Consolidated Cases for Negotiable Instrument Law

Friday
5:30pm – 8:30pm
FCJ 207
Reporter: Angelica Mae P. Yuson

Case: ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

G.R. No. 187769 June 4, 2014

Facts:
• Petitioner and respondent Gutierrez entered into a business venture together.

• Patrimonio issued pre-signed checks and entrusted them to Gutierrez. Although signed, the checks has
no payee’s name, date or amount.

• Patrimonio had specific instruction not to fill them out without previous notification to and approval by
him.

• Subsequently, without Ptrimonio’s knowledge and consent, Gutierrez went to Marasigan to secure a
loan in the amount of P200,000 on the excuse that Patrimonio needed the money for the construction of his
house. Marasigan then acceded to Gutierrez’s request and gave him the money.

• Gutierrez simultaneously delivered to Marasigan one of the blank checks issued by Patrimonio with the
blank portions filled out as “cash” and “Two Hundred Thousand Pesos Only” and the amount of P200,000.

• Marasigan then deposited the checks but was dishonored. He sought for Gutierrez but to no avail. He
then sent demand letters to petitioner.

• The petitioner then filed before the RTC a complaint for the declaration of the nullity of the loan.

• Ruling of the RTC: The RTC ruled in favor of Marasigan. It found that the petitioner, in issuing the pre-
signed blank checks, had the intention of issuing a negotiable instrument even with specific instructions to
Gutierrez not to negotiate without his approval. Moreover, the RTC declared Marasigan as holder in due course.

• The petitioner then elevated the case to the CA contending that Marasigan is not a holder in due course.

• Ruling of the CA: The CA affirmed the RTC ruling, although on different factual findings. Hence, the
case.

Issues:
1. W/N the petitioner authorized the borrowing
2. W/N Gutierrez completely filled out the subject check strictly under the petitioner’s authority; and
3. W/N Marasigan is a holder in due course

Held:
1st Issue:
• The contract of loan entered into by Gutierrez in behalf of the petitioner should nullified for being void.
Hence, he is not bound by the contract of loan.
• The essential requisites of a valid contract:
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established
• In this case, consent is lacking since Gutierrez did not have the petitioner’s written or verbal consent to
enter into a contract of loan.

2nd Issue:
• Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person making the signature in order that the
paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as
such for any amount. In order, however, that any such instrument when completed may be enforced against
any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with
the authority given and within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance with the authority given and within a reasonable time.
• The above provision applies to an incomplete but delivered instrument.
• The Court held that the check was not completed strictly under the authority given by the petitioner.
• Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the
authority when he used the check to pay the loan he supposedly contracted for the construction of petitioner’s
house. This is a clear violation of the petitioner’s instruction to use the checks for the expenses of their business
venture (Slam Dunk). It cannot therefore be validly concluded that the check was completely strictly in
accordance with the authority given by the petitioner.
• Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal
defense that the blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan
has no right to enforce payment against the petitioner and the latter cannot be obliged to pay the face value of
the check.

3rd Issue:
• Marsigan is not a holder in due course.
• Sec. 52 — 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 the person negotiating it.(emphasis supplied)
Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for
value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is necessary that
at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of
the person negotiating it.
• It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted
with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is
required is knowledge of such facts that his action in taking the note amounted bad faith.
• In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of
loan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith.
Reporter: Reggie Ann S. Santos

Case: Rizal Commercial Banking Corporation vs Hi-Tri Development Corporation

G.R. NO. 192413 JUNE 13, 2012

Facts:

Luz Bakunawa and her husband Manuel, now deceased (Spouses Bakunawa) are registered owners of
six (6) parcels of land covered by TCT Nos. 324985 and 324986 of the Quezon City Register of Deeds, and
TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. These lots were sequestered by
the Presidential Commission on Good Government [(PCGG)].

Sometime in 1990, a certain Teresita Millan (Millan), through her representative, Jerry Montemayor,
offered to buy said lots for ₱6,724,085.71, with the promise that she will take care of clearing whatever
preliminary obstacles there may be to effect a completion of the sale. The Spouses Bakunawa gave to Millan the
Owners Copies of said TCTs and in turn, Millan made a downpayment of ₱1,019,514.29 for the intended
purchase. However, for one reason or another, Millan was not able to clear said obstacles. As a result, the
Spouses Bakunawa rescinded the sale and offered to return to Millan her downpayment of ₱1,019,514.29.
However, Millan refused to accept back the ₱1,019,514.29 down[]payment. Consequently, the Spouses
Bakunawa, through their company, the Hi-Tri Development Corporation (Hi-Tri) took out on October 28, 1991,
a Managers Check from RCBC-Ermita in the amount of ₱1,019,514.29, payable to Millan’s company Rosmil
Realty and Development Corporation (Rosmil) c/o Teresita Millan and used this as one of their basis for a
complaint against Millan and Montemayor which they filed with the Regional Trial Court of Quezon City,
Branch 99. On January 31, 2003, during the pendency of the above mentioned case and without the knowledge
of [Hi-Tri and Spouses Bakunawa], RCBC reported the ₱1,019,514.29-credit existing in favor of Rosmil to the
Bureau of Treasury as among its unclaimed balances as of January 31, 2003. Allegedly, a copy of the Sworn
Statement executed by Florentino N. Mendoza, Manager and Head of RCBCs Asset Management,
Disbursement " Sundry Department (AMDSD) was posted within the premises of RCBC-Ermita. 4

Issue: * *Whether or not the escheat of the account in RCBC is proper.

Held:

*No. An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank (drawee),
requesting the latter to pay a person named therein (payee) or to the order of the payee or to the bearer, a named
sum of money. The issuance of the check does not of itself operate as an assignment of any part of the funds in
the bank to the credit of the drawer. Here, the bank becomes liable only after it accepts or certifies the check.
After the check is accepted for payment, the bank would then debit the amount to be paid to the holder of the
check from the account of the depositor-drawer.

There are checks of a special type called managers or cashiers checks. These are bills of exchange drawn
by the banks manager or cashier, in the name of the bank, against the bank itself. Typically, a managers or a
cashiers check is procured from the bank by allocating a particular amount of funds to be debited from the
depositors account or by directly paying or depositing to the bank the value of the check to be drawn. Since the
bank issues the check in its name, with itself as the drawee, the check is deemed accepted in advance.
Ordinarily, the check becomes the primary obligation of the issuing bank and constitutes its written promise to
pay upon demand. 4

Nevertheless, the mere issuance of a managers check does not ipso facto work as an automatic transfer
of funds to the account of the payee. In case the procurer of the managers or cashiers check retains custody of
the instrument, does not tender it to the intended payee, or fails to make an effective delivery, we find the
following provision on undelivered instruments under the Negotiable Instruments Law applicable: 5

Sec. 16. Delivery; when effectual; when presumed5. Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing,
as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is
in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them
liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is
proved. 5

Since there was no delivery, presentment of the check to the bank for payment did not occur. An order
to debit the account of respondents was never made. In fact, petitioner confirms that the Managers Check was
never negotiated or presented for payment to its Ermita Branch, and that the allocated fund is still held by the
bank. As a result, the assigned fund is deemed to remain part of the account of Hi-Tri, which procured the
Managers Check. The doctrine that the deposit represented by a managers check automatically passes to the
payee is inapplicable, because the instrument although accepted in advance remains undelivered. Hence,
respondents should have been informed that the deposit had been left inactive for more than 10 years, and that it
may be subjected to escheat proceedings if left unclaimed.
Reporter: Mary Jane F. Diagro

Case: Violago VS. BA Finance Corp.

G.R. No. 158262 July 21, 2008

FACTS:
1983: Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to sell a Toyota
Cressida Model 1983 to increase the sales quota to his cousin, Pedro F. Violago and his wife, Florencia.
Spouses would just have to pay a down payment of PhP 60.5K while the balance would be financed by BA
Finance. The spouses would pay the monthly installments to BA Finance while Avelino would take care of the
documentation and approval of financing of the car.
August 4, 1983: the spouses and Avelino signed a promissory note under which they bound themselves
to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP
5,822.25 a month, the first installment to be due and payable on September 16, 1983.

Avelino prepared a Disclosure Statement of Loan/Credit Transportation which showed the net purchase
price of the vehicle, down payment, balance, and finance charges. VMSC then issued a sales invoice in favor of
the spouses with a detailed description of the Toyota Cressida car. In turn, the spouses executed a chattel
mortgage over the car in favor of VMSC as security for the amount of PhP 209,601.

VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse. After
receiving the amount of PhP 209,601,
VMSC executed a Deed of Assignment of its rights and interests under the promissory note and chattel
mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC
through Avelino spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago,
another cousin of Avelino
Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance.

March 1, 1984: BA Finance filed with the RTC a complaint for Replevin with Damages against the
spouses

RTC: favored BA finance , however, declared that they are entitled to be indemnified by Avelino

CA: affirmed - promissory note was a negotiable instrument and that BA Finance was a holder in due course

ISSUE: 1. Whether or not the PN is negotiable?

2. Whether or not BA FINANCE is a holder in due course?

HELD: YES

1. The PN is negotiable:

Section 1. Form of Negotiable Instruments. – An instrument to be negotiable must conform to the following
requirements:

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

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
2. BA FINANCE is a holder in due course.
Section 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 the person negotiating it.

(a) the “Promissory Note”, Exhibit “A”, is complete and regular; (b) the “Promissory Note” was endorsed by
the VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and for
value; (d) the Appellee was never informed, before and at the time the “Promissory Note” was endorsed to the
Appellee, that the vehicle sold to the Defendants-Appellants was not delivered to the latter and that VMSC had
already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to
Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu Branch), the same occurred
only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over the “Chattel
Mortgage” by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.

Since BA Finance is a holder in due course, petitioners cannot raise the defense of non-delivery of the
object and nullity of the sale against the corporation.
The NIL considers every negotiable instrument prima facie to have been issued for a valuable consideration. In
Salas, we held that a party holding an instrument may enforce payment of the instrument for the full amount
thereof. As such, the maker cannot set up the defense of nullity of the contract of sale. Thus, petitioners are
liable to respondent corporation for the payment of the amount stated in the instrument.

VMSC is a family-owned corporation of which Avelino was president. Avelino committed fraud in
selling the vehicle to petitioners, a vehicle that was previously sold to Avelino’s other cousin, Esmeraldo

Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners’ loss. He
cannot now hide behind the separate corporate personality of VMSC to escape from liability for the amount
adjudged by the trial court in favor of petitioners.
Obligation was incurred in the name of the corporation, the petitioner would still be personally liable therefor
because for all legal intents and purposes, he and the corporation are one and the same.
Reporter: Darren Robee B. Sandoval

Case: Cayanan vs North Star International Travel Inc.

G.R. No. 172954 October 5, 2011

Facts:

North Star International Travel Incorporated (North Star) is a corporation engaged in the travel agency
business while petitioner is the owner/general manager of JEAC International Management and Contractor
Services, a recruitment agency.

On March 17, 1994, Virginia Balagtas, the General Manager of North Star, in accommodation and upon
the instruction of its client, petitioner herein, sent the amount of US$60,000 to View Sea Ventures Ltd., in
Nigeria from her personal account in Citibank Makati. On March 29, 1994, Virginia again sent US$40,000 to
View Sea Ventures by telegraphic transfer, with US$15,000 coming from petitioner. Likewise, on various dates,
North Star extended credit to petitioner for the airplane tickets of his clients, with the total amount of such
indebtedness under the credit extensions eventually reaching P510,035.47. To cover payment of the foregoing
obligations, petitioner issued five checks to North Star. When presented for payment, the checks in the amount
of P1,500,000 and P35,000 were dishonored for insufficiency of funds while the other three checks were
dishonored because of a stop payment order from petitioner. North Star, through its counsel, wrote petitioner on
September 14, 1994 informing him that the checks he issued had been dishonored. North Star demanded
payment, but petitioner failed to settle his obligations. Hence, North Star instituted Criminal Case Nos. 166549-
53 charging petitioner with violation of Batas Pambansa Blg. 22, or the Bouncing Checks Law before the
Metropolitan Trial Court (MeTC) of Makati City.

Issue:

Whether or not the checks were issued for a valuable consideration entitling respondent to damages.

Held:

Yes. We have held that upon issuance of a check, in the absence of evidence to the contrary, it is
presumed that the same was issued for valuable consideration which may consist either in some right, interest,
profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some
responsibility, to act, or labor, or service given, suffered or undertaken by the other side. Under the Negotiable
Instruments Law , it is presumed that every party to an instrument acquires the same for a consideration or for
value. As petitioner alleged that there was no consideration for the issuance of the subject checks, it devolved
upon him to present convincing evidence to overthrow the presumption and prove that the checks were in fact
issued without valuable consideration. Sadly, however, petitioner has not presented any credible evidence to
rebut the presumption, as well as North Stars assertion, that the checks were issued as payment for the
US$85,000 petitioner owed.

Petitioner claims that North Star did not give any valuable consideration for the checks since the
US$85,000 was taken from the personal dollar account of Virginia and not the corporate funds of North Star.
The contention, however, deserves scant consideration. The subject checks, bearing petitioners signature, speak
for themselves. The fact that petitioner himself specifically named North Star as the payee of the checks is an
admission of his liability to North Star and not to Virginia Balagtas, who as manager merely facilitated the
transfer of funds. Indeed, it is highly inconceivable that an experienced businessman like petitioner would issue
various checks in sizeable amounts to a payee if these are without consideration. Moreover, we note that
Virginia Balagtas averred in her Affidavit that North Star caused the payment of the US$60,000 and US$25,000
to View Sea Ventures to accommodate petitioner, which statement petitioner failed to refute. In addition,
petitioner did not question the Statement of Account No. 8639 dated August 31, 1994 issued by North Star
which contained itemized amounts including the US$60,000 and US$25,000 sent through telegraphic transfer to
View Sea Ventures per his instruction. Thus, the inevitable conclusion is that when petitioner issued the subject
checks to North Star as payee, he did so to settle his obligation with North Star for the US$85,000. And since
the only payment petitioner made to North Star was in the amount of P220,000.00, which was applied to
interest due, his liability is not extinguished. Having failed to fully settle his obligation under the checks, the
appellate court was correct in holding petitioner liable to pay the value of the five checks he issued in favor of
North Star.

Legal Basis:

Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose signature appears thereon to have become a
party thereto for value.
Reporter: Christian Paul V. Quadra
Case: Dino vs. Loot
G.R. No. 170912

Facts:
Sometime in December 1992, a member of a syndicate approached Dino and induced him to lend the
group 3M pesos to be secured by a real estate mortgage on the properties of the said member. Petitioner issued
three Metrobank checks totaling P3,000,000.00, one of which is Check No. C-MA-142119406-CA postdated 13
February 1993 in the amount of P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.
Petitioner discovered that the documents covered rights over government properties. Realizing he had been
deceived, petitioner advised Metrobank to stop payment of his checks. However, only one check was stopped.
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in exchange
for cash in the sum of P948,000.00, which respondents borrowed from Metrobank and charged against their
credit line.When respondents where to deposit the check, it was dishonored due to the reason of payment
stopped. Respondents filed a collection of suit against Dino and Lobitana. Respondents alleged, among other
things, that they are holders in due course.

The trial court ruled in favor of respondents and declared them due course holders of the subject check
Only petitioner filed an appeal.

The Court of Appeals modified the trial courts decision. The Court of Appeals ruled that petitioner acted
in good faith in ordering the stoppage of payment of the subject check and thus, he must not be made liable for
those amounts. The Court of Appeals noted that petitioner raised the defense that the check is a crossed check
for the first time on appeal

Issue: Whether or not the spouses Loot where holders in due course.

Held:
NO, respondents where NOT holders in due course. The act of crossing a check serves as a warning to
the holder that the check has been issued for a definite purpose so that the holder thereof must inquire if he has
received the check pursuant to that purpose; otherwise, he is not a holder in due course.

Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:
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 has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must additionally be considered:
A crossed check (a) may not be encashed but only deposited in the bank; (b) may be negotiated only once to
one who has an account with a bank; and (c) warns the holder that it has been issued for a definite purpose so
that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a
holder in due course.

Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas, title
to the check or the nature of her possession. This respondents failed to do. Respondents verification from
Metrobank on the funding of the check does not amount to determination of Lobitanas title to the check. Failing
in this respect, respondents are guilty of gross negligence amounting to legal absence of good faith, contrary to
Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of
the subject check. Petitioner cannot be obliged to pay the face value of the check. Respondents can collect from
the immediate indorser,Lobitana.
Reporter: Martin Xavier T. Macasinag

Case: Philippine Commercial International Bank (PCIB) vs Balmacedo and Ramos

G.R. No. 158143 September 21, 2011

Facts:

PCIB filed an action for recovery against Respondent Balmacedo for taking advantage of his position as
Branch Manager, who fraudulently obtained and encashed 34 Managers Check in the total amount of
P10,782,150.00 in connivance with Ramos who received a portion of the profits obtained by Balmacedo.

Balmacedo ——> did not file an answer, therefore

declared in default.

Ramos ——> he is a legitimate business man and brother in law of Balmacedo who sold the latter fighting
cocks.

RTC ——> found Balmacedo and Ramos guilty by falsifying

several commercial documents

CA ——> no sufficient evidence to prove that Ramos colluded with Balmacedo

Issue: WON Ramos acted fraudulently with Balmacedo?

Held:

NO, Ramos did not act fraudulently with Balmacedo. What was only proven was that Balmacedo used
Ramos as a payee when he filed the application forms for Managers Check. The fact that Ramos was made a
payee does not amount to him being guilty in acting in connivance with Balmacedo for the fraudulent act.
Adducing from the facts, it is clear that PCIB contributed to the commission of the fraud due to the negligence
of its employees. They allowed Balmacedo to encashed Managers Checks that were clearly Crossed Checks.

Jurisprudence provides that the crossing of the checks has the following effects: (1) the check cannot be
encashed, but only deposited to the bank,(2) the check may only be negotiated once to the one who has an
account with the bank, and (3) the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check for that purpose,
otherwise he is not a holder in due course. When a check is crossed, it is the duty of the collecting bank to
ascertain that the check is only deposited to the payees account. PCIB failed to do this, it allowed Balcameda to
encash 26 Managers Checks which were all crossed checks, or checks payable to the payees account only.
Reporter: Anthony Angel S. Tejares

Case: Salazar vs. J.Y. Brothers Marketing Corporation (2010)

G.R. No. 171998 | 2010-10-20

Subject: Novation; Substitution of the dishonored check with another check did not result in a novation,
the old obligation was not extinguished; Acceptance of crossed check affects only the mode of payment,
did not result in novation; Salazar is liable as an accommodation indorser

Facts:

Anamer Salazar, a freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew
a supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Brothers Marketing (J.Y.
Bros., for short). As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of
rice worth P214,000. As payment, Salazar negotiated and indorsed to J.Y. Bros. a Prudential Bank Check No.
067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000 with the assurance
that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However,
upon presentment, the check was dishonored due to "closed account."

Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement crossed Solid Bank Check No.
PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of P214,000 but which,
just the same, bounced due to insufficient funds.

Despite demand, Salazar failed to settle the amount due J.Y. Bros.. Consequently, latter charged Salazar
and Timario with the crime of estafa before the Regional Trial Court (RTC).

The RTC acquitted Salazar of the crime but held him liable for the value of the 300 bags of rice. Salazar
went up to the Supreme Court (SC) on a petition for review on certiorari under Rule 45 to appeal the civil
aspect of the decision. The SC set aside the RTC order. Thereafter, the RTC rendered a new decision dismissing
the civil aspect against Salazar but ordering the
arrest of Nena Jaucian Timario.

The RTC found that Salazar's liability should be limited to the allegation in the amended information
that "she endorsed and negotiated said check," and since she had never been the holder of the check, her signing
of her name on the face of the dorsal side of the check did not produce the technical effect of an indorsement
arising from negotiation. The RTC also concluded that the acceptance of the Solid Bank check by J.Y. Bros. , in
replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check.

On appeal, the Court of Appeals (CA) reversed the RTC. The CA, applying Sections 63, 66 and 29 of
the Negotiable Instruments Law, found that Salazar was considered an indorser of the checks paid to J.Y. Bros.
and considered her as an accommodation indorser, who was liable on the instrument to a holder for value,
notwithstanding that such holder at the time of the taking of the instrument knew her only to be an
accommodation party. Motion for reconsideration was denied. Hence, this petition.

Held:

Novation
1. Novation is done by the substitution or change of the obligation by a subsequent one which
extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.
 2. Novation may either be extinctive or modificatory, much being dependent on the nature of the
change and the intention of the parties. Extinctive novation is never presumed; there must be an express
intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to
dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation
necessitates that the incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superceded by the new one. The test of incompatibility is whether they can stand
together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first. (see Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc.
and Stronghold Insurance Co., Inc.)

3. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation
and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential
requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the
extinguishment of the old obligation, and (4) the birth of a valid new obligation. (see Foundation Specialists,
Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.)

4. Novation is merely modificatory where the change brought about by any subsequent agreement is
merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this
instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or
supplant some but not all of its provisions.) (seeFoundation Specialists, Inc. v. Betonval Ready Concrete, Inc.
and Stronghold Insurance Co., Inc.)

5. The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the
old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new
contract merely supplements the old one.

Substitution of the dishonored check with another check did not result in a novation, the old obligation was not
extinguished

6. There are only two ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and
declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must
be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. (see Nyco Sales Corporation v. BA Finance Corporation)

7. The acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did
not result to novation as there was no express agreement to establish that Salazar was already discharged from
[her] liability to pay respondent the amount of P214,000 as payment for the 300 bags of rice. As we said,
novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank check
was delivered to J.Y. Bros., the same was also indorsed by Salazar which shows Salazar 's recognition of the
existing obligation to J.Y. Bros. to pay P214,000 subject of the replaced Prudential Bank check.

8. Moreover, the acceptance of the Solid Bank check did not result to any incompatibility, since the two
checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of P214,000,
i.e., the credit obtained from the purchase of the 300 bags of rice. Indeed, there was no substantial change in the
object or principal condition of the obligation of Salazar as the indorser of the check to pay the amount
ofP214,000. It would appear that J.Y. Bros. accepted the Solid Bank check to give Salazar the chance to pay her
obligation.

Acceptance of crossed check affects only the mode of payment, did not result in novation
 9. It is also contended that the acceptance of the Solid Bank check, a non-negotiable check being a
crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in
lieu of the old obligation, since there was an essential change in the circumstance of each check.

10. Among the different types of checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce makes reference to
such instruments. We have taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and could not be converted into cash. Thus, the
effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for
deposit only by the rightful person, i.e., the payee named therein. The change in the mode of paying the
obligation was not a change in any of the objects or principal condition of the contract for novation to take
place.

Salazar is liable as an accommodation indorser

11. Considering that when the Solid Bank check, which replaced the Prudential Bank check, was
presented for payment, the same was again dishonored; thus, the obligation which was secured by the Prudential
Bank check was not extinguished and the Prudential Bank check was not discharged. Thus, we found no
reversible error committed by the CA in holding Salazar liable as an accommodation indorser for the payment
of the dishonored Prudential Bank check.
Reporter: Elieann Mae P. Quinajon

Case: Aglibot v Santia

Facts:
• Santia loaned the amount of P2,500,000.00 to PLCC, through its Manager, Aglibot.
• The loan was evidenced by a Promissory Note issued by Aglibot in behalf of PLCC, payable in 1 year
subject to interest at 24% per annum.
• As guarantee or security for the payment of note, Aglibot issued and delivered 11 post-dated personal
checks drawn from her own demand account in Metrobank.
• Checks were dishonored by the bank for having been drawn against insufficient funds or closed account.
• Santia demanded payment but neither Aglibot and PLCC heeded his demand
• 11 informations for violation of BP Blg. 22 were filed against Aglibot.
• Aglibot claimed that she issued her own 11 post-dated checks to Santia in behalf of her employer,
PLCC, the true borrower and beneficiary of the loan.
• Her liability should only be as a mere guarantor and as such could not be compelled to pay Santia unless
the latter has exhausted all the property of PLCC

Issue: Whether Aglibot is liable to Santia as a mere guarantor?

Held:

No. She is what the NIL calls an accommodation party.

The relation between an accommodation party and the party accommodated is, in effect, one of principal
and surety—The accommodation party being the surety. It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promisor and debtor from the beginning. The liability is
immediate and direct. Moreover in PBC v Aruego, that unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also unconditional to a holder for value. The mere fact that
Aglibot issued her own checks to Santia made her personally liable to the latter on her checks without the need
for Santia to first go after PLCC for the payment of its loan.

Legal Basis:

Sec 29. Liability of an accommodation party-

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