cases

212 SCRA 448 – Mercantile Law – Negotiable Instruments Law
– Negotiable Instruments in General – Bearer Instrument –
Certificate of Time Deposit

In April 1983, de la Cruz’ loan with Security bank matured and
no payment was made by de la Cruz. Security Bank eventually
set-off the time deposit to pay off the loan.

In 1982, Angel de la Cruz obtained certificates of time deposit
(CTDs) from Security Bank and Trust Company for the former’s
deposit with the said bank amounting to P1,120,000.00. The said
CTDs are couched in the following manner:

Caltex sued Security Bank to compel the bank to pay off the
CTDs. Security Bank argued that the CTDs are not negotiable
instruments even though the word “bearer” is written on their
face because the word “bearer” contained therein refer to
depositor and only the depositor can encash the CTDs and no
one else.

This is to Certify that B E A R E R has deposited in this
Bank the sum of _______
Pesos,
Philippine
Currency,
repayable to said depositor _____ days. after date, upon
presentation and surrender of this certificate, with interest at
the rate of ___ % per cent per annum.
Angel de la Cruz subsequently delivered the CTDs to Caltex in
connection with the purchase of fuel products from Caltex.
In March 1982, Angel de la Cruz advised Security Bank that he
lost the CTDs. He executed an affidavit of loss and submitted it
to the bank. The bank then issued another set of CTDs. In the
same month, Angel de la Cruz acquired a loan of P875,000.00
and he used his time deposits as collateral.
In November 1982, a representative from Caltex went to
Security Bank to present the CTDs (delivered by de la Cruz) for
verification. Caltex advised Security Bank that de la Cruz
delivered Caltex the CTDs as security for purchases he made
with the latter. Security Bank refused to accept the CTDs and
instead required Caltex to present documents proving the
agreement made by de la Cruz with Caltex. Caltex however
failed to produce said documents.

ISSUE: Whether or not the certificates of time deposit are
negotiable.
HELD: Yes. The CTDs indicate that they are payable to the
bearer; that there is an implication that the depositor is the bearer
but as to who the depositor is, no one knows. It does not say on
its face that the depositor is Angel de la Cruz. If it was really the
intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having
the word “BEARER” stamped on the space provided for the
name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof.
Thus, de la Cruz is the depositor “insofar as the bank is
concerned,” but obviously other parties not privy to the
transaction between them would not be in a position to know
that the depositor is not the bearer stated in the CTDs.
However, Caltex may not encash the CTDs because although the
CTDs are bearer instruments, a valid negotiation thereof for the

true purpose and agreement between Caltex and De la Cruz,
requires both delivery and indorsement. As discerned from the
testimony of Caltex’ representative, the CTDs were delivered to
them by de la Cruz merely for guarantee or security and not as
payment.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the
reversal of the decision promulgated by respondent court on
March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with
modifications, the earlier decision of the Regional Trial Court of
Manila, Branch XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

1. On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's
Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs)
to herein plaintiff in connection with his purchased of fuel
products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 4850).
4. On March 18, 1982, Angel dela Cruz executed and delivered
to defendant bank the required Affidavit of Loss (Defendant's
Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained
a loan from defendant bank in the amount of Eight Hundred
Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time
Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated
time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN, February 9,

1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz"
as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter setoff and applied the time deposits in question to the payment of
the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower
court's dismissal of the complaint, hence this petition wherein
petitioner faults respondent court in ruling (1) that the subject
certificates of deposit are non-negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a
holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce
relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced
below to provide a better understanding of the issues involved in
this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank
the sum of PESOS: FOUR THOUSAND ONLY, SECURITY
BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon
presentation and surrender of this certificate, with interest at the
rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are nonnegotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the amount
deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever
purports to be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who
made the deposit and further engages itself to pay said depositor
the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby
hold that the CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to
become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

Atty. Calida:

(b) Must contain an unconditional promise or order to pay a sum
certain in money;

q And no other person or entity or company, Mr. Witness?
witness:

(c) Must be payable on demand, or at a fixed or determinable
future time;

a None, your Honor. 7

(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the
law for negotiability. The parties' bone of contention is with
regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back
in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of
the bank, the depositor referred (sic) in these certificates states
that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel
dela Cruz was the one who cause (sic) the amount.

xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these
certificates of time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the writing,
that is, from the face of the instrument itself. 9 In the construction
of a bill or note, the intention of the parties is to control, if it can
be legally ascertained. 10 While the writing may be read in the
light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it
or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as

contradistinguished from what their words express, but what is
the meaning of the words they have used. What the parties
meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or,
for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the
amount to Angel de la Cruz only, it could have with facility so
expressed that fact in clear and categorical terms in the
documents, instead of having the word "BEARER" stamped on
the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof.
Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned,"
but obviously other parties not privy to the transaction between
them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require
any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties
thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable
Instruments Law and calls for the application of the elementary
rule that the interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on
the CTDs. This time, the answer is in the negative. The records
reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs
amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between
it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz' purchases of its fuel products. Any doubt
as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ".
. . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products"
(Emphasis ours.) 13 This admission is conclusive upon petitioner,
its protestations notwithstanding. Under the doctrine of estoppel,
an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against
the person relying thereon. 14 A party may not go back on his
own acts and representations to the prejudice of the other party
who relied upon them. 15 In the law of evidence, whenever a
party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true,
and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act, or omission, be permitted to falsify
it. 16

If it were true that the CTDs were delivered as payment and not
as security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the
court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or
dates ofpayment of the alleged indebtedness of Angel de la Cruz
to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the
latter's alleged indebtedness to it, plaintiff corporation opposed
the motion. 18 Had it produced the receipt prayed for, it could
have proved, if such truly was the fact, that the CTDs were
delivered as payment and not as security. Having opposed the
motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in
Intergrated Realty Corporation, et al. vs. Philippine National
Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was
used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge.
However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it
to have been a deposit of the property as collateral security. It

has been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt continues
in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an
intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs
the question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the
holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In
the present case, however, there was no negotiation in the sense
of a transfer of the legal title to the CTDs in favor of petitioner
in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder
for value by reason of his lien. Accordingly, a negotiation for
such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of nonpayment of the principal obligation, must be contractually
provided for.
The pertinent law on this point is that where the holder has a lien

on the instrument arising from contract, he is deemed a holder
for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor
and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:

Civil Code specifically declares:

Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.

Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien
holder of the CTDs, neither proved the amount of its credit or
the extent of its lien nor the execution of any public instrument
which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter
has definitely the better right over the CTDs in question.

Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere
rule of adjective law prescribing the mode whereby proof may
be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the
execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel
de la Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the

Art. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.

Finally, petitioner faults respondent court for refusing to delve
into the question of whether or not private respondent observed
the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor,
on the ground that petitioner failed to raised that issue in the
lower court. 28
On this matter, we uphold respondent court's finding that the
aspect of alleged negligence of private respondent was not
included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 29 The issues agreed
upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of the

assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation
of some doctrinal authorities, the foregoing enumeration does
not include the issue of negligence on the part of respondent
bank. An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues
necessary to the disposition of a case are properly raised. Thus,
to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which
they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at
a pre-trial conference bars the consideration of other questions
on appeal. 32

To accept petitioner's suggestion that respondent bank's
supposed negligence may be considered encompassed by the
issues on its right to preterminate and receive the proceeds of the
CTDs would be tantamount to saying that petitioner could raise
on appeal any issue. We agree with private respondent that the
broad ultimate issue of petitioner's entitlement to the proceeds of
the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent
bank's supposed negligence is only one. Hence, petitioner's
submission, if accepted, would render a pre-trial delimitation of
issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was
raised in the court below, petitioner still cannot have the odds in
its favor. A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case of lost
instruments payable to bearer, which it invokes, will reveal that
said provisions, even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not mandatory. The
very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends due
or about to become due, be not paid a third person, as well as in
order to prevent the ownership of the instrument that a duplicate
be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not

mandatory but discretionary on the part of the "dispossessed
owner" to apply to the judge or court of competent jurisdiction
for the issuance of a duplicate of the lost instrument. Where the
provision reads "may," this word shows that it is not mandatory
but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37
Articles 548 to 558 of the Code of Commerce, on which
petitioner seeks to anchor respondent bank's supposed
negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer
instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for
some valid ground, may elect to refuse to issue a replacement of
the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans compliance with the
procedure outlined therein, and none establishes a mandatory
precedent requirement therefor.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC.,
HENRY WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION,
respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

SO ORDERED.

This is a petition for certiorari under Rule 45 of the Rules of
Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated
July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

The antecedent facts culled from the petition are as follows:

WHEREFORE, on the modified premises above set forth, the
petition is DENIED and the appealed decision is hereby
AFFIRMED.

Republic of the Philippines

The petitioner is a corporation engaged in the logging business.
It had for its program of logging activities for the year 1978 the
opening of additional roads, and simultaneous logging

operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao
Oriental. For this purpose, it needed two (2) additional units of
tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic
Gulf & Pacific Company of Manila, through its sister company
and marketing arm, Industrial Products Marketing (the "sellerassignor"), a corporation dealing in tractors and other heavy
equipment business, offered to sell to petitioner-corporation two
(2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the
other an HDD-16-B.
In order to ascertain the extent of work to which the tractors
were to be exposed, (t.s.n., May 28, 1980, p. 44) and to
determine the capability of the "Used" tractors being offered,
petitioner-corporation requested the seller-assignor to inspect the
job site. After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of
the machines and availability of parts. (t.s.n., May 28, 1980, pp.
59-66).

deed of sale with chattel mortgage with promissory note was
executed (Exh. "2").
Simultaneously with the execution of the deed of sale with
chattel mortgage with promissory note, the seller-assignor, by
means of a deed of assignment (E exh. " 1 "), assigned its rights
and interest in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2)
units of "Used" tractors to the petitioner-corporation's job site
and as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when
one of the tractors broke down and after another nine (9) days,
the other tractor likewise broke down (t.s.n., May 28, 1980, pp.
68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally
advised the seller-assignor of the fact that the tractors broke
down and requested for the seller-assignor's usual prompt
attention under the warranty (E exh. " 5 ").

With said assurance and warranty, and relying on the sellerassignor's skill and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2) units
of "Used" Allis Crawler Tractors. It also paid the down payment
of Two Hundred Ten Thousand Pesos (P210,000.00).

In response to the formal advice by petitioner Rodolfo T.
Vergara, Exhibit "5," the seller-assignor sent to the job site its
mechanics to conduct the necessary repairs (Exhs. "6," "6-A,"
"6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did
not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n.,
May 28, 1980, p. 78).

On April 5, 1978, the seller-assignor issued the sales invoice for
the two 2) units of tractors (Exh. "3-A"). At the same time, the

Because of the breaking down of the tractors, the road building
and simultaneous logging operations of petitioner-corporation

were delayed and petitioner Vergara advised the seller-assignor
that the payments of the installments as listed in the promissory
note would likewise be delayed until the seller-assignor
completely fulfills its obligation under its warranty (t.s.n, May
28, 1980, p. 79).

sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise
prayed for such other and further relief as would be just under
the premises.

Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and
have them reconditioned, and thereafter to offer them for sale.
The proceeds were to be given to the respondent and the excess,
if any, to be divided between the seller-assignor and petitionercorporation which offered to bear one-half (1/2) of the
reconditioning cost (E exh. " 7 ").

In a decision dated April 20, 1981, the trial court rendered the
following judgment:

No response to this letter, Exhibit "7," was received by
petitioner-corporation and despite several follow-up calls,
seller-assignor did nothing with regard to the request, until
complaint in this case was filed by the respondent against
petitioners, the corporation, Wee, and Vergara.

the
the
the
the

The complaint was filed by the respondent against the
petitioners for the recovery of the principal sum of One Million
Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty
One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter
at the rate of twelve (12%) percent per annum, attorney's fees of
Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the
dismissal of the complaint and asking the trial court to order the
respondent to pay the petitioners damages in an amount at the

WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their
official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED
NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY ONE THOUSAND
SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86)
as of August 15, 1979 and accruing interest thereafter at the rate
of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the
costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the
motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate
Court and assigned therein the following errors:

I

xxx xxx xxx

THAT THE LOWER COURT ERRED IN FINDING THAT
THE SELLER ATLANTIC GULF AND PACIFIC COMPANY
OF MANILA DID NOT APPROVE DEFENDANTSAPPELLANTS CLAIM OF WARRANTY.

Holding that breach of warranty if any, is not a defense available
to appellants either to withdraw from the contract and/or demand
a proportionate reduction of the price with damages in either
case (Art. 1567, New Civil Code). We now come to the issue as
to whether the plaintiff-appellee is a holder in due course of the
promissory note.

II
THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE
AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial
court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from the
fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a contract
of sale unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is any, as in
this case, does not lie in favor of the appellants and against the
plaintiff-appellee who is the assignee of the promissory note and
a holder of the same in due course. Warranty lies in this case
only between Industrial Products Marketing and Consolidated
Plywood Industries, Inc. The plaintiff-appellant herein upon
application by appellant corporation granted financing for the
purchase of the questioned units of Fiat-Allis Crawler,Tractors.

To begin with, it is beyond arguments that the plaintiff-appellee
is a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting
or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the
Financing Act.
A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and signed by the
maker; it contains an unconditional promise to pay a certain sum
of money payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was
taken in the conditions that the note was complete and regular
upon its face before the same was overdue and without notice,
that it had been previously dishonored and that the note is in
good faith and for value without notice of any infirmity or defect
in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any
defect of title of prior parties and free from defenses available to

prior parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon (Sec. 57, NIL); the appellants engaged that they would
pay the note according to its tenor, and admit the existence of the
payee IPM and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to
law and evidence, We find the appeal without merit and thus
affirm the decision in toto. With costs against the appellants. (pp.
50-55, Rollo)
The petitioners' motion for reconsideration of the decision of
July 17, 1985 was denied by the Intermediate Appellate Court in
its resolution dated October 17, 1985, a copy of which was
received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:

AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT
ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR
PAYMENT OF THE PROMISSORY NOTE BECAUSE:

THE

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;

I.

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY
FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT
A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE
LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO
BEARER.

V.

II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE:

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY
THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF
THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR
USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN
AFFIXED THEREON OR CANCELLED.

adopted by the respondent appellate court, that "14 days after
delivery, the first tractor broke down and 9 days, thereafter, the
second tractor became inoperable" are sustained by the records.
The petitioner was clearly a victim of a warranty not honored by
the maker.
The Civil Code provides that:

The petitioners prayed that judgment be rendered setting aside
the decision dated July 17, 1985, as well as the resolution dated
October 17, 1985 and dismissing the complaint but granting
petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to
the petition filed on February 20, 1986, contended that the
petition was filed out of time; that the promissory note is a
negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in
question is a negotiable instrument so as to bar completely all
the available defenses of the petitioner against the respondentassignee.
Preliminarily, it must be established at the outset that we
consider the instant petition to have been filed on time because
the petitioners' motion for reconsideration actually raised new
issues. It cannot, therefore, be considered pro- formal.

ART. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have, should
they render it unfit for the use for which it is intended, or should
they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible,
or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to
the seller the particular purpose for which the goods are
acquired, and it appears that the buyer relies on the sellers skill
or judge judgment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;
xxx xxx xxx

The petition is impressed with merit.
First, there is no question that the seller-assignor breached its
express 90-day warranty because the findings of the trial court,

ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.

xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any
hidden faults or defects in the thing sold even though he was not
aware thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in
the thing sold. (Emphasis supplied).

ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
xxx xxx xxx

It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule,
extends to the corporation to whom it assigned its rights and
interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in
which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses
may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the
tractors broke down, the petitioner-corporation notified the
seller-assignor's sister company, AG & P, about the breakdown
based on the seller-assignor's express 90-day warranty, with
which the latter complied by sending its mechanics. However,
due to the seller-assignor's delay and its failure to comply with
its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally
rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its
contract with the seller-assignor, necessarily can no longer sue
the seller-assignor except by way of counterclaim if the sellerassignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles
(35 SCRA 102) we held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is
only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or
was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first
file suit and wait for adjudgement before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the

other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)

When instrument is payable to order.

Going back to the core issue, we rule that the promissory note in
question is not a negotiable instrument.

xxx xxx xxx

The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to
pay to the INDUSTRIAL PRODUCTS MARKETING, the sum
of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be
payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. . . .

These are the only two ways by which an instrument may be
made payable to order. There must always be a specified person
named in the instrument. It means that the bill or note is to be
paid to the person designated in the instrument or to any person
to whom he has indorsed and delivered the same. Without the
words "or order" or"to the order of, "the instrument is payable
only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but will
merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against
the latter." (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never
be a holder in due course but remains a mere assignee of the
note in question. Thus, the petitioner may raise against the
respondent all defenses available to it as against the sellerassignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the
seller-assignor when it was sued by the respondent-assignee
because the petitioner's defenses apply to both or either of either

of them. Actually, the records show that even the respondent
itself admitted to being a mere assignee of the promissory note
in question, to wit:

ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN.,
February 13, 1980).

ATTY. PALACA:
Did we get it right from the counsel that what is being assigned
is the Deed of Sale with Chattel Mortgage with the promissory
note which is as testified to by the witness was indorsed?
(Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do
you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a
transaction between two persons; what is assigned are rights, the
rights of the mortgagee were assigned to the IFC Leasing &
Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel
mortgage were assigned; . . . you want to make a distinction, one
is an assignment of mortgage right and the other one is
indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one
single transaction?

Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the
respondent cannot be a holder in due course for a more
significant reason.
The evidence presented in the instant case shows that prior to the
sale on installment of the tractors, there was an arrangement
between the seller-assignor, Industrial Products Marketing, and
the respondent whereby the latter would pay the seller-assignor
the entire purchase price and the seller-assignor, in turn, would
assign its rights to the respondent which acquired the right to
collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing
the sale on installment of the tractors were all executed on the
same day by and among the buyer, which is herein petitioner
Consolidated Plywood Industries, Inc.; the seller-assignor which
is the Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the respondent had
actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not defective.
The respondent knew that when the tractors turned out to be
defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from the

petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the
same with actual knowledge of the foregoing facts so that its
action in taking the instrument amounted to bad faith, is not a
holder in due course. As such, the respondent is subject to all
defenses which the petitioners may raise against the sellerassignor. Any other interpretation would be most inequitous to
the unfortunate buyer who is not only saddled with two useless
tractors but must also face a lawsuit from the assignee for the
entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.

any infirmity in the instrument of deffect in the title of the person
negotiating it

Lastly, the respondent failed to present any evidence to prove
that it had no knowledge of any fact, which would justify its act
of taking the promissory note as not amounting to bad faith.

We subscribe to the view of Campos and Campos that a
financing company is not a holder in good faith as to the buyer,
to wit:

Sections 52 and 56 of the Negotiable Instruments Law provide
that: negotiating it.

In installment sales, the buyer usually issues a note payable to
the seller to cover the purchase price. Many times, in pursuance
of a previous arrangement with the seller, a finance company
pays the full price and the note is indorsed to it, subrogating it to
the right to collect the price from the buyer, with interest. With
the increasing frequency of installment buying in this country, it
is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will , the
finance company will be subject to the defense of failure of
consideration and cannot recover the purchase price from the
buyer. As against the argument that such a rule would seriously
affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:

xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. — A holder in due course is a holder who has taken
the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of

xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To
constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

It may be that our holding here will require some changes in
business methods and will impose a greater burden on the
finance companies. We think the buyer-Mr. & Mrs. General

Public-should have some protection somewhere along the line.
We believe the finance company is better able to bear the risk of
the dealer's insolvency than the buyer and in a far better position
to protect his interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on finance companies it is
a potent argument in favor of a rule which win afford public
protection to the general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance Co. v. Martin,
63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos,
Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange
Country Machine Works (34 Cal. 2d 766) involving similar facts,
it was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted
as a party to it. When a finance company actively participates in
a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the
transaction.
In like manner, therefore, even assuming that the subject
promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on installment
of the subject two Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. It follows that the respondent's
rights under the promissory note involved in this case are subject
to all defenses that the petitioners have against the sellerassignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable instrument

is subject to the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral
issues, we find that both the trial and respondent appellate court
erred in holding the promissory note in question to be
negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein,
there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather
unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the
respondent appellate court dated July 17, 1985, as well as its
resolution dated October 17, 1986, are hereby ANNULLED and
SET ASIDE. The complaint against the petitioner before the trial
court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

Simultaneously, the seller assigned the deed of sale with chattel
mortgage and promissory note to respondent. The used tractors
were then delivered but barely 14 days after, the tractors
broke down. The seller sent mechanics but the tractors were
not repaired accordingly as they were no longer serviceable.
Petitioner would delay the payments on the promissory notes
until the seller completes its obligation under the warranty.

Thereafter, a collection suit was filed against petitioner for the
payment of the promissory note.

HELD:
CONSOLIDATED PLYWOOD V. IFC
149 SCRA 448

FACTS:
Petitioner bought from Atlantic Gulf and Pacific Company,
through its sister company Industrial Products Marketing, two
used tractors. Petitioner was issued a sales invoice for the
two used tractors. At the same time, the deed of sale with
chattel mortgage with promissory note was issued.

It is patent that the seller is liable for the breach in warranty
against the petitioner.
This liability as a general rule
extends to the corporation to whom it assigned its rights and
interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is
negotiable, in which case, the latter’s rights are based on a
negotiable instrument and assuming further that
the
petitioner’s defense may not prevail against it.
The promissory note in question is not a negotiable
instrument.
The promissory note in question lacks the socalled words of negotiability. And as such, it follows that the
respondent can never be a holder in due course but remains
merely an assignee of the note in question. Thus, the
petitioner may raise against the respondents all defenses

available to it against the seller.

(seller-assignor who violatedwarranty) > IFC (holder in due
course or merely an assignee?)
1 Consolidated Plywood Industries, Inc (Consolidated) is
a corporation engaged in the logging business
2
For the purpose of opening of additional roads and
simultaneous logging operations along the route of roads, it
needed 2 additional units of tractors
3 Atlantic Gulf & Pacific Company of Manila, through its
sister company and marketing arm, Industrial Products
Marketing (IPM) (seller-assignor) offered to sell 2 "Used"
Allis Crawler Tractors

Negotiable Instruments Case Digest: Consolidated Plywood
Industries, Inc V. IFC Leasing And Acceptance Corp.
G.R. No. 72593 April 30, 1987

4
IPM inspected the job site and assured that the tractors were
fit for the job and gave a 90-days performance warranty of
the machines and availability of parts.

Consolidated purchased on installment.

Lessons Applicable: Requisites of negotiability to antedated and
postdated instruments (Negotiable Instruments Law)

1
It paid the down payment of P210,000

FACTS: Consolidated (buyer pays promossor note) > IPM

5

April 5, 1978: IPM issued the sales invoice and the

deed of sale with chattel mortgage withpromissory note was
executed

reconditioning cost
12 IPM didn't do anything

6
IPM, by means of a deed of assignment, assigned its rights
and interest in the chattelmortgage in favor of IFC Leasing
and Acceptance Corp. (IFC)

13 IFC filed against Consolidated for the recovery of the
principal sum P1,093,789.71, interest and attorney's fees
14 RTC and CA: favored IFC

7 After 14 days, one of the tractors broke down and after
another 9 days, the other tractor too
8 Because of the breaking down of the tractors, the road
building and simultaneous logging operations were delayed
9

Consolidated unilaterally rescinded the contract w/ IPM

10 April 7, 1979: Wee of Consolidated asked IPM to pull
out the units and have them reconditioned, and thereafter to
offer them for sale.
11
The proceeds were to be given to IFC and the excess will be
divided between:
IPM

1

Consolidated which offered to bear one-half 1/2 of the

15 breach of warranty if any, is not a defense available to
Consolidated either to withdraw from the contract and/or
demand a proportionate reduction of the price with damages
in either case
ISSUE: W/N IFC is a holder in due course of the negotiable
promissory note so as to bar completely all the available
defenses of the Consolidated against IPM
HELD: CA reversed and set aside
16 Consolidated is a victim of warranrty
17
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have, should
they render it unfit for the use for which it is intended, or should
they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or

would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible,
or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.

rights and interests

ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:

1
assuming the note is negotiable

(1) Where the buyer, expressly or by implication makes known to
the seller the particular purpose for which the goods are
acquired, and it appears that the buyer relies on the sellers skill
or judge judgment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

1
Consolidated's defenses may not prevail against it.

xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any
hidden faults or defects in the thing sold even though he was not
aware thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in
the thing sold. (Emphasis supplied).
18 GR: extends to the corporation to whom it assigned its

19 EX: assignee is a holder in due course of the promissory
note

20 Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
xxx xxx xxx ART. 1567. In the cases of articles 1561, 1562,
1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis
supplied)
21 Consolidated, having unilaterally and extrajudicially
rescinded its contract with the seller-assignor, can no longer
sue IPM except by way of counterclaim if IPM sues it
because of the rescission

22 Considering that paragraph (d), Section 1 of the
Negotiable Instruments Law requires that a promissory note
"must be payable to order or bearer" - in this case it is nonnegotiable
1
= expression of consent that the instrument may be
transferred
1
consent is indispensable since a maker assumes greater risk
under a negotiable instrument than under a non-negotiable
one
23 When instrument is payable to order

27 Even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the
IFC cannot be a holder in due course due to absence of GF
for knowing that the tractors were defective
28
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. - A holder in due course is a holder who has taken the
instrument under the following conditions:
xxx xxx xxx xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of
any infirmity in the instrument of deffect in the title of the person
negotiating it

24
SEC. 8. WHEN PAYABLE TO ORDER. - The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. . . .
25 Without the words "or order" or"to the order of, "the
instrument is payable only to the person designated therein
and is therefore non-negotiable.

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - To
constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

26 Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but
will merely "step into the shoes" of the person designated in
the instrument and will thus be open to all defenses available
against the latter

29 We believe the finance company is better able to bear
the risk of the dealer's insolvency than the buyer and in a far
better position to protect his interests against unscrupulous
and insolvent dealers. . .

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 xEduardo 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]

FIRST DIVISION
[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA,
LLAMAS, respondent.

petitioner, vs.

DIONISIO

V.

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

DECISION

The Antecedents

PANGANIBAN, J.:

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

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]

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, anotherP40,000.00
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;

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

3) Cost of this suit.[6]

Petitioner
consideration:

Ruling of the Court of Appeals

I

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.

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:

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

submits

the

following

issues

for

our

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.

pleadings or a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.

II

First Issue:

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.

Novation

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

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:

1) There must be a previous valid obligation.

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.

3) The old contract must be extinguished.

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
merelymodificatory 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:

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

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.

that the present respondent has done away with his right to exact
fulfillment from either of the solidary debtors.[25]

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:

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]

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,

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.

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, QuezonCity, 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 23 rd 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]

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

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:

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

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]

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

Lessons Applicable: Consideration and Accommodation Party
(Negotiable Instruments Law)
FACTS:
1 Romeo Garcia and Eduardo de Jesus borrowed P400K
and issued a promissory note binding themselves solidarily
to Dionisio Llamas
2 Llamas filed a complaint for sum of money and
damages against Garcia and de Jesus.
3
Garcia: signed merely as an accommodation party
4

RTC: favored Llamas against de Jesus

CA: no novation

ISSUE: W/N de Jesus is not be liable as an accomodation party
because note is non-negotiable
Garcia V. Llamas (2003)
G.R. No. 154127 December 8, 2003

HELD: YES. CA Affirmed
5 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 - NOT in this case
6 By its terms, the note was made payable to a specific
person rather than to bearer or to order- a requisite for
negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the
NILs provisions on the liabilities and defenses of an
accommodation party.
7 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
8
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.
1 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.
1 The relation between an accommodation party and the
party accommodated is, in effect, one of principal and surety