Jurisprudence: G.R. No. 157833 October 15, 2007

FIRST DIVISION

BANK OF THE PHILIPPINE ISLANDS v. GREGORIO C. ROXAS,

 G.R. No. 157833  October 15, 2007

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DECISION





SANDOVAL-GUTIERREZ, J.:




For our resolution is the instant Petition for Review on Certiorari assailing the Decision[1] of the Court of Appeals (Fourth Division) dated February 13, 2003 in CA-G.R. CV No. 67980.

The facts of the case, as found by the trial court and affirmed by the Court of Appeals, are:

Gregorio C. Roxas, respondent, is a trader.  Sometime in March 1993, he delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in the amount of P348,805.50.   However, when respondent tried to encash the check, it was dishonored by the drawee bank.   Spouses Cawili then assured him that they would replace the bounced check with a cashier’s check from the Bank of the Philippine Islands (BPI), petitioner.

On March 31, 1993, respondent and Rodrigo Cawili went to petitioner’s branch at Shaw Boulevard, Mandaluyong City where Elma Capistrano, the branch manager, personally attended to them.  Upon Elma’s instructions, Lita Sagun, the bank teller, prepared BPI Cashier’s Check No. 14428 in the amount of P348,805.50, drawn against the account of Marissa Cawili, payable to respondent.  Rodrigo then handed the check to respondent in the presence of Elma.

The following day, April 1, 1993, respondent returned to petitioner’s branch at Shaw Boulevard to encash the cashier’s check but it was dishonored.   Elma informed him that Marissa’s account was closed on that date.

Despite respondent’s insistence, the bank officers refused to encash the check and tried to retrieve it from respondent.   He then called his lawyer who advised him to deposit the check in his (respondent’s) account at Citytrust, Ortigas Avenue.   However, the check was dishonored on the ground “Account Closed.”

On September 23, 1993, respondent filed with the Regional Trial Court, Branch 263, Pasig City a complaint for sum of money against petitioner, docketed as Civil Case No. 63663.   Respondent prayed that petitioner be ordered to pay the amount of the check, damages and cost of the suit.

In its answer, petitioner specifically denied the allegations in the complaint, claiming that it issued the check by mistake in good faith; that its dishonor was due to lack of consideration; and that respondent’s remedy was to sue Rodrigo Cawili who purchased the check.  As a counterclaim, petitioner prayed that respondent be ordered to pay attorney’s fees and expenses of litigation. 

Petitioner filed a third-party complaint against spouses Cawili.  They were later declared in default for their failure to file their answer.

After trial, the RTC rendered a Decision, the dispositive portion of which reads:

         WHEREFORE, in view of the foregoing premises, this Court hereby renders judgment in favor of herein plaintiff and orders the defendant, Bank of the Philippine Islands, to pay Gerardo C. Roxas:



1)      The sum of P348,805.50, the face value of the cashier’s check, with legal interest thereon computed from April 1, 1993 until the amount is fully paid;

2)      The sum of P50,000.00 for moral damages;

3)      The sum of P50,000.00 as exemplary damages to serve as an example for the public good;

4)      The sum of P25,000.00 for and as attorney’s fees; and the

5)      Costs of suit.

As to the third-party complaint, third-party defendants Spouses Rodrigo and Marissa Cawili are hereby ordered to indemnify defendant Bank of the Philippine Islands such amount(s) adjudged and actually paid by it to herein plaintiff Gregorio C. Roxas, including the costs of suit.



SO ORDERED.





On appeal, the Court of Appeals, in its Decision, affirmed the trial court’s judgment.

Hence, this petition.

Petitioner ascribes to the Court of Appeals the following errors: (1) in finding that respondent is a holder in due course; and (2) in holding that it (petitioner) is liable to respondent for the amount of the cashier’s check.  

Section 52 of the Negotiable Instruments Law provides:

SEC. 52. What constitutes a holder in due course. – A holder in due course is a holder who has taken the instrument under the following conditions:

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

(b)    That he became the holder of it before it was overdue and without notice that it 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 person negotiating it.

        

          As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course.  One who claims otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking.   In this case, petitioner contends that the element of “value” is not present, therefore, respondent could not be a holder in due course.

          Petitioner’s contention lacks merit.  Section 25 of the same law  states:

         SEC. 25. Value, what constitutes. – Value is any consideration sufficient to support a simple contract.  An antecedent or pre-existing debt constitutes value; and is deemed as such whether the instrument is payable on demand or at a future time.











          In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and South Sea Surety & Insurance Co., Inc.,[2] this Court ruled that value “in general terms may be some right, interest, profit or benefit to the party who makes the contract or some forbearance, detriment, loan, responsibility, etc. on the other side.”   Here, there is no dispute that respondent received Rodrigo Cawili’s cashier’s check as payment for the former’s vegetable oil.   The fact that it was Rodrigo who purchased the cashier’s check from petitioner will not affect respondent’s status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili.  Verily, the Court of Appeals did not err in concluding that respondent is a holder in due course of the cashier’s check.

          Furthermore, it bears emphasis that the disputed check is a cashier’s check.   In International Corporate Bank v. Spouses Gueco,[3] this Court held that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the bank as the maker.   The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand.    In New Pacific Timber & Supply Co. Inc. v. Señeris,[4] this Court took judicial notice of the “well-known and accepted practice in the business sector that a cashier’s check is deemed as cash.”   This is because the mere issuance of a cashier’s check is considered acceptance thereof.

In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashier’s check.   Having been accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon presentment by the former.

          WHEREFORE, the petition is DENIED.   The assailed Decision of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 67980 is AFFIRMED.    Costs against petitioner.

          SO ORDERED.

Jurisprudence: G.R. No. 154127 December 8, 2003

FIRST DIVISION

G.R. No. 154127 : December 8, 2003

ROMEO C. GARCIA, Petitioner, vs. DIONISIO V. LLAMAS, respondent.

D E C I S I O N

PANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by the complete incompatibility between the old and the new agreements. Petitioner herein fails to show either requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary debtor stands.

The Case

Before us is a Petition for Review[1 under Rule 45 of the Rules of Court, seeking to nullify the November 26, 2001 Decision[2 and the June 26, 2002 Resolution[3 of the Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as follows:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the award for attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the court of origin for purposes of receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.[4

The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner and de Jesus].

Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of the check and [respondents] acceptance thereof novated or superseded the note.

[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the reply were the face of the check and the reverse side thereof.

For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was made when [respondents] daughter, one Nits Llamas-Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the months of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed the instant case while his retirement was being processed; and that, in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees, plus P1,000.00 for every court appearance.

During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he would no [longer] present evidence. Given this development, the trial court gave [respondent] permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.

Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that [petitioners and de Jesus] solidary liability under the promissory note cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the check bounced.[5

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as follows:

WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally, the [respondent] the following sums, to wit:

1) P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representing interests already paid by x x x de Jesus;

2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt appearance, and;

3) Cost of this suit.[6

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even though De Jesus had been declared in default. The case against the latter was therefore remanded by the CA to the trial court for the ex parte reception of the formers evidence.

As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise even a single genuine issue regarding any material fact.

The appellate court ruled that no novation -- express or implied -- had taken place when respondent accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced upon its presentment.

Hence, this Petition.[7

Issues

Petitioner submits the following issues for our consideration:

I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of P400,000.00 in favor of Respondent Llamas, although the check subsequently bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x x de Jesus or [the superseding of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial difficulties, he be given an extension of time to pay his loan obligation and that his retirement benefits from the Philippine National Police will answer for said obligation.

II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of petitioner that he was merely an accommodation party, despite the fact that the promissory note provided for a joint and solidary liability, should have been given weight and credence considering that subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole liability over the loan obligation.

III

Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-blown trial.[8

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment against him -- be it a judgment on the pleadings or a summary judgment -- was proper.

The Courts Ruling

The Petition has no merit.

First Issue:

Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his co-obligor, paid the loan with the check.

The fallacy of the second (alternative) argument is all too apparent. The check could not have extinguished the obligation, because it bounced upon presentment. By law,[9 the delivery of a check produces the effect of payment only when it is encashed.

We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.[10 Article 1293 of the Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from -- and may even be made without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary.[11 Both modes of substitution by the debtor require the consent of the creditor.[12

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement.[13 Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation.[14 For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.[15

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point.[16 The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence.[17

Applying the foregoing to the instant case, we hold that no novation took place.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together.

Neither could the payment of interests -- which, in petitioners view, also constitutes novation[18 -- change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof.

Also unmeritorious is petitioners argument that the obligation was novated by the substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the formers place in the relation.[19 Well-settled is the rule that novation is never presumed.[20 Consequently, that which arises from a purported change in the person of the debtor must be clear and express.[21 It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place.

In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person was substituted in his place, or that the joint and solidary obligation was cancelled and substituted by the solitary undertaking of De Jesus. The CA aptly held:

x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of the obligation being solidary due to the fact that the promissory note expressly declared that the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or performance from one of the solidary debtors or some or all of them simultaneously, and payment made by one of them extinguishes the obligation. It therefore follows that in case the creditor fails to collect from one of the solidary debtors, he may still proceed against the other or others. x x x [22

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor.[23 Since novation implies a waiver of the right the creditor had before the novation, such waiver must be express.[24 It cannot be supposed, without clear proof, that the present respondent has done away with his right to exact fulfillment from either of the solidary debtors.[25

More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment. Respondents acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to pay the entirety of the obligation.

It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.[26 It is up to the former to determine against whom to enforce collection.[27 Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable[28 for the entire obligation.[29

Second Issue:

Accommodation Party

Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as such, he was released as obligor when respondent agreed to extend the term of the obligation.

This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

PROMISSORY NOTE

P400,000.00

RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof.

It is understood that our liability under this loan is jointly and severally [sic].

Done at Quezon City, Metro Manila this 23rd day of December, 1996.[30

By its terms, the note was made payable to a specific person rather than to bearer or to order[31 -- a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent of the parties.[32 The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation party. The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety -- the accommodation party being the surety.[33 It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissor and debtor from the beginning. The liability is immediate and direct.[34

Third Issue:

Propriety of Summary Judgment

or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that (1) except as to the amount of damages, there is no genuine issue regarding any material fact; and (2) the moving party is entitled to a judgment as a matter of law.

A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings raise only a legal, not a genuine, issue regarding any material fact.[35 Consequently, facts are asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or admissions.[36 A summary judgment may be applied for by either a claimant or a defending party.[37

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is proper when an answer fails to render an issue or otherwise admits the material allegations of the adverse partys pleading. The essential question is whether there are issues generated by the pleadings.[38 A judgment on the pleadings may be sought only by a claimant, who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. [39

Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His Answer[40 apparently raised several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. We quote with approval the CAs observations:

Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid issues. Firstly, Garcias claim that he was merely an accommodation party is belied by the promissory note that he signed. Nothing in the note indicates that he was only an accommodation party as he claimed to be. Quite the contrary, the promissory note bears the statement: It is understood that our liability under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de Jesus already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the dorsal side of said check.[41

From the records, it also appears that petitioner himself moved to submit the case for judgment on the basis of the pleadings and documents. In a written Manifestation,[42 he stated that judgment on the pleadings may now be rendered without further evidence, considering the allegations and admissions of the parties.[43

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

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

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Jurisprudence: G.R. No. 81322 February 5, 1990

SECOND DIVISION

G.R. No. 81322 February 5, 1990

GREGORIO D. CANEDA, JR., petitioner,
vs.
HON. COURT OF APPEALS, HON. REGIONAL TRIAL COURT OF DAVAO, BRANCH IX, INVESTORS FINANCE CORPORATION, doing business under the name and style, "FNCB FINANCE", AND BUENAVENTURA GUESON, respondents.

Gregorio D. Caneda, Jr. for and in his own behalf as petitioner.

ABC Law Offices for respondent FNCB Finance.



PARAS, J.:

This is a petition for certiorari and prohibition with preliminary injunction seeking the cancellation of the entry of judgment in CA-G.R. CV No. 03390 entitled "Investors Finance Corporation, doing business under the name and style "FNCB FINANCE", Plaintiff v. Buenaventura Gueson and John Doe, Defendants and Third Party Plaintiffs-Appellees v. Gregorio Caneda, Jr., Third Party Defendant-Appellant."

It appears on record that sometime on November 8, 1977, Buenaventura Gueson for value received, executed a promissory note for the sum of P18,960.00 in favor of Gregorio Caneda, Jr. promising to pay a monthly installment of P790.00 for 24 months with 14% interest per annum; that to secure the obligation Gueson executed a chattel mortgage and used a Toyota Jiffy jeep as a collateral; that it is expressly stipulated in the promissory note and chattel mortgage that default in the payment of any installment will make the entire obligation due and demandable. This promissory note and chattel mortgage was assigned by Gregorio Caneda in favor of Investors Finance Corporation (FNCB). Defendant Gueson defaulted in his obligation and as of September 24, 1980 had an outstanding balance of P11,230.00 exclusive of interest and other charges. Despite repeated demands defendant Gueson allegedly failed and refused to pay the entire obligation. Hence, FNCB on December, 1980 filed a complaint for replevin and/or sum of money against Buenaventura Gueson and John Doe. As relief, FNCB prayed for the seizure of the Toyota Jiffy jeep and its delivery to it, the payment of 25% of the total amount due as attorney's fees plus 10% thereof as liquidated damages and costs. In the alternative FNCB also prayed for the payment of the sum of P11,230.00 with interest at 15% per annum to be computed from September 25, 1978 until fully paid (Rollo, pp. 124-127).

On January 2, 1981, Buenaventura Gueson filed his answer with third party complaint. In his answer Gueson interposed the defense that he did not receive any value for the promissory note he executed as he merely accommodated the real debtor Gregorio Caneda, Jr.; that as the accommodated party Caneda, Jr. executed a deed of sale in Gueson's favor covering the Jiffy jeep subject matter of the chattel mortgage and he also executed a counter deed of sale in favor of Caneda, Jr.; that with the consent of FNCB, Caneda Jr. executed an "undertaking" whereby he bound himself to pay and assume the obligation stipulated in the promissory note and chattel mortgage; that FNCB is not a holder in due course of the promissory note nor an assignee in good faith; that as the real debtor Caneda, Jr. is primarily liable to FNCB; that because of Caneda's unjustifiable refusal to honor his obligation Gueson suffered damages. He, therefore, prayed that Caneda, Jr. be ordered to pay directly FNCB and in the event that he be required to pay FNCB that he should be reimbursed by Caneda, Jr. As counterclaim, he also asked for the payment of actual and moral damages, attorney's fees and litigation expenses (Rollo, p. 146).

On March 18, 1981, Gregorio D. Caneda, Jr. filed his answer to the third party complaint. He denied that he is the real debtor or the party accommodated. He alleged that he had not incurred any monetary obligation in favor of FNCB. He pointed out that Gueson agreed to buy his Jiffy jeep, but since he has no cash, they agreed that Gueson will apply for financing with FNCB; that he executed a deed of sale on the condition that if the financing will not be approved the sale shall not materialize and Gueson shall deed back the jeep to him; that since the loan was approved the "counter deed of sale" was rendered moot and academic; that Gueson was not relieved of his obligation to FNCB since the "undertaking" was "with recourse to Buenaventura Gueson in case of default"; that under Section 19 of the Negotiable Instruments Law, Gueson is still liable to FNCB even assuming that he is merely an accommodation party. Accordingly, he prayed for the dismissal of the complaint against him (Rollo, pp. 134-135; 146-147).

On June 18, 1981, the pre-trial conference was terminated as no settlement could be reached by the parties (Rollo, p. 134). Trial ensued thereafter.

On February 19, 1982 hearing, the John Doe named on the complaint was identified as Gregorio Caneda, Jr. Upon FNCB'S motion the third party complaint was treated as a cross-claim and the pleading filed by Caneda, Jr. was considered as an answer to the complaint and cross-claim (Rollo, pp. 7-10). In said hearing FNCB presented Bethoven Sur, its Field Collector as its lone witness who identified the promissory note (Exhibit A) and the chattel mortgage (Exhibit B) and testified on the transaction. Buenaventura Gueson also testified in the hearing and identified the undated counter deed of sale (Exhibit 1) and the undertaking (Exhibit 2). In his testimony he accommodated Atty. Gregorio Caneda, Jr. upon the prodding of the Rivera spouses, his townmates. He also pointed out that the typewritten words "with recourse to Buenaventura Gueson in case of default' appearing in Exhibit 2 was not there when Atty. Caneda, Jr. signed the document; that the jeep and its registration papers were always in the possession of Atty. Caneda, Jr. (Rollo, pp. 14-15). Gueson formally offered his exhibits and rested his case on June 2, 1987.

Because of Caneda's failure to attend the hearing, who instead filed an ex-parte motion for postponement despite the previous warning of the Court that the October 22, 1982 hearing could not be moved as the previous scheduled hearing for the reception of Caneda, Jr.'s evidence was postponed at his instance, the trial court in its order dated October 22, 1982 declared that Caneda waived his right to present evidence and the case would be decided on the evidence on record. Caneda filed a motion for reconsideration, but it was denied in the order of the trial court dated November 22, 1982.

The above incident was elevated to the Court of Appeals. But for lack of merit the petition for certiorari and prohibition filed by Caneda Jr. was dismissed on March 15, 1983 by the Appellate Court in AC G.R. Sp. No. 15220. Thereafter, Caneda, Jr. filed a petition for review on certiorari, but this Court in G.R. No. 64567 resolved on August 15, 1983 to deny the petition for lack of merit (Ibid.).

On November 26, 1983, the trial court rendered its decision* on the main case, finding that Buenaventura Gueson was merely an accommodation party for the benefit of Caneda, Jr.; that there was novation in the form of substitution of debtors when Gregorio Caneda, Jr. executed the undertaking assuming the liability of B. Gueson in favor of FNCB; that the phrase "With recourse to Buenaventura Gueson in case of default" found in the undertaking was inserted only after Caneda and FNCB had already signed the undertaking and without the knowledge of B. Gueson and that Caneda was in bad faith in trying to evade payment of a justly-secured legal obligation. The dispositive portion of said decision reads:

WHEREFORE, premises duly considered, judgment is hereby rendered

I. On the complaint:

a) Dismissing the same as against Defendant/Cross-claimant Buenaventura Gueson;

b) Ordering Defendant/Cross-defendant Gregorio D. Caneda, Jr., to pay plaintiff the sum of ELEVEN THOUSAND TWO HUNDRED THIRTY (P11,230.00) PESOS, Philippine Currency, with interest at the rate of 12% per annum computed from September 25, 1978 until fully paid; plus the sum equivalent to 25% of the total amount due and payable as and for attorney's fees, including costs of premium of the Replevin Bond, and filing fees.

II.    On the Counterclaim and Cross-claim of Defendant/Cross-Claimant Buenaventura Gueson:

a) Ordering the defendant/cross-defendant Gregorio D. Caneda, Jr., to pay the defendant/cross-claimant Buenaventura Gueson the amount of TEN THOUSAND (P10,000.00) PESOS, Philippine Currency, as moral damages he suffered established under his Counterclaim;

b) Ordering the defendant/cross defendant Gregorio D. Caneda, Jr., to pay defendant/cross-claimant Buenaventura Gueson the sum of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, as exemplary damages; and

c) Ordering the defendant/cross-defendant Gregorio D. Caneda, Jr., to pay defendant-cross-claimant Buenaventura Gueson the sum of THREE THOUSAND (P3,000.00) PESOS, Philippine Currency, as and for attorney's fees plus TWO THOUSAND (P2,000.00) PESOS, Philippine Currency, for expenses of litigation.

Finally, said defendant/cross-defendant Gregorio D. Caneda, Jr., is hereby ordered to pay the costs of the suit.

IT IS SO ORDERED.

From the above decision, Caneda, Jr. interposed an appeal. In its decision** in CA-G.R. CV No. 03390 promulgated on November 28, 1986, the Third Division of the Court of Appeals affirmed the decision of the trial court with costs against appellant Caneda, Jr. (Rollo, pp. 144-152).

On June 2,1987, the Court of Appeals made an entry of judgment of its decision in CA-G.R. CV No. 03390 as it became final and executory on December 28, 1986 (Rollo, p. 11). Original records of the case were remanded to the trial court on June 3, 1987 (Rollo, p. 117).

On June 18, 1987, Caneda Jr. filed with the Court of Appeals a motion to cancel entry of judgment alleging that the appellate court's decision is not yet final and executory as he has not received a copy of the said decision. In its resolution dated July 23, 1987, the Court of Appeals denied said motion.

Hence, this petition.

The main issue in this case is whether or not a copy of the November 28, 1986 decision of the Court of Appeals has been properly served on herein petitioner and therefore has become final and executory.

After all the required pleadings had been filed, the petition was given due course in the resolution of July 25, 1988 (Rollo, p. 103) and the parties were required to submit simultaneously their respective memoranda. Private respondent Gueson filed his memorandum on October 3,1988 (Rollo, p. 112) while FNCB waived its right to file memorandum (Rollo, p. 174). Petitioner filed his memorandum on October 10, 1988 (Rollo, p. 154).

Petitioner claimed among others that the Court of Appeals arbitrarily denied his motion to cancel entry of judgment, despite the fact that on June 3, 1987, he learned for the first time that a decision dated November 28, 1986 was rendered by the Court of Appeals because he was not furnished a copy of said decision which was delivered instead by letter carrier Anastacio Arbizo of the Post Office of Davao City on December 11, 1986 at about 12:10 noon to a certain Boy Reyes, petitioner's neighbor, living just in front of his office as shown by the record book of said letter carrier and the certification of Cresenciano C. Tagaza, Postmaster VI (Annex "B"; Rollo, p. 95). To date, Boy Reyes who moved with his family to Cateel, Davao del Norte about six months from the filing of the petition, has not delivered to petitioner subject decision. Petitioner argued that Boy Reyes is not authorized to receive his mails so that the negligence of Reyes is not binding on him. Hence, he claimed that the Court of Appeals' denial of his motion to cancel entry of judgment is tantamount to a denial of his fundamental right to due process of law and prayed for: (a) the cancellation of the entry of judgment; (b) the setting aside of the order dated July 23, 1987 of the Court of Appeals; and (c) the delivery to him of a copy of the decision dated November 28, 1986, so that he can appeal. Pending the determination of the instant petition he also prayed for the issuance of a restraining order or a writ of preliminary injunction to prohibit the enforcement of the decision of the trial court as affirmed by the Court of Appeals.

On the other hand, while respondents pointed out that previous summons and other pleadings were duly served in petitioner's office, they were not able to show that the copy of the decision in question was properly served on the petitioner as required by Section 8, Rule 14 of the Rules of Court. In fact, petitioner's claim that as appearing in the registry book of the Bureau of Post as well as the Certification of the Postmaster that the copy of the Court of Appeals' decision was delivered to Boy Reyes, his neighbor, was not successfully rebutted.

Instead respondents resorted to suppositions and surmises claiming that it is unthinkable that Boy Reyes, petitioner's neighbor, "living just right in front of the office" which office also serve as petitioner's residence would not deliver the mail matter containing the decision to petitioner, considering the fact that no incident has been cited that would show any motive why Boy Reyes did not inform him or deliver to him the mail containing the decision; and that it is impossible to believe that petitioner failed to receive the mail containing the decision when all mails sent to him by the Court of Appeals were received by him at the same address. Finally, private respondent concluded that there is no practical benefit by giving due course to the petition (Rollo, pp. 64-67). Be that as it may, suppositions and surmises are not evidence sufficient to show compliance with the Rules.

Hence, as ruled by this Court under similar. circumstances where service was made at an address which was neither the "residence" nor the "dwelling house" of the petitioner nor his office or regular place of business at the time of service and served on a person who is not the proper person to whom the papers should be left, the same is not the service contemplated by the Rules. The statutory requirements of substituted service must be followed strictly, faithfully and fully and any substituted service other than that authorized by statute is considered ineffective (Filmerco Commercial Co., Inc. v. IAC, 149 SCRA 194-196 [1987]).

In fine, Caneda's motion to cancel the assailed entry of judgment should have been granted by the Court of Appeals but to remand this case to respondent Court for that purpose alone, after which the same will be returned again to this Court on appeal or review, would be an exercise that would only delay the final adjudication of the litigation. There are sufficient facts on record not to mention the findings of the trial court and the Court of Appeals by which the merits of the appeal can be resolved. Well-settled is the rule that remanding of a case for the reception of evidence is not necessary if the Supreme Court could resolve the dispute based on the records before it (Quisumbing v. Court of Appeals, 122 SCRA 703 [1983]; Board of Liquidators v. Zulueta, 115 SCRA 548 [1982]). More so in this case, where a decision has already been promulgated and in fact ready for appeal. Thus, it was held that where there is enough basis for the Court to end the basic controversy between the parties here and now, procedural steps can be dispensed with, which would not anyway affect substantially the merits of their respective claims (Velasco v. Court of Appeals, 95 SCRA 621622 [1980]).

As to the merits of the main case, it is undisputed that Buenaventura Gueson executed a promissory note in favor of petitioner Caneda, secured by a chattel mortgage on a Toyota Jiffy jeep as collateral; which promissory note and chattel mortgage were assigned by Caneda in favor of FNCB evidently to secure his obligation with said company, with the knowledge and consent of Gueson. The records also show that when FNCB tried to collect from Gueson, Caneda consented and affixed his signature on an "undertaking" thereby acknowledging indebtedness in favor of FNCB.

The principal question that arises is the effect of the assignment on the obligations of Gueson and Caneda to FNCB.

As between Gueson and Caneda, it is obvious that whether private agreement or understanding transpired between them is binding on them alone and not on FNCB whose only concern in the whole transaction is the repayment of the loan it has extended.

As regard FNCB, both the trial court and the Court of Appeals are of the view that Caneda is the real debtor of said company and Gueson is only an accommodation party of Caneda. However, the trial court concluded that there was novation in the form of substitution of debtors when Caneda executed the undertaking assuming the liability of Gueson in favor of FNCB.

Novation has been defined as the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, referred to as objective or real novation or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor, also called as subjective or personal novation (Cochingyan, Jr. v. R & B Surety and Insurance Co., Inc., 151 SCRA 349 [1987]).

But as explained by this Court, novation is never presumed; it must be explicitly stated or there must be a manifest incompatibility between the old and the new obligations in every aspect. The test of incompatibility between two obligations or contracts, is whether or not they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the later obligation novates the first (Bisaya Land Transportation Co., Inc. v. Sanchez, 153 SCRA 534-535 [1987]).

As correctly observed by the Court of Appeals, there is no novation, whether express or implied. There is no express novation since the undertaking executed on October 2, 1980 does not state in clear terms that the promissory note and chattel mortgage executed by Gueson is extinguished and in lieu thereof the undertaking will be substituted. Neither is there an implied novation since the promissory note and chattel mortgage are not incompatible with the undertaking.

Neither is there substitution of debtors. Petitioner Caneda in executing the undertaking assuming the liability with FNCB, merely confirmed that he is the real or principal debtor while Gueson in signing the promissory note and the chattel mortgage accommodated Caneda in his obligation with FNCB. Otherwise stated, he became a surety. Thus, this Court has ruled, that 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 is liable on the instrument to a holder for value, notwithstanding the fact that such holder at the time of taking the instrument knew him to be only an accommodation party. Nonetheless, after paying the holder, such accommodation party has the right 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 (People v. Maniego, 148 SCRA 31 [1987]).

Likewise, it is no defense to state on the part of either Gueson or Caneda that they did not receive any value for the promissory note executed, both claiming to be only an accommodation party. As held by this Court, a third person advances the face value of the note to the accommodated party at the time of the creation of the note, the consideration for the note as regards its maker is the money advanced to the accommodated party, and it cannot be said that the note is lacking in consideration as to the accommodating party just because he himself received none of the money. It is enough that value was given for the note at the time of its creation (Acuna v. Veloso and Xavier, 50 Phil. 241-242 [1927]).

In resume, FNCB can go against both Caneda, the principal debtor and Gueson as the surety or either of them. But the lower court erred in dismissing the claim against Gueson. FNCB did not however, appeal thereby rendering this case moot as against Gueson. It does not however, follow that FNCB cannot recover the full amount from Caneda being the accommodated party. By not appealing the decision of the lower court, FNCB merely opted to recover its credit from Caneda and waived its right to recover from Gueson.

In like manner, the disputed phrase "with recourse to Buenaventura Gueson in case of default" is immaterial insofar as the liability of Caneda is concerned. If at all, said phrase merely confirms the fact that Gueson is merely an accommodation party and will not absolve Caneda, the principal debtor, from payment of the indebtedness with FNCB.

After a careful study of the records, no plausible reason can be found to disturb the findings and conclusions of the Court of Appeals.

PREMISES CONSIDERED, the appeal of petitioner is hereby ALLOWED, but considering this case on the merits, the assailed decision of the Court of Appeals of November 28, 1986 making Caneda, Jr. liable to FNCB, is hereby AFFIRMED.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

Jurisprudence: G.R. No. 166405 August 6, 2008

SECOND DIVISION

CLAUDE P. BAUTISTA v. AUTO PLUS TRADERS, INCORPORATED and COURT OF APPEALS (Twenty-First Division)

G.R. No. 166405          August 6, 2008

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DECISION

QUISUMBING, J.:

This petition for review on certiorari assails the Decision[1] dated August 10, 2004 of the Court of Appeals in CA-G.R. CR No. 28464 and the Resolution[2] dated October 29, 2004, which denied petitioner’s motion for reconsideration.  The Court of Appeals affirmed the February 24, 2004 Decision and May 11, 2004 Order of the Regional Trial Court (RTC), Davao City, Branch 16, in Criminal Case Nos. 52633-03 and 52634-03.

The antecedent facts are as follows:

Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of Cruiser Bus Lines and Transport Corporation, purchased various spare parts from private respondent Auto Plus Traders, Inc. and issued two postdated checks to cover his purchases.  The checks were subsequently dishonored.  Private respondent then executed an affidavit-complaint for violation of Batas Pambansa Blg. 22[3] against petitioner.  Consequently, two Informations for violation of BP Blg. 22 were filed with the Municipal Trial Court in Cities (MTCC) of Davao City against the petitioner.  These were docketed as Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001.  The Informations[4] read:

Criminal Case No. 102,004-B-2001:

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22, committed as follows:

That on or about December 15, 2000, in the City of Davao, Philippines, and within the jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully well that he had no sufficient funds and/or credit with the drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check No. 058832, dated December 15, 2000, in the amount of P151,200.00, in favor of Auto Plus Traders, Inc., but when said check was presented to the drawee bank for encashment, the same was dishonored for the reason “DRAWN AGAINST INSUFFICIENT FUNDS” and despite notice of dishonor and demands upon said accused to make good the check, accused failed and refused to make payment to the damage and prejudice of herein complainant.

CONTRARY TO LAW.

Criminal Case No. 102,005-B-2001:

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22, committed as follows:

That on or about October 30, 2000, in the City of Davao, Philippines, and within the jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully well that he had no sufficient funds and/or credit with the drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check No. 059049, dated October 30, 2000, in the amount of P97,500.00, in favor of Auto Plus Traders, [Inc.], but when said check was presented to the drawee bank for encashment, the same was dishonored for the reason “DRAWN AGAINST INSUFFICIENT FUNDS” and despite notice of dishonor and demands upon said accused to make good the check, accused failed and refused to make payment, to the damage and prejudice of herein complainant.

CONTRARY TO LAW.

Petitioner pleaded not guilty.  Trial on the merits ensued.  After the presentation of the prosecution’s evidence, petitioner filed a demurrer to evidence.  On April 21, 2003, the MTCC granted the demurrer, thus:

WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as to the guilt of the accused.  Cruiser Bus Line[s] and Transport Corporation, through the accused is directed to pay the complainant the sum of P248,700.00 representing the value of the two checks, with interest at the rate of 12% per annum to be computed from the time of the filing of these cases in Court, until the account is paid in full; ordering further Cruiser Bus Line[s] and Transport Corporation, through the accused, to reimburse complainant the expense representing filing fees amounting to P1,780.00 and costs of litigation which this Court hereby fixed at P5,000.00.

SO ORDERED.[5]

Petitioner moved for partial reconsideration but his motion was denied.  Thereafter, both parties appealed to the RTC.  On February 24, 2004, the trial court ruled:

WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to read as follows: Accused is directed to pay and/or reimburse the complainant the following sums: (1) P248,700.00 representing the value of the two checks, with interest at the rate of 12% per annum to be computed from the time of the filing of these cases in Court, until the account is paid in full; (2) P1,780.00 for filing fees and P5,000.00 as cost of litigation.

SO ORDERED.[6]

Petitioner moved for reconsideration, but his motion was denied on May 11, 2004.  Petitioner elevated the case to the Court of Appeals, which affirmed the February 24, 2004 Decision and May 11, 2004 Order of the RTC:

WHEREFORE, premises considered, the instant petition is DENIED.  The assailed Decision of the Regional Trial Court, Branch 16, Davao City, dated February 24, 2004 and its Order dated May 11, 2004 are AFFIRMED.

SO ORDERED.[7]

          Petitioner now comes before us, raising the sole issue of whether the Court of Appeals erred in upholding the RTC’s ruling that petitioner, as an officer of the corporation, is personally and civilly liable to the private respondent for the value of the two checks.[8]

Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the accused and that the corporation, which has a separate personality from its officers, is solely liable for the value of the two checks.

Private respondent counters that petitioner should be held personally liable for both checks.  Private respondent alleged that petitioner issued two postdated checks: a personal check in his name for the amount of P151,200 and a corporation check under the account of Cruiser Bus Lines and Transport Corporation for the amount of P97,500.  According to private respondent, petitioner, by issuing his check to cover the obligation of the corporation, became an accommodation party.  Under Section 29[9] of the Negotiable Instruments Law, an accommodation party is liable on the instrument to a holder for value.  Private respondent adds that petitioner should also be liable for the value of the corporation check because instituting another civil action against the corporation would result in multiplicity of suits and delay.

At the outset, we note that private respondent’s allegation that petitioner issued a personal check disputes the factual findings of the MTCC.  The MTCC found that the two checks belong to Cruiser Bus Lines and Transport Corporation while the RTC found that one of the checks was a personal check of the petitioner.  Generally this Court, in a petition for review on certiorari under Rule 45 of the Rules of Court, has no jurisdiction over questions of facts.  But, considering that the findings of the MTCC and the RTC are at variance,[10] we are compelled to settle this issue.

A perusal of the two check return slips[11] in conjunction with the Current Account Statements[12] would show that the check for P151,200 was drawn against the current account of Claude Bautista while the check for P97,500 was drawn against the current account of Cruiser Bus Lines and Transport Corporation.  Hence, we sustain the factual finding of the RTC.

Nonetheless, we find the appellate court in error for affirming the decision of the RTC holding petitioner liable for the value of the checks considering that petitioner was acquitted of the crime charged and that the debts are clearly corporate debts for which only Cruiser Bus Lines and Transport Corporation should be held liable.

Juridical entities have personalities separate and distinct from its officers and the persons composing it.[13]  Generally, the stockholders and officers are not personally liable for the obligations of the corporation except only when the veil of corporate fiction is being used as a cloak or cover for fraud or illegality, or to work injustice.[14]  These situations, however, do not exist in this case.  The evidence shows that it is Cruiser Bus Lines and Transport Corporation that has obligations to Auto Plus Traders, Inc. for tires.  There is no agreement that petitioner shall be held liable for the corporation’s obligations in his personal capacity.  Hence, he cannot be held liable for the value of the two checks issued in payment for the corporation’s obligation in the total amount of P248,700.

          Likewise, contrary to private respondent’s contentions, petitioner cannot be considered liable as an accommodation party for Check No. 58832.  Section 29 of the Negotiable Instruments Law defines an accommodation party as 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 gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending his name or credit to some other person.[15] An accommodation party lends his name to enable the accommodated party to obtain credit or to raise money; he receives no part of the consideration for the instrument but assumes liability to the other party/ies thereto.[16]  The first two elements are present here, however there is insufficient evidence presented in the instant case to show the presence of the third requisite.  All that the evidence shows is that petitioner signed Check No. 58832, which is drawn against his personal account.  The said check, dated December 15, 2000, corresponds to the value of 24 sets of tires received by Cruiser Bus Lines and Transport Corporation on August 29, 2000.[17]  There is no showing of when petitioner issued the check and in what capacity.  In the absence of concrete evidence it cannot just be assumed that petitioner intended to lend his name to the corporation.   Hence, petitioner cannot be considered as an accommodation party.

          Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks especially since there is no evidence that the debts covered by the subject checks have been paid.

WHEREFORE, the petition is GRANTED.  The Decision dated August 10, 2004 and the Resolution dated October 29, 2004 of the Court of Appeals in CA-G.R. CR No. 28464 are REVERSED and SET ASIDE.  Criminal Case Nos. 52633-03 and 52634-03 are DISMISSED, without prejudice to the right of private respondent Auto Plus Traders, Inc., to file the proper civil action against Cruiser Bus Lines and Transport Corporation for the value of the two checks.  

No pronouncement as to costs.

          SO ORDERED.

Jurisprudence: G.R. No. 154740 April 16, 2008

THIRD DIVISION

HENRY DELA RAMA CO v. ADMIRAL UNITED SAVINGS BANK,

   
G.R. No. 154740 April 16, 2008

DECISION

NACHURA, J.:
     

          On appeal is the February 19, 2002 Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 42167, setting aside the May 18, 1991 Decision[2] of the Regional Trial Court (RTC) of Quezon City, Branch 100, as well as its subsequent Resolution,[3] denying petitioner’s motion for reconsideration. 



          On February 28, 1983, Admiral United Savings Bank (ADMIRAL) extended a loan of Five Hundred Thousand Pesos (P500,000.00) to petitioner Henry Dela Rama Co (Co), with Leocadio O. Isip (Isip) as co-maker.  The loan was evidenced by Promissory Note No. A1-041[4] dated February 28, 1983 and payable on or before February 23, 1984, with interest at the rate of 18% per annum and service charge of 10% per annum.  The note also provided for liquidated damages at the rate of 3% per month plus incidental cost of collection and/or legal fees/cost, in the event of non-payment on due date.



Co and Isip failed to pay the loan when it became due and demandable.  Demands for payment were made by ADMIRAL, but these were not heeded.  Consequently, ADMIRAL filed a collection case against Co and Isip with the RTC of Quezon City, docketed as Civil Case No. Q-48543.



          Co answered the complaint alleging that the promissory note was sham and frivolous; hence, void ab initio.  He denied receiving any benefits from the loan transaction, claiming that ADMIRAL merely induced him into executing a promissory note.  He also claimed that the obligations, if any, had been paid, waived or otherwise extinguished. Co allegedly ceded several vehicles to ADMIRAL, the value of which was more than enough to cover the alleged obligation. He added that there was condonation of debt and novation of the obligation.  ADMIRAL was also guilty of laches in prosecuting the case. Finally, he argued that the case was prematurely filed and was not prosecuted against the real parties-in-interest.[5]



          Pending resolution of the case, Isip died.  Accordingly, he was dropped from the complaint.



          Co then filed a third party complaint against Metropolitan Rentals & Sales, Inc. (METRO RENT). He averred that the incorporators and officers of METRO RENT were the ones who prodded him in obtaining a loan of P500,000.00 from ADMIRAL.  The proceeds of the loan were given to the directors and officers of METRO RENT, who assured him of prompt payment of the loan obligation.  METRO RENT also assured him that he would be discharged from all liabilities under the promissory note, but it did not make good its promise.  Co, thus, prayed that METRO RENT be adjudged liable to ADMIRAL for the payment of the obligation under the promissory note.[6]



          Traversing the third party complaint, METRO RENT denied receiving the loan proceeds from Co.  It claimed that the loan was Co’s personal loan from which METRO RENT derived no benefit, thus, it cannot be held liable for the payment of the same.[7]



In due course and after hearing, the RTC rendered a Decision[8] on May 18, 1991, dismissing the complaint on the ground that the obligation had already been paid or otherwise extinguished.  It primarily relied on the release of mortgage executed by the officers of ADMIRAL, and on Co’s testimony that METRO RENT already paid the loan. The RTC also dismissed Co’s third party complaint against METRO RENT, as well as his counterclaim against ADMIRAL for lack of basis.



          ADMIRAL appealed the dismissal of the complaint to the CA.[9] On February 19, 2002, the CA rendered the assailed decision.[10]  Reversing the RTC, the CA found preponderance of evidence to hold Co liable for the payment of his loan obligation to ADMIRAL.  It rejected Co’s assertion that he merely acted as an accommodation party for METRO RENT, declaring that Co’s liability under the note was apparent in his express, absolute and unconditional promise to pay the loan upon maturity.  The CA further held that whatever agreement Co had with METRO RENT cannot bind ADMIRAL since there is no showing that the latter was aware of the agreement, let alone consented to it. The CA also rejected Co’s alternative defense that METRO RENT already paid the loan, finding the testimonial evidence in support of the assertion as pure hearsay.



          The CA disposed, thus:



          UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must be as it hereby is, REVERSED and SET ASIDE, and a new one entered CONDEMNING [petitioner] Henry Dela Rama Co to pay [respondent] Admiral United Savings Bank: (1) the sum of FIVE HUNDRED THOUSAND (P500,000.00) PESOS, Philippine Currency, with interest at eighteen percent (18%) per annum, and charges of ten percent (10%) per annum, reckoned from 28 February 1984, until fully paid; (2) the sum equivalent to three percent (3%)  per month from said due date until fully paid, by way of liquidated damages; and, (3) the sum equivalent to twenty-five percent (25%) of the total amount due in the concept of attorney’s fees.



            For insufficiency of evidence, the third party complaint against third party defendant Metropolitan Rental and Sales, Incorporated, is DISMISSED. Without costs.



            SO ORDERED.[11]





          Co filed a motion for reconsideration, but the CA denied the same on August 7, 2002.[12]

        

Hence, this appeal by Co faulting the CA for reversing the RTC.



The appeal lacks merit.



Co has not denied the authenticity and due execution of the promissory note.  He, however, asserts that he is not legally bound by said document because he merely acted as an accommodation party for METRO RENT.  He claimed the he signed the note only for the purpose of lending his name to METRO RENT, without receiving value therefor.



The argument fails to persuade.



The document, bearing Co’s signature, speaks for itself. To repeat, Co has not questioned the genuineness and due execution of the note. By signing the promissory note, Co acknowledged receipt of the loan amounting to P500,000.00, and undertook to pay the same, plus interest, to ADMIRAL on or before February 28, 1984.  Thus, he cannot validly set up the defense that he did not receive the value of the note or any consideration therefor.



          At any rate, Co’s assertion that he merely acted as an accommodation party for METRO RENT cannot release him from liability under the note.  An accommodation party who lends his name to enable the accommodated party to obtain credit or raise money is liable on the instrument to a holder for value even if he receives no part of the consideration.[13]  He assumes the obligation to the other party and binds himself to pay the note on its due date.  By signing the note, Co thus became liable for the debt even if he had no direct personal interest in the obligation or did not receive any benefit therefrom.



In Sierra v. Court of Appeals,[14] we held that:



A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. If he reneges on his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead its sharp repudiation.





Co is not unfamiliar with commercial transactions. He is a certified public accountant, who obtained his bachelor’s degree in accountancy from De La Salle University.  Certainly, he fully understood the import and consequences of what he was doing when he signed the promissory note. He even mortgaged his own properties to secure payment of the loan. His disclaimer, therefore, does not inspire belief.



Co also offered the alternative defense that the loan had already been extinguished by payment.  He testified that METRO RENT paid the loan a week before April 11, 1983.[15]



In Alonzo v. San Juan,[16] we held that the receipts of payment, although not exclusive, were deemed to be the best evidence of the fact of payment.



In this case, no receipt was presented to substantiate the claim of payment.  Instead, Co presented a Release of Real Estate Mortgage[17] dated April 11, 1983 to prove his assertion.  But a cancellation of mortgage is not conclusive proof of payment of a loan, even as it may serve as basis for an inference that payment of the principal obligation had been made.



Unfortunately for Co, no such inference can be made from the deed he presented.  The Release of Real Estate Mortgage reads:



The ADMIRAL UNITED SAVINGS BANK, a banking institution duly organized and existing under and by virtue of the laws of the Philippines, with offices at S. Medalla Building, EDSA corner Gen. MacArthur, Cubao, Quezon City, Metro-Manila, represented in this act by its First Vice-President, MR. EMMANUEL ALMANZOR, and its Asst. Vice President, MR. ROSSINI PETER G. GAMALINDA, the mortgagee of the properties described in Transfer Certificates of Title Nos. 3478 and 95759 of the Registry of Deeds of Laguna in the MORTGAGE executed on February 24, 1983 and acknowledged on the same date before Atty. Benjamin Baens del Rosario, Notary Public for and in Quezon City, Metro Manila who entered in his notarial protocol as Doc. No. 70, Page No. 15, Book No. IV, Series of 1983, in favor of the said Bank, by HENRY DE[LA] RAMA CO, hereby RELEASES and DISCHARGES the mortgage on the aforesaid Transfer Certificates of Title Nos. 3478 and 95759 of the Registry of Deeds of Laguna.[18]





The record is bereft of any showing that the promissory note was secured by a mortgage over properties covered by TCT Nos. 3478 and 95759.  Thus, it cannot be assumed that the mortgage executed on February 28, 1983, and released on April 11, 1983, was the security for the subject promissory note.  



In addition, TCT Nos. 3478 and 95759, the supposed collaterals for the loan, are still with the bank.[19]  If indeed there was payment of the principal obligation and cancellation of the mortgage in 1983, Co should have immediately demanded for the return of the TCTs.  This he failed to do.[20] It was only on June 11, 1987, after the filing of the complaint with the RTC, that Co demanded for the return of TCT Nos. 3478 and 95759.[21]  Co’s inaction militates against his assertion.



Jurisprudence is replete with rulings that in civil cases, the party who alleges a fact has the burden of proving it.  Burden of proof is the duty of a party to present evidence on the facts in issue necessary to prove the truth of his claim or defense by the amount of evidence required by law.[22]  Thus, a party who pleads payment as a defense has the burden of proving that such payment had, in fact, been made. When the plaintiff alleges nonpayment, still, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove nonpayment.[23]



Verily, Co failed to discharge this burden.  His bare testimonial assertion that METRO RENT paid the loan a week before April 11, 1983 or forty-five (45) days after [the] release of the loan, cannot be characterized as adequate and competent proof of payment. Accordingly, the CA rightly rejected his alternative defense of payment. 



Similarly, Co’s protestation that the cancellation of the real estate mortgage extinguished his obligation to pay the loan cannot be sustained.  We perceive it as a strained attempt to rationalize his untenable position. 



A real estate mortgage is but an accessory contract to secure the loan in the promissory note.  Its cancellation does not automatically result in the extinguishment of the loan. Being the principal contract, the loan is unaffected by the release or cancellation of the mortgage.  Certainly, a debt may subsist even without a mortgage.  Thus, in the case at bench, ADMIRAL can still run after Co for the payment of the loan under the promissory note, even after the release of the mortgage on the properties, especially because there was no showing that the mortgage was constituted as a security for the loan covered by the promissory note.



In sum, the CA committed no reversible error in holding Co liable for the payment of the loan.



However, we find a need to modify the damages awarded in favor of ADMIRAL.



The CA, in conformity with the terms of the promissory note, awarded to ADMIRAL the amount of P500,000.00 with interest at 18% per annum, and service charge at the rate of 10% per annum, computed from February 28, 1984 until fully paid.  It also awarded the sum equivalent to three percent (3%) per month from said due date until fully paid, by way of liquidated damages, and the sum equivalent to twenty-five (25%) of the total amount due in the concept of attorney’s fees.[24]



We sustain the interest rate of 18% per annum for being fair and reasonable.  However, equity dictates that we reduce the service charge, liquidated damages and attorney’s fees awarded in favor of ADMIRAL.



          In L.M. Handicraft Manufacturing Corporation v. Court of Appeals,[25] we held that a bank is only entitled to a maximum of 2% per annum service charge for amounts not over P500,000.00.  We, therefore, modify the amount of service charge from 10% to 2%, or P10,000.00 per annum beginning February 28, 1984 until full payment of the loan obligation.



As to the awards of liquidated damages and attorney’s fees, we acknowledge that the law allows a party to recover liquidated damages and attorney's fees under a written agreement, thus:



[T]he attorney's fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon defendant. The attorney's fees so provided are awarded in favor of the litigant, not his counsel.



On the other hand, the law also allows parties to a contract to stipulate on liquidated damages to be paid in case of breach. A stipulation on liquidated damages is a penalty clause where the obligor assumes a greater liability in case of breach of an obligation. The obligor is bound to pay the stipulated amount without need for proof on the existence and on the measure of damages caused by the breach.[26]





Nonetheless, courts are empowered to reduce such penalty if the same is iniquitous or unconscionable. Article 1229 of the Civil Code states:



ART. 1229.      The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.





This sentiment is echoed in Article 2227 of the same Code:



ART. 2227.      Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.





ADMIRAL is more than adequately protected from a possible breach of contract because of the stipulations on the payment of interest, service fee, liquidated damages and attorney’s fees.   Thus, this Court finds the award of liquidated damages and attorney’s fees by the CA exorbitant.  After all, liquidated damages and attorney’s fees serve the same purpose, that is, as penalty for breach of contract.[27] Accordingly, we reduce the liquidated damages to P150,000.00, and attorney’s fees to 10% of the principal loan or P50,000.00.



WHEREFORE, the petition is DENIED.  The assailed Decision of the Court of Appeals in CA-G.R. CV No. 42167 is AFFIRMED with MODIFICATIONS.  Petitioner Henry Dela Rama Co is ordered to pay Admiral United Savings Bank P500,000.00, with interest at 18% per annum from February 28, 1984 until the loan is fully paid.  In addition, Co is adjudged liable to pay ADMIRAL a service charge equivalent to 2% of the principal loan, or P10,000.00 per year also from February 28, 1984 until the full payment of the loan; P150,000.00, as liquidated damages; and  P50,000.00, as attorney’s fees.



SO ORDERED.

Jurisprudence: G.R. No. 117660. December 18, 2000

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.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review challenging the decision[1] dated October 17, 1994 of the 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 attorney’s 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 attorney’s 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 attorney’s 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,[3] the 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[4]to the previous Memorandum of  Agreement.  The new arrangement 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 Cariño 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,[6] payable to the respondent bank.  Thereafter, the bank released the proceeds of the 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 bank’s 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 Loan	Amount	Payment Due Date	Payment Extension Dates
Civil Case 86-37374    August 12, 1982	P    78,212.29	Nov.  10, 1982	Feb.    8, 1983 May    9, 1983 Aug.    7, 1983
Civil Case 86-37388    July 19, 1982	P  632,911.39	Jan.    15, 1983	May   16, 1983 Aug.   14, 1983
Civil Case 86-37543    September 14, 1982    October 1, 1982	P  510,000.00 P  494,936.71	March 13, 1983 March 30, 1983	June   11, 1983 Sept.    9, 1983 June   28, 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 court’s 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.[8] He has the right, after paying the holder, to obtain 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.[9] Suretyship is defined as the relation which exists where one person has undertaken 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.[10] The surety’s liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.[11] And the creditor may proceed against 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.[13] In order that a novation can take place, the concurrence of the following requisites[14] are indispensable:

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,[15] it must be clearly and unequivocally shown.[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.[18] But respondent appellate 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.