal form supplied by the Bank at the counter." Scjuris
[19]

Under these rules, to be able to withdraw from the savings account deposit
under the Philippine foreign currency deposit system, two requisites must be
presented to petitioner bank by the person withdrawing an amount: (a) a duly
filled-up withdrawal slip, and (b) the depositors passbook. Private respondent
admits that he signed a blank withdrawal slip ostensibly in violation of Rule
No. 6 requiring that the request for withdrawal must name the payee, the
amount to be withdrawn and the place where such withdrawal should be
made. That the withdrawal slip was in fact a blank one with only private
respondents two signatures affixed on the proper spaces is buttressed by
petitioners allegation in the instant petition that had private respondent
indicated therein the person authorized to receive the money, then Ruben
Gayon, Jr. could not have withdrawn any amount. Petitioner contends that
"(i)n failing to do so (i.e., naming his authorized agent), he practically
authorized any possessor thereof to write any amount and to collect the
same." [20]

Such contention would have been valid if not for the fact that the withdrawal
slip itself indicates a special instruction that the amount is payable to "Ramon
A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioners
personnel should have been duly warned that Gayon, who was also employed
in petitioners Buendia Ave. Extension branch, was not the proper payee of
[21]

the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman

should have issued another authority to Gayon for such withdrawal. Of
course, at the dorsal side of the withdrawal slip is an "authority to withdraw"
naming Gayon the person who can withdraw the amount indicated in the
check. Private respondent does not deny having signed such authority.
However, considering petitioners clear admission that the withdrawal slip was
a blank one except for private respondents signature, the unavoidable
conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was
intercalated and thereafter it was signed by Gayon or whoever was allowed by
petitioner to withdraw the amount. Under these facts, there could not have
been a principal-agent relationship between private respondent and Gayon so
as to render the former liable for the amount withdrawn.

Moreover, the withdrawal slip contains a boxed warning that states: "This
receipt must be signed and presented with the corresponding foreign currency
savings passbook by the depositor in person. For withdrawals thru a
representative, depositor should accomplish the authority at the back." The
requirement of presentation of the passbook when withdrawing an amount
cannot be given mere lip service even though the person making the
withdrawal is authorized by the depositor to do so. This is clear from Rule No.
6 set out by petitioner so that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be entered in the depositors
passbook. The fact that private respondents passbook was not presented
during the withdrawal is evidenced by the entries therein showing that the last
transaction that he made with the bank was on September 3, 1984, the date
he deposited the controversial check in the amount of $2,500.00. [22]

In allowing the withdrawal, petitioner likewise overlooked another rule that is

printed in the passbook. Thus:

"2.......All deposits will be received as current funds and will be

repaid in the same manner; provided, however, that deposits
of drafts, checks, money orders, etc. will be accepted as subject
 to collection only and credited to the account only upon receipt of
the notice of final payment. Collection charges by the Banks
foreign correspondent in effecting such collection shall be for the
account of the depositor. If the account has sufficient balance, the
collection shall be debited by the Bank against the account. If, for
any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return
such proceeds, the provisional entry therefor made by the Bank in
the savings passbook and its records shall be deemed
automatically cancelled regardless of the time that has elapsed,
and whether or not the defective items can be returned to the
depositor; and the Bank is hereby authorized to execute
immediately the necessary corrections, amendments or changes
in its record, as well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and underlining
supplied.) Jurissc

As correctly held by the Court of Appeals, in depositing the check in his name,
private respondent did not become the outright owner of the amount stated
therein. Under the above rule, by depositing the check with petitioner, private
respondent was, in a way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as
a check, whether a managers check or ordinary check, is not legal tender. As [23]

such, after receiving the deposit, under its own rules, petitioner shall credit the
amount in private respondents account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check has been
cleared for deposit. Again, this is in accordance with ordinary banking
practices and with this Courts pronouncement that "the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements." The rule finds more meaning in this case where the check
[24]

involved is drawn on a foreign bank and therefore collection is more difficult

than when the drawee bank is a local one even though the check in question
is a managers check. Misjuris
[25]

In Banco Atlantico v. Auditor General, Banco Atlantico, a commercial bank in

[26]

Madrid, Spain, paid the amounts represented in three (3) checks to Virginia
Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did
so without previously clearing the checks with the drawee bank, the Philippine
National Bank in New York, on account of the "special treatment" that Boncan
received from the personnel of Banco Atlanticos foreign department. The
Court held that the encashment of the checks without prior clearance is
"contrary to normal or ordinary banking practice specially so where the
drawee bank is a foreign bank and the amounts involved were large."
Accordingly, the Court approved the Auditor Generals denial of Banco
Atlanticos claim for payment of the value of the checks that was withdrawn by
Boncan.

Said ruling brings to light the fact that the banking business is affected with
public interest. By the nature of its functions, a bank is under obligation to
treat the accounts of its depositors "with meticulous care, always having in
mind the fiduciary nature of their relationship." As such, in dealing with its
[27]

depositors, a bank should exercise its functions not only with the diligence of a
good father of a family but it should do so with the highest degree of care.[28]

In the case at bar, petitioner, in allowing the withdrawal of private respondents

deposit, failed to exercise the diligence of a good father of a family. In total
disregard of its own rules, petitioners personnel negligently handled private
respondents account to petitioners detriment. As this Court once said on this
matter:

"Negligence is the omission to do something which a reasonable

man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something
which a prudent and reasonable man would do. The seventy-eight
(78)-year-old, yet still relevant, case of Picart v. Smith, provides
the test by which to determine the existence of negligence in a
particular case which may be stated as follows: Did the defendant
in doing the alleged negligent act use that reasonable care and
caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence. The law
here in effect adopts the standard supposed to be supplied by the
imaginary conduct of the discreet pater-familias of the Roman law.
The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation
before him. The law considers what would be reckless,
blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that." [29]

Petitioner violated its own rules by allowing the withdrawal of an amount that
is definitely over and above the aggregate amount of private respondents
dollar deposits that had yet to be cleared. The banks ledger on private
respondents account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00. Upon private respondents
[30]

deposit of $2,500.00 on September 3, 1984, that amount was credited in his

ledger as a deposit resulting in the corresponding total balance of $3,250.00.
On September 10, 1984, the amount of $600.00 and the additional charges
[31]

of $10.00 were indicated therein as withdrawn thereby leaving a balance of

$2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the
ledger and on October 23, 1984, the amount of $2,541.67 was entered as
withdrawn with a balance of $109.92. On November 19, 1984 the word
[32]

"hold" was written beside the balance of $109.92. That must have been the
[33]

time when Reyes, petitioners branch manager, was informed unofficially of the
fact that the check deposited was a counterfeit, but petitioners Buendia Ave.
Extension Branch received a copy of the communication thereon from Wells
Fargo Bank International in New York the following day, November 20, 1984.
According to Reyes, Wells Fargo Bank International handled the clearing of
[34]

checks drawn against U.S. banks that were deposited with petitioner. Jjlex
[35]

From these facts on record, it is at once apparent that petitioners personnel

allowed the withdrawal of an amount bigger than the original deposit of
$750.00 and the value of the check deposited in the amount of $2,500.00
although they had not yet received notice from the clearing bank in the United
States on whether or not the check was funded. Reyes contention that after
the lapse of the 35-day period the amount of a deposited check could be
withdrawn even in the absence of a clearance thereon, otherwise it could take
a long time before a depositor could make a withdrawal, is untenable. Said
[36]

practice amounts to a disregard of the clearance requirement of the banking

system.

While it is true that private respondents having signed a blank withdrawal slip
set in motion the events that resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioners personnel was the proximate
cause of the loss that petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense, policy and
precedent, is "that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without
which the result would not have occurred." The proximate cause of the
[37]

withdrawal and eventual loss of the amount of $2,500.00 on petitioners part

was its personnels negligence in allowing such withdrawal in disregard of its
own rules and the clearing requirement in the banking system. In so doing,
petitioner assumed the risk of incurring a loss on account of a forged or
counterfeit foreign check and hence, it should suffer the resulting damage.

WHEREFORE, the petition for review on certiorari is DENIED. The Decision of

the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED.

SO ORDERED. Newmiso

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.
 SECOND DIVISION

[G.R. No. 117660. December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners,

vs. THE HON. COURT OF APPEALS and REGENT SAVINGS and
LOAN BANK, INC.,respondents.

DECISION
QUISUMBING, J.:

This is a petition for review challenging the decision dated October 17, 1994 of the
[1]

Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent
bank against herein petitioners. In the decision of the Court of Appeals, petitioners were
ordered to pay respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against

defendants, as follows:

1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from November 10, 1982,
plus 15% as liquidated damage plus 10% of the total amount due, as attorneys fees,
plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of the total
amount due, plus attorneys fees equivalent to 10% of the total amount due, plus
costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge
thereon, at the rates of 14% and 2% per annum, respectively, computed from March
13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstanding
principal of the loan, computed from March 13, 1983, until fully paid; and on the
 second cause of action, the amount of P494,936.71, together with interest and
service charge thereon at the rates of 14% and 2%, per annum, respectively,
computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from March 30, 1983, until fully
paid, plus (on both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts
due, plus costs.[2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels
of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement, the [3]

parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would
be settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two
Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland
Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the agreement
and every six months thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an
Addendum to the previous Memorandum of Agreement. The new arrangement
[4]

pertained to the revision of settlement of the initial payments of P1,000,000.00 and

prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:

Whereas, the parties have agreed to qualify the stipulated terms for the
payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.

WHEREFORE, in consideration of the mutual covenant and agreement of the

parties, they do further covenant and agree as follows:

1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes
the VENDOR to obtain a loan from Summa Savings and Loan Association with
office address at Valenzuela, Metro Manila, being represented herein by its
President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of
ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS,
plus interest thereon at such rate as the VENDEE and the Financier may agree,
which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash which
was agreed to be paid upon signing of the Memorandum of Agreement, plus 18%
interest on the balance of two million pesos stipulated upon in Item No. 1(c) of the
said agreement; provided however, that said loan shall be made for and in the name
of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full amount of the said loan to
 the Financier on such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from and in the
name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes,
payable to the respondent bank. Thereafter, the bank released the proceeds of the
[6]

loan to petitioners. However, petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de
Jesus, endorsed the subject promissory notes to the banks counsel for collection. The
bank gave petitioners opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show
up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for Collection of
Sums of money. The corresponding case histories are illustrated in the table below:

Date of Amount Payment Payment

Loan Due Extension
Date Dates
Civil Case
86-37374 P78,212.29 Nov. 10, Feb. 8,
August 12, 1982 1983
1982 May 9,
1983
Aug. 7,
1983

Civil Case
86-37388 P632,911.39 Jan. 15, May 16,
July 19, 1983 1983
1982 Aug. 14,
1983

Civil Case
86-37543 P510,000.00 March June 11,
September 13, 1983 1983
14, 1982 Sept. 9,
P494,936.71 1983
March
October 1, 30, 1983 June 28,
1982 1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of novation and insisted there was a
valid substitution of debtor. They alleged that the addendum specifically states that
although the promissory notes were in their names, Wonderland shall be responsible for
the payment thereof.
The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its
obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was,
actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not
answerable. And since the loans obtained under the four promissory notes
(Exhs. A, C, G, and E) have not been paid, despite opportunities given by
plaintiff to defendants to make payments, it stands to reason that defendants
are liable to pay their obligations thereunder to plaintiff. In fact, defendants
failed to file a third-party complaint against Wonderland, which shows the
weakness of its stand that Wonderland is answerable to make said payments.
[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed
by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE

ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS
FROM ANY LIABILITY OVER THE PROMISSORY NOTES.

Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party
is the cause or consideration for the obligation or promise by the other. The vendee is
obliged to pay the price, while the vendor must deliver actual possession of the land. In
the instant case the original plan was that the initial payments would be paid in
cash. Subsequently, the parties (with the participation of respondent bank) executed an
addendum providing instead, that the petitioners would secure a loan in the name of
Agro Conglomerates Inc. for the total amount of the initial payments, while the
settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to
some other person and is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew (the signatory) to be an
accommodation party. He has the right, after paying the holder, to obtain
[8]

reimbursement from the party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation party being the surety.
Suretyship is defined as the relation which exists where one person has undertaken
[9]

an obligation and another person is also under the obligation or other duty to the
obligee, who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform. The suretys liability to the creditor or
[10]

promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal. And the creditor may proceed against
[11]

any one of the solidary debtors. [12]

We do not give credence to petitioners assertion that, as provided by the

addendum, their obligation to pay the promissory notes was novated by substitution of a
new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein
do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. In order that a
[13]

novation can take place, the concurrence of the following requisites are indispensable:
[14]

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound
the petitioners to pay, were executed after the addendum. The addendum modified the
contract of sale, not the stipulations in the promissory notes which pertain to the surety
contract. At this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners.Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed, it must be clearly and unequivocally shown.
[15] [16]

As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that,
if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered. [17]

The contract of sale between Wonderland and petitioners did not materialize. But it
was admitted that petitioners received the proceeds of the promissory notes obtained
from respondent bank.
Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other

means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him.

Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary party. But respondent appellate
[18]

court did not err in holding that petitioners are duty-bound under the law to pay the
claims of respondent bank from whom they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the
Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.