G.R. No. 72593 April 30, 1987 CONSOLIDATED PLYWOOD INDUSTRIES, INC. vs.

IFC LEASING AND ACCEPTANCE CORPORATION This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985, denying the motion for reconsideration. The antecedent facts culled from the petition are as follows: The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two additional units of tractors. Cognizant of petitionercorporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing the "sellerassignor", a corporation dealing in tractors and other heavy equipment business, offered to sell to petitionercorporation two "Used" Allis Crawler Tractors, one an HDD21-B and the other an HDD-16-B. In order to ascertain the extent of work to which the tractors were to be exposed and to determine the capability of the "Used" tractors being offered, petitioner-corporation requested the sellerassignor to inspect the job site. After conducting said inspection, the seller-assignor assured petitionercorporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety days performance of the machines and availability of parts. With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on instalment said two units of "Used" Allis Crawler Tractors. It also paid the down payment of P210,000.00. On April 5, 1978, the seller-assignor issued the sales invoice for the two units of tractors. At the same time, the deed of sale with chattel mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent. Immediately thereafter, the seller-assignor delivered said two units of "Used" tractors to the petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of the machines. Barely fourteen days had elapsed after their delivery when one of the tractors broke down and after another nine days, the other tractor likewise broke down. On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the sellerassignor of the fact that the tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty. In response to the formal advice by petitioner Rodolfo T. Vergara, the seller-assignor sent to the job site its mechanics to conduct the necessary repairs, but the

tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the instalments as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfils its obligation under its warranty. Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to bear one-half of the reconditioning cost. No response to this letter was received by the petitionercorporation and despite several follow-up calls; the sellerassignor did nothing with regard to the request, until the complaint in this case was filed by the respondent against the petitioners, the corporation, Wee, and Vergara. The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of P1,093,789.71, accrued interest of P151,618.86 as of August 15, 1979, accruing interest thereafter at the rate of twelve percent per annum, attorney's fees of P249,081.71 and costs of suit. The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, P20,000.00 as and for attorney's fees, and P5,000.00 for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises. In a decision dated April 20, 1981, the trial court rendered the following judgment: WHEREFORE, judgment is hereby rendered: ordering defendants to pay jointly and severally in their official and personal capacities the principal sum of P1,093,798.71 with accrued interest of P151,618.,86 as of August 15, 1979 and accruing interest thereafter at the rate of 12% per annum; ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent of the principal and to pay the costs of the suit. Defendants' counterclaim is disallowed. On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners. Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors: THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY ; THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE. On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of the trial court. The pertinent portions of the decision are as follows: From the evidence presented by the parties on the

issue of warranty, We are of the considered opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiffappellant herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors. Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from the contract and/or demand a proportionate reduction of the price with damages in either case (Art. 1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a holder in due course of the promissory note. To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in financing and receivable discounting extending credit facilities to consumers and industrial, commercial or agricultural enterprises by discounting or factoring commercial papers or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act. A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 considering the following. it is in writing and signed by the maker; it contains an unconditional promise to pay a certain sum of money payable at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and regular upon its face before the same was overdue and without notice, that it had been previously dishonored and that the note is in good faith and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL). In view of the essential elements found in the questioned promissory note, We opine that the same is legally and conclusively enforceable against the defendants-appellants. WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal without merit and thus affirm the decision in toto. With costs against the appellants. The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on October 21, 1985. Hence, this petition was filed on the following grounds: ON

ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER; THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE; SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING; THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE: THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW; IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN; THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED. The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the court of origin. On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended that the petition was filed out of time; that the promissory note is a negotiable instrument and respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence. The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available defenses of the petitioner against the respondentassignee. Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered pro- formal. The petition is impressed with merit. First, there is no question that the seller-assignor breached its express 90day warranty because the findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was clearly a victim of a warranty not honored by the maker. The Civil Code provides that: ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the

vendee is an expert who, by reason of his trade or profession, should have known them. ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment whether he be the grower or manufacturer or not, there is an implied warranty that the goods shall be reasonably fit for such purpose; ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even though he was not aware thereof. This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail against it. Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitionercorporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics. However, due to the sellerassignor's delay and its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for which they were purchased. Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor. Articles 1191 and 1567 of the Civil Code provide that: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission. In the case of the University of the Philippines v. De los Angeles we held: In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not

correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument. The pertinent portion of the note is as follows: FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of P 1,093,789.71, Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ... Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument. The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one. ... When instrument is payable to order? SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. . . . These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order" or"to the order of, "the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter." Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing. This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the records show that even the respondent itself admitted to being a mere assignee of the promissory note in question, to wit: ATTY. PALACA: Did we get it right from the counsel that what is being assigned is the Deed of Sale with Chattel Mortgage with the promissory note which is as testified to

by the witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions on cross, COURT: You confirm his manifestation? You are nodding your head? Do you confirm that? ATTY. ILAGAN: The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons; what is assigned are rights, the rights of the mortgagee were assigned to the IFC Leasing & Acceptance Corporation. COURT: He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want to make a distinction, one is an assignment of mortgage right and the other one is indorsement of the promissory note. What counsel for defendants wants is that you stipulate that it is contained in one single transaction? ATTY. ILAGAN: We stipulate it is one single transaction. Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason. The evidence presented in the instant case shows that prior to the sale on instalment of the tractors, there was an arrangement between the sellerassignor, Industrial Products Marketing, and the respondent whereby the latter would pay the sellerassignor the entire purchase price and the seller-assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc. A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on instalment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise valid defenses available as against the assignor.Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith. Sections 52 and 56 of the Negotiable Instruments Law provide that: SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a holder who has

taken the instrument under the following conditions: That he took it in good faith and for value; That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of the person negotiating it ..SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer, to wit: In instalment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will , the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . . . If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which win afford public protection to the general buying public against unscrupulous dealers in personal property. In the case of Commercial Credit Corporation v. Orange Country Machine Works involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due course of the note given in the transaction. In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing company which actively participated in the sale on instalment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the sellerassignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable." Prescinding from the foregoing and setting aside other peripheral issues, we find that both

the trial and respondent appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the assigner- assignor and respondent assignee at the expense of the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-assignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the sellerassignor in the rather unlikely possibility that it so desires, WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court is DISMISSED. SO ORDERED. G.R. No. L-39641 February 28, 1983 METROPOL BACOLOD FINANCING & INVESTMENT CORPORATION vs. SAMBOK MOTORS COMPANY The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue issued therein being one purely of law. On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount of P15, 939.00 payable in twelve equal monthly instalments, beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that in case on non-payment of any of the instalments, the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to twenty-five percent of the total amount due. On the same date, Sambok Motors Company hereinafter referred to as Sambok, a sister company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following endorsement: Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G. NONILLO Asst. General Manager The maker, Dr. Villaruel defaulted in the payment of his instalments when they became due, so on October 30, 1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok as indorse of said note of the fact that the same has been dishonoured and demanded payment. Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been declared insolvent. During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. On plaintiff's motion for summary

judgment, the trial court rendered its decision dated September 12, 1973, the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered: Ordering Sambok Motors Company to pay to the plaintiff the sum of P15, 939.00 plus the legal rate of interest from October 30, 1969; Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and To pay the cost of suit. Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone assignment of error as follows: The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors Company as assignor and a qualified indorse of the subject promissory note and in not holding it as only secondarily liable thereof. Appellant Sambok argues that by adding the words "with recourse" in the endorsement of the note, it becomes a qualified endorser that being a qualified endorser, it does not warrant that if said note is dishonoured by the maker on presentment, it will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of the Negotiable Instruments Law: that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. The appeal is without merit. A qualified endorsement constitutes the endorser a mere assignor of the title to the instrument. It may be made by adding to the endorser s signature the words "without recourse" or any words of similar import. Such an endorsement relieves the endorser of the general obligation to pay if the instrument is dishonoured but not of the liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law already mentioned herein. However, appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonour, protest and presentment. "Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. Appellant, by indorsing the note "with recourse" does not make itself a qualified endorser but a general endorser who is secondarily liable, because by such endorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such endorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonoured, he will pay the amount thereof to the holder. Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonour, protest and presentment were waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general endorser. Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonoured by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. His liability becomes the same as that of the original obligor. Consequently, the holder need not even proceed against the maker before suing the endorser.

WHEREFORE, the decision of the lower court is hereby affirmed. No costs. SO ORDERED. G.R. No. 76788 January 22, 1990 JUANITA SALAS vs. HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the same parties. Records disclose that on February 6, 1980, Juanita Salas hereinafter referred to as petitioner bought a motor vehicle from the Violago Motor Sales Corporation for P58, 138.20 as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation hereinafter referred to as private respondent, which financed the purchase. Petitioner defaulted in her instalments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident on 9 May 1980.This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial Court of San Fernando, Pampanga. In its decision dated September 10, 1982, the trial court held, thus: WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as attorney's fees. The counterclaim of defendant is dismissed. With costs against defendant. Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved from the obligation under the contract. On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which is quoted hereunder: The allegations, statements, or admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with his pleadings. Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings, do not require proof and cannot be contradicted unless previously shown to have been made through palpable mistake. When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denied them, and sets forth what he claims to be the facts. A perusal of the evidence shows that the amount of P58, 138.20 stated in the promissory note is the amount

assumed by the plaintiff in financing the purchase of defendant's motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl, 614.95 for 36 months. Considering that the defendant was able to pay twice as admitted by the plaintiff, defendant's account became delinquent only beginning May, 1980 or in the total sum of P3, 229.90; she is therefore liable to pay the remaining balance of P54, 908.30 at l4% per annum from October 2, 1980 until full payment. WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the defendant to pay the plaintiff the sum of P54, 908.30 at 14% per annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With costs to defendant. Petitioner's motion for reconsideration was denied; hence, the present recourse. In the petition before us, petitioner assigns twelve errors which focus on the alleged fraud, bad faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to private respondent who should instead proceed against VMS. Petitioner argues that in the light of the provision of the law on sales by description which she alleges is applicable here, no contract ever existed between her and VMS and therefore none had been assigned in favor of private respondent. She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the case before it can be made to answer for damages because VMS was earlier sued by her for "breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court originally ordered petitioner to pay the remaining balance of the motor vehicle instalments in the amount of P31, 644.30 representing the difference between the agreed consideration of P49, 000.00 as shown in the sales invoice and petitioner's initial down payment of P17, 855.70 allegedly evidenced by a receipt. Said decision was however reversed later on, with the same court ordering defendant VMS instead to return to petitioner the sum of P17, 855.70. Parenthetically, said decision is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. Private respondent in its comment, prays for the dismissal of the petition and counters that the issues raised and the allegations adduced therein are a mere rehash of those presented and already passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as an authority as the same is still pending determination in the appellate court. We see no cogent reason to disturb the challenged decision. The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which will bar completely all the available defences of the petitioner against private respondent. Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established. The records reveal that involved herein

is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defences available against and can enforce payment only to the same extent as, the assignor-vendor. Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable instrument. Among others, the instrument in order to be considered negotiable must contain the so-called "words of negotiability i.e., must be payable to "order" or "bearer". Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order or "to the order of", the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defences available against the latter. Such being the situation in the above-cited case, it was held that therein private respondent is not a holder in due course but a mere assignee against whom all defences available to the assignor may be raised. In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim against petitioner is a promissory note which bears all the earmarks of negotiability. The pertinent portion of the note reads: PROMISSORY NOTE (MONTHLY) P58, 138.20 San Fernando, Pampanga, Philippines Feb. 11, 1980 For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum based on the diminishing balance, the said principal sum, to be payable, without need of notice or demand, in instalments of the amounts following and at the dates hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for ______ months due and payable on the ______ day of each month starting _____198__ thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be

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

impleaded as a party. Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract" case. Hence, we reach a similar opinion as did respondent court when it held: We can only extend our sympathies to the defendant herein petitioner in this unfortunate incident. Indeed, there is nothing we can do as far as the Violago Motor Sales Corporation is concerned since it is not a party in this case. To even discuss the issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction in question would amount, to denial of due process, hence, improper and unconstitutional. She should have impleaded Violago Motor Sales. IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against petitioner. SO ORDERED G.R. No. 105774 April 25, 2002 GREAT ASIAN SALES CENTER CORPORATION vs. THE COURT OF APPEALS Before us is a Petition for Review on Certiorari under Rule 45 of the Revised Rules on Civil Procedure assailing the June 9, 1992 Decision of the Court of Appeals in CA-G.R. CV No. 20167. The Court of Appeals affirmed the January 26, 1988 Decision of the Regional Trial Court of Manila, Branch 52, ordering petitioners Great Asian Sales Center Corporation and Tan Chong Lin to pay, solidarily, respondent Bancasia Finance and Investment Corporation the amount of P1,042,005.00. The Court of Appeals affirmed the trial court s award of interest and costs of suit but deleted the award of attorney s fees. The Facts: Great Asian is engaged in the business of buying and selling general merchandise, in particular household appliances. On March 17, 1981, the board of directors of Great Asian approved a resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr. to secure a loan from Bancasia in an amount not to exceed P1.0 million. The board resolution also authorized Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. On February 10, 1982, the board of directors of Great Asian approved a second resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2.0 million. The second board resolution also designated Arsenio as the authorized signatory to sign all instruments, documents and checks necessary to secure the discounting line. On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee, solitarily, the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing Surety Agreement in favor of Bancasia to guarantee, solitarily, the debts of Great Asian to Bancasia. Thus, Tan Chong Lin signed two surety agreements in favor of Bancasia. Great Asian, through its Treasurer and General Manager Arsenio, signed four Deeds of Assignment of Receivables, assigning to Bancasia fifteen post-dated checks. Nine of the checks were payable to Great Asian, three were payable to "New Asian Emp.", and the last three were payable to cash. Various customers of Great Asian issued these post-dated checks in payment for appliances and other merchandise. Great Asian and

Bancasia signed the first Deed of Assignment on January 12, 1982 covering four post-dated checks with a total face value of P244,225.82, with maturity dates not later than March 17, 1982. Of these four post-dated checks, two were dishonoured. Great Asian and Bancasia signed the second Deed of Assignment also on January 12, 1982 covering four post-dated checks with a total face value of P312, 819.00, with maturity dates not later than April 1, 1982. All these four checks were dishonoured. Great Asian and Bancasia signed the third Deed of Assignment on February 11, 1982 covering eight post-dated checks with a total face value of P344, 475.00, with maturity dates not later than April 30, 1982. All these eight checks were dishonoured. Great Asian and Bancasia signed the fourth Deed of Assignment on March 5, 1982 covering one post-dated check with a face value of P200, 000.00, with maturity date on March 18, 1982. This last check was also dishonored. Great Asian assigned the post-dated checks to Bancasia at a discount rate of less than 24% of the face value of the checks. Arsenio endorsed all the fifteen dishonoured checks by signing his name at the back of the checks. Eight of the dishonoured checks bore the endorsement of Arsenio below the stamped name of "Great Asian Sales Center", while the rest of the dishonoured checks just bore the signature of Arsenio. The drawee banks dishonoured the fifteen checks on maturity when deposited for collection by Bancasia, with any of the following as reason for the dishonour: "account closed", "payment stopped", "account under garnishment", and "insufficiency of funds". The total amount of the fifteen dishonoured checks is P1, 042,005.00. Below is a table of the fifteen dishonoured checks: After the drawee bank dishonoured Check No. 097480 dated March 16, 1982, Bancasia referred the matter to its lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying him of the dishonour and demanding payment from him. Subsequently, Bancasia sent by personal delivery a letter dated June 16, 1982 to Tan Chong Lin, notifying him of the dishonour of the fifteen checks and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonoured checks. On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition for insolvency, verified under oath by its Corporate Secretary, Mario Tan. Attached to the verified petition was a "Schedule and Inventory of Liabilities and Creditors of Great Asian Sales Center Corporation," listing Bancasia as one of the creditors of Great Asian in the amount of P1,243,632.00. On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety Agreements he signed in favor of Bancasia. In its answer, Great Asian denied the material allegations of the complaint claiming it was unfounded, malicious, baseless, and unlawfully instituted since there was already a pending insolvency proceedings, although Great Asian subsequently withdrew its petition for voluntary insolvency. Great Asian further raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absence of consideration and consent of all

the parties to the Surety Agreements signed by Tan Chong Lin. Ruling of the Trial Court: The trial court rendered its decision on January 26, 1988 with the following findings and conclusions: "From the foregoing facts and circumstances, the Court finds that the plaintiff has established its causes of action against the defendants. The Board Resolution, dated March 17, 1981, authorizing Arsenio Lim Piat, Jr., general manager and treasurer of the defendant Great Asian to apply and negotiate for a loan accommodation or credit line with the plaintiff Bancasia in an amount not exceeding P1,000,000.00, and the other Board Resolution approved on February 10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian Center a discounting line with Bancasia at prevailing discounting rates in an amount not to exceed P2,000,000.00, both of which were intended to secure money from the plaintiff financing firm to finance the business operations of defendant Great Asian, and pursuant to which Arsenio Lim Piat, Jr. was able to have the aforementioned fifteen checks totalling P1,042,005.00 discounted with the plaintiff, which transactions were obviously known by the beneficiary thereof, defendant Great Asian, as in fact, in its aforementioned Schedule and Inventory of Liabilities and Creditors attached to its Verified Petition for Insolvency, dated May 12, 1982, the defendant Great Asian admitted an existing liability to the plaintiff, in the amount of P1,243,632.00, secured by it, by way of financing accommodation, from the said financing institution Bancasia Finance and Investment Corporation, plaintiff herein, sufficiently establish the liability of the defendant Great Asian to the plaintiff for the amount of P1,042,005.00 sought to be recovered by the latter in this case. WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the two defendants ordering the latter, jointly and severally, to pay the former: The amount of P1, 042,005.00, plus interest thereon at the legal rate from the filing of the complaint until the same is fully paid; Attorney s fees equivalent to twenty per cent of the total amount due; and The costs of suit. SO ORDERED." Ruling of the Court of Appeals: On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the award of attorney s fees, as follows: "As against appellants bare denial of it, the Court is more inclined to accept the appellee s version, to the effect that the subject deeds of assignment are but individual transactions which being collectively evidentiary of the loan accommodation and/or credit line it granted the appellant corporation should not be taken singly and distinct there from. In addition to its plausibility, the proposition is, more importantly, adequately backed by the documentary evidence on record. Aside from the aforesaid Deeds of Assignment and the Board Resolutions of the appellant corporation s Board of Directors the appellee consistent with its theory interposed the Surety Agreements the appellant Tan Chong Lin executed, as well as the demand letters it served upon the latter as surety. It bears emphasis that the second Resolution of the appellant corporation s Board of Directors even closely coincides with the execution of the February 11, 1982 and March 5, 1982

Deeds of Assignment. Were the appellants posturing true, it seems rather strange that the appellant Tan Chong Lin did not even protest or, at least, make known to the appellee what he together with the appellant corporation represented to be a corporate larceny to which all of them supposedly fell prey. In the petition for voluntary insolvency it filed, the appellant corporation, instead, indirectly acknowledged its indebtedness in terms of financing accommodations to the appellee, in an amount which, while not exactly matching the sum herein sought to be collected, approximates the same. The appellants contend that the foregoing warranties enlarged or increased the surety s risk, such that appellant Tan Chong Lin should be released from his liabilities. Without saying more, the appellants position is, however, soundly debunked by the undertaking expressed in the Comprehensive and Continuing Surety Agreements to the effect that the "surety/ies, jointly and severally among themselves and likewise with the principal, hereby agree/s and bind/s himself to pay at maturity all the notes, drafts, bills of exchange, overdrafts and other obligations which the principal may now or may hereafter owe the creditor." With the possible exception of the fixed ceiling for the amount of loan obtainable, the surety undertaking in the case at bar is so comprehensive as to contemplate each and every condition, term or warranty which the principal parties may have or may be minded to agree on. Having affixed his signature thereto, the appellant Tan Chong Lin is expected to have, at least, read and understood the same. With the foregoing disquisition, the Court sees little or no reason to go into the appellants remaining assignments of error, save the matter of attorney s fees. For want of a statement of the rationale therefore in the body of the challenged decision, the trial court s award of attorney s fees should be deleted and disallowed. WHEREFORE, the decision appealed from is MODIFIED, to delete the trial court s award of attorney s fees. The rest is AFFIRMED in toto.SO ORDERED." The Issues: The petition is anchored on the following assigned errors: The respondent Court erred in not holding that the proper parties against whom this action for collection should be brought are the drawers and endorser of the checks in question, being the real parties in interest, and not the herein petitioners; The respondent Court erred in not holding that the petitioner-corporation is discharged from liability for failure of the private respondent to comply with the provisions of the Negotiable Instruments Law on the dishonour of the checks; The respondent Court erred in its appreciation and interpretation of the effect and legal consequences of the signing of the deeds of assignment and the subsequent endorsement of the checks by Arsenio Lim Piat, Jr. in his individual and personal capacity and without stating or indicating the name of his supposed principal; The respondent Court erred in holding that the assignment of the checks is a loan accommodation or credit line accorded by the private respondent to petitionercorporation, and not a purchase and sale thereof; The respondent Court erred in not holding that there was a material alteration of the risk assumed by the petitionersurety under his surety agreement by the terms, conditions, warranties and obligations assumed by the

assignor Arsenio Lim Piat, Jr. under the deeds of assignment or receivables; The respondent Court erred in holding that the petitioner-corporation impliedly admitted its liability to private respondent when the former included the latter as one of its creditors in its petition for voluntary insolvency, although no claim was filed and proved by the private respondent in the insolvency court; The respondent Court erred in holding the petitioners liable to private respondent on the transactions in question." The issues to be resolved in this petition can be summarized into three: WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF ASSIGNMENT AND THUS BIND GREAT ASIAN; WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS OF ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL CODE, INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS LAW; WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE SURETY AGREEMENTS. The Court s Ruling: The petition is bereft of merit. First Issue: Authority of Arsenio to Sign the Deeds of Assignment - Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in his personal capacity. The primordial question that must be resolved is whether Great Asian authorized Arsenio to sign the Deeds of Assignment. If Great Asian so authorized Arsenio, then Great Asian is bound by the Deeds of Assignment and must honor its terms. The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders approval for certain specific acts. Section 23 of the Code provides: The Board of Directors or Trustees - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees." In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority of the board of directors. The board of directors normally designates one or more corporate officers to sign loan documents or deeds of assignment for the corporation. To secure a credit accommodation from Bancasia, the board of directors of Great Asian adopted two board resolutions on different dates, the first on March 17, 1981, and the second on February 10, 1982. These two board resolutions, as certified under oath by Great Asian s Corporate Secretary Mario K. Tan, state: First Board Resolution"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr., be authorized as he is authorized to apply for and negotiate for a loan accommodation or credit line in the amount not to exceed P1,000,000.00, with Bancasia Finance and Investment Corporation, and likewise to sign any and all papers, documents, and/or promissory notes in connection with said loan accommodation or credit line, including the power to mortgage such properties of the corporation as may be needed to effectuate the same."

Second Board Resolution "RESOLVED that Great Asian Sales Center Corp. obtain a discounting line with BANCASIA FINANCE & INVESTMENT CORPORATION, at prevailing discounting rates, in an amount not to exceed P2, 000,000. RESOLVED FURTHER, that the corporation secure such other forms of credit lines with BANCASIA FINANCE & INVESTMENT CORPORATION in an amount not to exceed P2,000,000.00 under such terms and conditions as the signatories may deem fit and proper. RESOLVED FURTHER, that the following persons be authorized individually, jointly or collectively to sign, execute and deliver any and all instruments, documents, checks, sureties, etc. necessary or incidental to secure any of the foregoing obligation: PROVIDED FINALLY that this authority shall be valid, binding and effective until revoked by the Board of Directors in the manner prescribed by law, and that BANCASIA FINANCE & INVESTMENT CORPORATION shall not be bound by any such revocation until such time as it is noticed in writing of such revocation." The first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, to apply for a "loan accommodation or credit line" with Bancasia for not more than P1.0 million. Also, the first resolution explicitly authorizes Arsenio to sign any document, paper or promissory note, including mortgage deeds over properties of Great Asian, to secure the loan or credit line from Bancasia. The second board resolution expressly authorizes Great Asian to secure a "discounting line" from Bancasia for not more than P2.0 million. The second board resolution also expressly empowers Arsenio, as the authorized signatory of Great Asian, "to sign, execute and deliver any and all documents, checks necessary or incidental to secure" the discounting line. The second board resolution specifically authorizes Arsenio to secure the discounting line "under such terms and conditions as he may deem fit and proper." As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan or discounting line from Bancasia. The two board resolutions also categorically designate Arsenio as the authorized signatory to sign and deliver all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the purpose of the two board resolutions, and about the authority of Arsenio to act and sign for Great Asian. The second board resolution even gave Arsenio full authority to agree with Bancasia on the terms and conditions of the discounting line. Great Asian adopted the correct and proper board resolutions to secure a loan or discounting line from Bancasia, and Bancasia had a right to rely on the two board resolutions of Great Asian. Significantly, the two board resolutions specifically refer to Bancasia as the financing institution from whom Great Asian will secure the loan accommodation or discounting line. Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and endorsing, the fifteen checks of Great Asian to Bancasia. On the face of the Deeds of Assignment, the contracting parties are indisputably Great Asian and Bancasia as the names of these entities are expressly mentioned therein as the assignor and assignee, respectively. Great Asian claims that Arsenio signed the Deeds of Assignment in his personal capacity because Arsenio signed above his printed name below which was

the word "Assignor", thereby making Arsenio the assignor. Great Asian conveniently omits to state that the first paragraph of the Deeds expressly contains the following words: "the ASSIGNOR, Great Asian Sales Center, a domestic corporation herein represented by its Treasurer Arsenio Lim Piat, Jr." The assignor is undoubtedly Great Asian, represented by its Treasurer, Arsenio. The only issue to determine is whether the Deeds of Assignment are indeed the transactions the board of directors of Great Asian authorized Arsenio to sign under the two board resolutions. Under the Deeds of Assignment, Great Asian sold fifteen post-dated checks at a discount, over three months, to Bancasia. The Deeds of Assignment uniformly state that Great Asian for valuable consideration received, does hereby SELL, TRANSFER, CONVEY, and ASSIGN, unto the ASSIGNEE, BANCASIA FINANCE & INVESTMENT CORP., a domestic corporation, the following ACCOUNTS RECEIVABLES due and payable to it, having an aggregate face value of." The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen checks, which were still not due and demandable then. In short, instead of waiting for the maturity dates of the fifteen post-dated checks, Great Asian sold the checks to Bancasia at less than the total face value of the checks. In exchange for receiving an amount less than the face value of the checks, Great Asian obtained immediately much needed cash. Over three months, Great Asian entered into four transactions of this nature with Bancasia, showing that Great Asian availed of a discounting line with Bancasia. In the financing industry, the term "discounting line" means a credit facility with a financing company or bank, which allows a business entity to sell, on a continuing basis, its accounts receivable at a discount. The term "discount" means the sale of a receivable at less than its face value. The purpose of a discounting line is to enable a business entity to generate instant cash out of its receivables which are still to mature at future dates. The financing company or bank which buys the receivables makes its profit out of the difference between the face value of the receivable and the discounted price. Thus, Section 3 (a) of the Financing Company Act of 1998 provides: "Financing companies" are corporations primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property." This definition of "financing companies" is substantially the same definition as in the old Financing Company Act (R.A. No. 5980). Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and Exchange Commission to implement the Financing Company Act of 1998 states:"Discounting" is a type of receivables financing whereby evidences of indebtedness of a third party, such as installment contracts, promissory notes and similar instruments, are purchased by, or assigned to, a financing company in an amount or for a consideration less than their face value."

Likewise, this definition of "discounting" is an exact reproduction of the definition of "discounting" in the implementing rules of the old Finance Company Act. Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment were the very transactions envisioned in the two board resolutions of Great Asian to raise funds for its business. Arsenio acted completely within the limits of his authority under the two board resolutions. Arsenio did exactly what the board of directors of Great Asian directed and authorized him to do. Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment as agent and authorized signatory of Great Asian under an authority expressly granted by its board of directors. The signature of Arsenio on the Deeds of Assignment is effectively also the signature of the board of directors of Great Asian, binding on the board of directors and on Great Asian itself. Evidently, Great Asian shows its bad faith in disowning the Deeds of Assignment signed by its own Treasurer, after receiving valuable consideration for the checks assigned under the Deeds. Second Issue: Breach of Contract by Great Asian - Bancasia s complaint against Great Asian is founded on the latter s breach of contract under the Deeds of Assignment. The Deeds of Assignment uniformly stipulate as follows: "If for any reason the receivables or any part thereof cannot be paid by the obligor/s, the ASSIGNOR unconditionally and irrevocably agrees to pay the same, assuming the liability to pay, by way of penalty three per cent of the total amount unpaid, for the period of delay until the same is fully paid. In case of any litigation which the ASSIGNEE may institute to enforce the terms of this agreement, the ASSIGNOR shall be liable for all the costs, plus attorney s fees equivalent to twenty-five per cent of the total amount due. Further thereto, the ASSIGNOR agrees that any and all actions which may be instituted relative hereto shall be filed before the proper courts of the City of Manila, all other appropriate venues being hereby waived. The last Deed of Assignment contains the following added stipulation: "Likewise, it is hereby understood that the warranties which the ASSIGNOR hereby made are deemed part of the consideration for this transaction, such that any violation of any one, some, or all of said warranties shall be deemed as deliberate misrepresentation on the part of the ASSIGNOR. In such event, the monetary obligation herein conveyed unto the ASSIGNEE shall be conclusively deemed defaulted, giving rise to the immediate responsibility on the part of the ASSIGNOR to make good said obligation, and making the ASSIGNOR liable to pay the penalty stipulated hereinabove as if the original obligor/s of the receivables actually defaulted." Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonoured checks, including penalty and attorney s fees. The failure of the drawers to pay the checks is a suspensive condition, the happening of which gives rise to Bancasia s right to demand payment from Great Asian. This

conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. Article 1157 of the Civil Code provides that "Obligations arise from: Law; Contracts; Quasi-contracts; Acts or omissions punished by law; and Quasi-delicts." By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the full value of the dishonoured checks. In short, Great Asian sold the post-dated checks on with recourse basis against itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law as between Great Asian and Bancasia. Article 1159 of the Civil Code further provides that "Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties had the right to adopt the with recourse stipulation which is separate and distinct from the warranties of an endorser under the Negotiable Instruments Law. Article 1306 of the Civil Code provides that "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law. There is nothing in the Negotiable Instruments Law or in the Financing Company Act old or new, that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be 17 assigned. Assignment of a negotiable instrument is actually the principal mode of conveying accounts receivable under the Financing Company Act. Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of the checks. The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy considerations militate against according finance companies the rights of a holder in due course. Otherwise, consumers who purchase appliances on instalment, giving their promissory notes or checks to the seller, will have no defense against the finance company should the appliances later turn out to be defective. Thus, the endorsement does not operate to make the finance company a holder in due course. For its own protection, therefore, the finance company usually requires the assignor, in a separate and distinct contract, to pay the

finance company in the event of dishonour of the notes or checks. As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasia s cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that Bancasia had under the express with recourse stipulation in the Deeds of Assignment. The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian can then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonour, still there would be no prejudice whatever to Great Asian. Under the Negotiable Instruments Law, notice of dishonour is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. In the instant case, all the checks were dishonoured for any of the following reasons: "account closed", "account under garnishment", insufficiency of funds", or "payment stopped". In the first three instances, the drawers had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded payment. Moreover, under common law, delay in notice of dishonor, where such notice is required, discharges the drawer only to the extent of the loss caused by the delay. This rule finds application in this jurisdiction pursuant to Section 196 of the Negotiable Instruments Law which states, "Any case not provided for in this Act shall be governed by the provisions of existing legislation, or in default thereof, by the rules of the Law Merchant." Under Section 186 of the Negotiable Instruments Law, delay in the presentment of checks discharges the drawer. However, Section 186 refers only to delay in presentment of checks but is silent on delay in giving notice of dishonor. Consequently, the common law or Law Merchant can supply this gap in accordance with Section 196 of the Negotiable Instruments Law. One other issue raised by Great Asian that of lack of consideration for the Deeds of Assignment is completely unsubstantiated. The Deeds of Assignment uniformly provide that the fifteen post-dated checks were assigned to Bancasia "for valuable consideration." Moreover, Article 1354 of the Civil Code states that, "Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary." The record is devoid of any showing on the part of Great Asian rebutting this presumption. On the other hand, Bancasia s Loan Section Manager, Cynthia Maclan, testified that Bancasia paid Great Asian a consideration at the discount rate of less than 24% of the face value of the post-dated checks. Moreover, in its verified petition for voluntary insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia as one of its creditors, an extra-judicial admission that Bancasia proved when it formally offered in evidence the verified petition for insolvency. The Insolvency Law requires the petitioner to submit a schedule of debts

that must "contain a full and true statement of all his debts and liabilities." The Insolvency Law even requires the petitioner to state in his verification that the schedule of debts contains "a full, correct and true discovery of all my debts and liabilities." Great Asian cannot now claim that the listing of Bancasia as a creditor was not an admission of its debt to Bancasia but merely an acknowledgment that Bancasia had sent a demand letter to Great Asian. Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation but a sale of the checks. With the sale, ownership of the checks passed to Bancasia, which must now, according to Great Asian, sue the drawers and endorser of the check who are the parties primarily liable on the checks. Great Asian forgets that under the Deeds of Assignment, Great Asian expressly undertook to pay the full value of the checks in case of dishonour. Again, we reiterate that this obligation of Great Asian is separate and distinct from its warranties as endorser under the Negotiable Instruments Law. Great Asian is, however, correct in saying that the assignment of the checks is a sale, or more properly a discounting, of the checks and not a loan accommodation. However, it is precisely because the transaction is a sale or a discounting of receivables, embodied in separate Deeds of Assignment, that the relevant provisions of the Civil Code are applicable and not the Negotiable Instruments Law. At any rate, there is indeed a fine distinction between a discounting line and a loan accommodation. If the accounts receivables like postdated checks are sold for a consideration less than their face value, the transaction is one of discounting, and is subject to the provisions of the Financing Company Act. The assignee is immediately subrogated as creditor of the accounts receivable. However, if the accounts receivable are merely used as collateral for the loan, the transaction is only a simple loan, and the lender is not subrogated as creditor until there is a default and the collateral is foreclosed. In summary, Great Asian s four contracts assigning its fifteen post-dated checks to Bancasia expressly stipulate the suspensive condition that in the event the drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since the common condition in the contracts had transpired, an obligation on the part of Great Asian arose from the four contracts, and that obligation is to pay Bancasia the full value of the checks, including the stipulated penalty and attorney s fees. Third Issue: The liability of surety Tan Chong Lin - Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the Surety Agreements he signed wherein he solidarily held himself liable with Great Asian for the payment of its debts to Bancasia. The Surety Agreements contain the following common condition:"Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above mentioned, or in case of the Principal s failure promptly to respond to any other lawful demand made by the Creditor, its successors, administrators or assigns, both the Principal and the Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held by the Creditor as Principal or agent, and it is agreed that a certified

statement by the Creditor as to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and purposes." Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lin s obligation hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great Asian. Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment enlarge or increase his risks under the Surety Agreements: "The ASSIGNOR warrants: the soundness of the receivables herein assigned; that said receivables are duly noted in its books and are supported by appropriate documents; that said receivables are genuine, valid and subsisting; that said receivables represent bona fide sale of goods, merchandise, and/or services rendered in the ordinary course of its business transactions; that the obligors of the receivables herein assigned are solvent; that it has valid and genuine title to and indefeasible right to dispose of said accounts; that said receivables are free from all liens and encumbrances; that the said receivables are freely and legally transferable, and that the obligor/s therein will not interpose any objection to this assignment, and has in fact given his/their consent hereto." Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially altered his obligations under the Surety Agreements, and therefore he is released from any liability to Bancasia. Under Article 1215 of the Civil Code, what releases a solidary debtor is a "novation, compensation, confusion or remission of the debt" made by the creditor with any of the solidary debtors. These warranties, however, are the usual warranties made by one who discounts receivables with a financing company or bank. The Surety Agreements, written on the letter head of "Bancasia Finance & Investment Corporation," uniformly state that "Great Asian Sales Center has obtained and/or desires to obtain loans, overdrafts, discounts and/or other forms of credits from" Bancasia. Tan Chong Lin was clearly on notice that he was holding himself as surety of Great Asian which was discounting postdated checks issued by its buyers of goods and merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of Great Asian s business activities or discounting transactions with Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan Chong Lin under the Surety Agreements. There is, moreover, no novation of the debt of Great Asian that would warrant release of the surety. In any event, the provisions of the Surety Agreements are broad enough to include the obligations of Great Asian to Bancasia under the warranties. The first Surety Agreement states that: herein Surety/ies, jointly and severally among themselves and likewise with principal, hereby agree/s and bind/s himself/themselves to pay at maturity all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the Principal may now or may hereafter owe the Creditor, including extensions or renewals thereof in the sum P1,000,000.00 plus stipulated interest thereon at the rate of sixteen percent per annum, or at such increased rate of interest which the Creditor may charge on

the Principal s obligations or renewals or the reduced amount thereof, plus all the costs and expenses which the Creditor may incur in connection therewith. Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above mentioned, or in case of the Principal s failure promptly to respond to any other lawful demand made by the Creditor, its successors, administrators or assigns, both the Principal and the Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and purposes. The second Surety Agreement contains the following provisions: " herein Surety/ies, jointly and severally among themselves and likewise with PRINCIPAL, hereby agree and bind themselves to pay at maturity all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor, including extensions and/or renewals thereof in the principal sum not to exceed P2,000,000.00 plus stipulated interest thereon, or such increased or decreased rate of interest which the Creditor may charge on the principal sum outstanding pursuant to the rules and regulations which the Monetary Board may from time to time promulgate, together with all the cost and expenses which the CREDITOR may incur in connection therewith. If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity any of the obligations or amounts due to the CREDITOR, or if for any reason whatsoever the PRINCIPAL fails to promptly respond to and comply with any other lawful demand made by the CREDITOR, or if for any reason whatsoever any obligation of the PRINCIPAL in favor of any person or entity should be considered as defaulted, then both the PRINCIPAL and the SURETY/IES shall be considered in default under the terms of this Agreement. Pursuant thereto, the SURETY/IES agree/s to pay jointly and severally with the PRINCIPAL, all outstanding obligations of the CREDITOR, whether due or not due, and whether owing to the PRINCIPAL in its personal capacity or as agent of any person, endorsee, assignee or transferee. Article 1207 of the Civil Code provides, " There is a solidary liability only when the obligation expressly so states, or when the law or nature of the obligation requires solidarity." The stipulations in the Surety Agreements undeniably mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the stipulations in the Surety Agreements are sufficiently broad, expressly encompassing "all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor". Consequently, Tan Chong Lin must be held solidarily liable with Great Asian for the non-payment of the fifteen dishonoured checks, including penalty and attorney s fees in accordance with the Deeds of Assignment. The Deeds of Assignment stipulate that in case of suit Great Asian shall

pay attorney s fees equivalent to 25% of the outstanding debt. The award of attorney s fees in the instant case is justified, not only because of such stipulation, but also because Great Asian and Tan Chong Lin acted in gross and evident bad faith in refusing to pay Bancasia s plainly valid, just and demandable claim. We deem it just and equitable that the stipulated attorney s fee should be awarded to Bancasia. The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of failure to pay, but the Deeds are silent on whether this penalty is a running monthly or annual penalty. Thus, the 3% penalty can only be considered as a one-time penalty. Moreover, the Deeds of Assignment do not provide for interest if Great Asian fails to pay. We can only award Bancasia legal interest at 12% interest per annum, and only from the time it filed the complaint because the records do not show that Bancasia made a written demand on Great Asian prior to filing the complaint. Bancasia made an extrajudicial demand on Tan Chong Lin, the surety, but not on the principal debtor, Great Asian. WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167 is AFFIRMED with MODIFICATION. Petitioners are ordered to pay, solidarily, private respondent the following amounts: P1,042,005.00 plus 3% penalty thereon ; interest on the total outstanding amount in item at the legal rate of 12% per annum from the filing of the complaint until the same is fully paid; attorney s fees equivalent to 25% of the total amount in item including interest at 12% per annum on the outstanding amount of the attorney s fees from the finality of this judgment until the same is fully paid; and costs of suit. SO ORDERED