8/11/2019 Nego Ch. 1-2 origs

1/60

SECOND DIVISION

[ G.R. No. 158262, July 21, 2008 ]

SPS. PEDRO AND FLORENCIA VIOLAGO, PETITIONERS, VS. BA FINANCE CORPORATION AND

AVELINO VIOLAGO, RESPONDENTS.

D E C I S I O N

VELASCO JR., J.:

This is a Petition for Review on Certiorari of the August 20, 2002 Decision[1]

and May 15, 2003

Resolution[2]

of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance

Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and ThirdParty Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-

spouses Pedro and Florencia Violago pray for the reversal of the appellate court's ruling

which held them liable to respondent BA Finance Corporation (BA Finance) under a

promissory note and a chattel mortgage. Petitioners likewise pray that respondent Avelino

Violago be adjudged directly liable to BA Finance.

The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC),

offered to sell a car to his cous in, Pedro F. Violago, and the latter's wife, Florencia. Avelino

explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the

spouses would just have to pay a down payment of PhP 60,500 while the balance would be

financed by respondent 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. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983

from VMSC.[3]

On 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 withoutrecourse.After receiving the amount ofPhP 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.[4]

The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which

issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The

spouses were unaware that the same car had already been sold in 1982 to Esmeraldo

Violago, another cousin of Avelino, and registered in Esmeraldo's name by the LTO-San

Rafael Branch. Despite the spouses' demand for the car and Avelino's repeated assurances,

there was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay

any monthly amortization to BA Finance.[5]

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in PasayCity a complaint for Replevin with Damages against the spouses. The complaint, docketed as

Civil Case No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if

delivery cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of

3% per month from February 15, 1984 until fully paid. BA Finance also asked for the payment

of attorney's fees, liquidated damages, replevin bond premium, expenses in the seizure of

the vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The

Violago spouses, as defendants a quo, were declared in default for failing to file an answer.

Eventually, the RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ

of execution was thereafter issued on January 11, 1985, followed by an alias writ of

execution.[6]

In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued

Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On

May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez

as security for a loan covered by a promissory note in the amount of PhP 260,664. This

promissory note was later endorsed to BA Finance, Cebu City branch.[7]

On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to

Quash Writ of Execution on the basis of lack of a valid service of summons on them, among

other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari

under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA

nullified the RTC's order. This CA decision became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following:

they never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA

Finance was not a holder in due c ourse under Section 59 of theNegotiable Instruments

Law(NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995,

the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino

praying that he be held liable to them in the event that they be held liable to BA Finance, as

well as for damages. VMSC was not impleaded as third party defendant. In his Motion to

Dismiss and Answer, Avelino contended that he was not a party to the transaction

personally, but VMSC. Avelino's motion was denied and the third party complaint against him

was entertained by the trial court. Subsequently, the spouses belabored to prove that they

affixed their signatures on the promissory note and chattel mortgage in favor of VMSC in

blank.[8]

The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the

Violago spouses. The RTC, however, declared that they are entitled to be indemnified by

Avelino. The dispositive portion of the RTC's decision reads:

WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R.

Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the

BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car,

model 1983, bearing Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by

the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to

pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty

[thereon] at three percent (3%) a month, from March 1, 1984, until the amount is fully paid.

In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally,

to the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney'sfees, and another amount also equivalent to twenty five percent (25%) of the said unpaid

8/11/2019 Nego Ch. 1-2 origs

2/60

balance, as liquidated damages. The defendant-third party-plaintiffs are also required to

shoulder the litigation expenses and costs.

As indemnification, third-party defendant Avelino Violago is ordered to deliver to

defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the

aforedescribed motor vehicle; or if such delivery is not possible, to pay to the said spouses

the sum of P198,003.06, together with the penalty thereon at three (3%) a month from

March 1, 1984, until the amount is entirely paid.

In either case, the third-party defendant should pay to the defendant-third-party plaintiffsspouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees,

and another sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as

liquidated damages.

Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs

the sum of P60,500.00 they paid to him as down payment for the car; and to pay them

P15,000.00 as moral damages; P10,000.00 as exemplary damages; and reimburse them for

all the expenses and costs of the suit.

The counterclaims of the defendants and third-party defendant, for lack of merit, are

dismissed.[9]

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory

note is a negotiable instrument; hence, the trial court should have applied the NIL and not

the Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle

at the time of sale, the sale was null and void for the failure in the "cause or consideration" of

the promissory note, which in this case was the sale and delivery of the vehicle. The spouses

also alleged that BA Finance was not a holder in due course of the note since it knew,

through its Cebu City branch, that the car was never delivered to the spouses.[10]

On the

other hand, Avelino prayed for the dismissal of the complaint against him because he was

not a party to the transaction, and for an order to the spouses to pay him moral damages

and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrument and that BAFinance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted

petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the

promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of

Appeals,[11]

the appellate court reasoned that since VMSC is an indispensable party, any

judgment will not bind it or be enforced against it. The absence of VMSC rendered the

proceedings in the RTC and the judgment in the Third Party Complaint "null and void, not

only as to the absent party but also to the present parties, namely the Defendants-Appellants

(petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago)." The CA set

aside the trial court's order holding Avelino liable for damages to the spouses without

prejudice to the action of the spouses a gainst VMSC and Avelino in a separate action.[12]

The dispositive portion of the August 20, 2002 CA Decision reads:

IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED.The appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a

quo is AFFIRMED, with the modification that the Third-Party Complaint against the Third-

Party-Defendant-appellant is DISMISSED, without prejudice. The counterclaims of the Third-

Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also without

prejudice.[13]

The spouses Violago sought but were denied reconsideration by the CA per its Resolution of

May 15, 2003.

The Issues

Petitioners raise the following issues:

WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BECONSIDERED A HOLDER IN DUE COURSE

WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE

VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY

AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED

DESPITE THE FRAUD AND DECEPTION OF AVELINO

The Court's Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the

third party complaint of petitioners against Avelino thereby effectively absolving Avelino

from any liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in due course of the

promissory note, we must determine whether the note is a negotiable instrument and,

hence, covered by the NIL. In their appeal to the CA, petitioners argued that the promissory

note is a negotiable instrument and that the provisions of the NIL, not the Civil Code, should

be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil

Code[14]

should be applied since their consent was vitiated by fraud, and, thus, the

promissory note does not carry any legal effect despite its negotiation. Either way, the

petitioners' arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct in finding all the

requisites of a negotiable instrument present. The NIL provides: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.The promissory note signed by petitioners reads:

8/11/2019 Nego Ch. 1-2 origs

3/60

209,601.00 Makati, Metro Manila, Philippines, August 4, 1983

For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO

MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE

THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest

at the rate stipulated herein below, in installments as follows:

Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid

on 9-16-83, and the succeeding monthly installments on the 16th day of each and every

succeeding month thereafter until the account is fully paid, provided that the penalty chargeof three (3%) per cent per month or a fraction thereof shall be added on each unpaid

installment from maturity thereof until fully paid.

x x x x

Notice of demand, presentment, dishonor and protest are hereby waived.

(Sgd.) (Sgd.)

PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO

763 Constancia St., Sampaloc, Manila same

(Address) (Address)

(Sgd.) (Sgd.)

Marivic Avaria Jesus Tuazon

(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATION

By:

(Sgd.)

AVELINO A. VIOLAGO, Pres.[15]

The promissory note clearly satisfies the requirements of a negotiable instrument under theNIL. It is in writing; signed by the Violago spouses; has an unconditional promise to pay a

certain amount, i.e., PhP 209,601, on specific dates in the future which could be determined

from the terms of the note; made payable to the order of VMSC; and names the drawees

with certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and

regular.

The more important issue now is whether or not BA Finance is a holder in due course. The

resolution of this issue will determine whether petitioners' defense of fraud and nullity of the

sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides:

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 i t 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.

The law presumes that a holder of a negotiable instrument is a holder thereof in due

course.[16]

In this case, the CA is correct in finding that BA Finance meets all the foregoing

requisites:In the present recourse, on its face, (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.[17]

In the hands of one other than a holder in due course, a negotiable instrument is subject to

the same defenses as if it were non-negotiable.[18]

A holder in due course, however, holds the

instrument free from any defect of title of prior parties and from defenses available to prior

parties among themselves, and may enforce payment of the instrument for the full amount

thereof.[19]

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 instrumentprima facieto have been issued for a valuable

consideration.[20]

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.[21]

Thus, petitioners are liable to respondent corporation for

the payment of the amount stated in the instrument.

From the third party complaint to the present petition, however, petitioners pray that the

veil of corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance.

Petitioners likewise pray for damages for the fraud committed upon them.

In Concept Builders, Inc. v. NLRC, we held:

It is a fundamental principle of corporation law that a corporation is an entity separate and

distinct from its stockholders and from other corporations to which it may be connected. But,

this separate and distinct personality of a corporation is merely a fiction created by law for

convenience and to promote justice. So, when the notion of separate juridical personality is

used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as

a device to defeat the labor laws, this separate personality of the corporation may be

disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation

is merely an adjunct, a business conduit or an alter ego of another corporation.

x x x x

8/11/2019 Nego Ch. 1-2 origs

4/60

The test in determining the applicability of the doctrine of piercing the veil of corporate

fiction is as follows:

1. Control, not mere majority or complete stock control, but complete

domination, not only of finances but of policy and business practice in

respect to the transaction attacked so that the corporate entity as to this

transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or

wrong, to perpetuate the violation of a statutory or other positive legal

duty, or dishonest and unjust acts in contravention of plaintiffs legal

rights; and3. The aforesaid control and breach of duty must proximately cause the

injury or unjust loss complained of.[22]

This case meets the foregoing test. 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. Nowhere in the pleadings did Avelino

refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he

merely insisted that he cannot be held liable because he was not a party to the transaction.

The fact that Avelino and Pedro are cousins, and that Avelino claimed to have a need to

increase the sales quota, was likely among the factors which motivated the spouses to buy

the car. Avelino, knowing fully well that the vehicle was already sold, and with abuse of his

relationship with the spouses, still proceeded with the sale and col lected the down payment

from petitioners. The trial court found that the vehicle was not delivered to the spouses.

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.

The fact that VMSC was not included as defendant in petitioners' third party complaint does

not preclude recovery by petitioners from Avelino; neither would such non-inclusion

constitute a bar to the application of the piercing-of-the-corporate-veil doctrine. We

suggested as much inArcilla v. Court of Appeals, an appellate proceeding involving petitioner

Arcilla's bid to avoid the adverse CA decision on the argument that he is not personally liable

for the amount adjudged since the same constitutes a corporate liability which nevertheless

cannot even be enforced against the corporation which has not been impleaded as a party

below. In that case, the Court found as well-taken the CA's act of disregarding the separate

juridical personality of the corporation and holding its president, Arcilla, liable for theobligations incurred in the name of the corporation although it was not a party to the

collection suit before the trial court. An excerpt fromArcilla:

x x x In short, even if We are to assume arguendothat the obligation was incurred in the

name of the corporation, the petitioner [Arcilla] would still be personally liable therefor

because for all legal intents and purposes, he and the corporation are one and the same. Csar

Marine Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of

separate juridical personality conferred upon such corporation by law should be disregarded.

Significantly, petitioner does not seriously challenge the [CA's] application of the doctrine

which permits the piercing of the corporate veil and the d isregarding of the fiction of a

separate juridical personality; this is because he knows only too well that from the beginning,

he merely used the corporation for his personal purposes.[23]

WHEREFORE, the CA's August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV

No. 48489 are SET ASIDEinsofar as they dismissed without prejudice the third partycomplaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino

Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs against

Avelino Violago.

SO ORDERED.

Quisumbing, (Chairperson), Ynares-Santiago, Carpio Morales,and Tinga, JJ.,concur.

8/11/2019 Nego Ch. 1-2 origs

5/60

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.

D E C I S I O N

GUTIERREZ, JR., J.:

This is a petition for certiorariunder 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 forreconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of

logging activities for the year 1978 the opening of additional roads, and simultaneous logging

operations along the route of said roads, in its logging concession area at Baganga, Manay,

and Caraga, Davao Oriental. For this purpose, it needed two (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

"seller-assignor"), 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 HD-

21-B and the other an HD-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 jobsite. 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).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment,

petitioner-corporation through petitioners Wee and Vergara, president a nd 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).

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 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 (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 jobsite and as agreed, the seller-assignor stationed its ownmechanics 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 (Exh. "5").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5", the seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs (Exhs. "6", "6-A",

"6-B", "6-C", "6-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).

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).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the

seller-assignor to pull out the units and have them reconditioned, and thereafter to offer

them for sale. The proceeds were to be given to the respondent and the excess, if any, to be

divided between the seller-assignor and petitioner-corporation which offered to bear one-

half (1/2) of the reconditioning cost (Exh. "7").

No response to this letter, Exhibit "7", was received by the petitioner-corporation and

despite several follow-up calls, the seller-assignor did nothing with regard to the request,

until the complaint in this case was filed by the respondent against the petitioners, the

corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the

principal sum of 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 HundredEighteen 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 (P249,081.71) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and

asking the trial court to order the respondent to pay the petitioners damages in an amount at

the sound discretion of the court, 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.

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

"WHEREFORE, judgment is hereby rendered:

"1) ordering defendants to pay jointly and severally in their official and personal capacities

8/11/2019 Nego Ch. 1-2 origs

6/60

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 filedby the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the

following errors:

I

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC

COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

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 totothe decision of the trial court. The pertinent portions of the decision are as

follows:

x x x x x x x x x

"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 andConsolidated Plywood Industries, Inc. The plaintiff-appellee herein upon application by

appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis

Crawler Tractors.

x x x x x x x x x

"Holding that breach of warranty, if any, is not a defense available to appellants either to

withdraw from the contract and/or demand a proportionate reduction of the price with

damages in either case (Art. 1567, New Civil Code). We now come to the issue as to whether

the plaintiff-appellee is a holder in due course of the promissory note.

"To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation

engaged in financing and receivable discounting extending credit facilities to consumers andindustrial, 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 facebefore 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:

I.

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.

II.

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF

THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE 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 THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

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

8/11/2019 Nego Ch. 1-2 origs

7/60

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

PROMISSORY NOTE.

V.

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.

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

respondent-assignee.

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 consideredpro-forma.

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, adopted by the respondent appellate court, that "14days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor

became inoperable" are sustained by the records. The petitioner was clearly a victim of a

warranty not honored by the maker.

The Civil Code provides that:

"ART. 1561. The vendor shall be responsible for warranty against the hidden defects which

the thing sold may have, should they render it unfit for the use for which it is intended, or

should they diminish 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 se ller's

skill or 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;

x x x x x x x x x

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

x x x x x x x x x

"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." (Italics supplied).

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. 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.

x x x x x x x x x

"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 theprice, with damages in either case."

8/11/2019 Nego Ch. 1-2 origs

8/60

8/11/2019 Nego Ch. 1-2 origs

9/60

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 andamong the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-

assignor which is the Industrial Products Marketing; and the a ssignee-financing company,

which is the respondent. Therefore, the respondent had actual knowledge of the fact that

the seller-assignor's right to collect the purchase price was not unconditional, and that it was

subject to the condition that the tractors sold were not defective. The respondent knew that

when the tractors turned out to be defective, it would be subject to the defense of failure of

consideration and cannot recover the purchase price from the petitioners. Even assuming

for the sake of argument that the promissory note is negotiable, the respondent, which took

the same with actual knowledge of the foregoing facts so that its action in taking the

instrument amounted to bad faith, is not a holder in due course. As such, the respondent is

subject to all defenses which the petitioners may raise against the seller-assignor. Any other

interpretation would be most inequitous to the unfortunate buyer who is not only saddled

with two useless tractors but must also face a lawsuit from the assignee for the entire

purchase price and all its incidents without being able to raise valid defenses available as

against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of

any fact, which would justify its act of taking the promissory note as not amounting to bad

faith.

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

"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a

holder who has taken the instrument under the following conditions:

x x x x x x x x x

x x x x x x x x x

"(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.

x x x x x x x x x

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.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 ofsuch facts that his action in taking the instrument amounts to bad faith." (Italics supplied)

We subscribe to the view of Campos and Campos that a financing company is not a holder in

good faith as to the buyer, to wit:

"In 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 find judicial approval

here. Where the goods sold turn out to be defective, the finance company will be subject to

the defense of failure of consideration and cannot recover the purchase price from thebuyer. As against the argument that such a rule would seriously affect 'a certain mode of

transacting business adopted throughout the State,' a court in one case stated:

"'It may be that our holding here will require some changes in business methods and will

impose a greater burden on the finance companies. We think the buyer Mr. & Mrs.

General Public should have some protection somewhere along the line. We believe the

finance company is better able to bear the risk of the dealer's insolvency than the buyer and

in a far better position to protect his interests against unscrupulous and insolvent dealers. . . .

"'If this opinion imposes great burdens on finance companies it is a potent argument in favor

of a rule which will afford 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 seller-assignor, Industrial

Products Marketing. For Section 58 of the Negotiable Instruments Law provides that in thehands 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. x x x."

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 seller-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 datedJuly 17, 1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and

8/11/2019 Nego Ch. 1-2 origs

10/60

SET ASIDE. The complaint against the petitioner before the trial court is DISMISSED.

SO ORDERED.

Fernan, (Chairman), Paras, Padilla, Bidin,and Cortes, JJ., concur.

8/11/2019 Nego Ch. 1-2 origs

11/60

THIRD DIVISION

[ G.R. No. 74886, December 03, 1992 ]

PRUDENTIAL BANK, PETITIONER, VS. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON

MILLS INC. AND ANACLETO R. CHI, RESPONDENTS.

D E C I S I O N

DAVIDE, JR, J.:

Petitioner seeks to review and set aside the decision[1]

of public respondent Intermediate

Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which

affirmed in totothe 15 June 1978 decision of Branch 9 (Quezon City) of the then Court ofFirst Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved

an action instituted by the petitioner for the recovery of a sum of money representing the

amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the

defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine

Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public

respondent as follows:

"On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract

with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year

deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p. 2). To effect payment for

said machineries, the defendant-appellant applied for a commercial letter of credit with the

Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the

Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p.

1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-

11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its

correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these

drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant

through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid.,

pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to

the defendant-appellant which accepted delivery of the same. To enable the defendant-

appellant to take delivery of the machineries, it executed, by prior arrangement with the

Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as

Prisident (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties who, bythe very terms andconditions thereof, were to be jointly and severally liable to the Prudential

Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts

issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take

delivery of the textile machineries and installed the same at its factory site at 69 Obudan

Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December

29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual

rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973

(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-

appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit

K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust

receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, andW, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result. Hence, the

present action for the collection of the principal amount of P956,384.95 was filed on October

3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the

defendants interposed identical special defenses, viz., the complaint states no cause of

action; if there is, the same has prescribed; and the plaintiff is guilty of laches."[2]

On 15 June 1978, the trial court rendered its decision the dispositive portion of

which reads:

"WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills,

Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1",

with interest at 6% per annum beginning September 15, 1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same nothaving been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action

thereon has not accrued, hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered

to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED."[3]

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said

court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred

in (a) disregarding its right to reimbursement from the private respondents for the entire

unpaid balance of the imported machines, the total amount of which was paid to the Nissho

Company Ltd., thereby violating the principle of the third party payor's right to

reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and

under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the

responsible officer of defendant corporation, liable under Section 13 of P.D. No. 115 for the

entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit

"C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty

at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple

guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that

Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related

evidence and jurisprudence which provide that such liability had already attached; (f)

contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the

petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-11");

and (g) interpreting "sight" drafts as Rollo, requiring acceptance by Philippine Rayon before

the latter could be held liable thereon.[4]

In its decision, public respondent sustained the trial court in all respects. As to the first andlast assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil

Code, applies only if there is no express contract between the parties and there is a clear

showing that the payment is justified. In the instant case, the relationship existing between

the petitioner and Philippine Rayon is governed by specific contracts, namely the application

for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the

last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not

accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts

stated therein. The public respondent did not agree with the petitioner's claim that the drafts

were sight drafts which did not require presentment for acceptance to Philippine Rayon

because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since

the ten (10) drafts were not presented and accepted, no valid demand for payment can be

made.

Public respondent also disagreed with the petitioner's contention that private respondentChi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based

http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn1http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn1http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn2http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn2http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn2http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn3http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn3http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn3http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn4http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn4http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn4http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn4http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn3http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn2http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn1

8/11/2019 Nego Ch. 1-2 origs

12/60

on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to

the first contention, the public respondent ruled that the civil liability provided for in said

Section 13 attaches only after conviction. As to the second, it expressed misgivings as to

whether Chi's signature on the trust receipt made the latter automatically liable thereon

because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to

be signed not by one (1) person a lone, but by two (2) persons; the last sentence of the same

is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public.

Besides, even granting that it was executed and acknowledged before a notary public, Chi

cannot be held liable therefore because the records fail to show that petitioner had either

exhausted the properties of Philippine Rayon or had resorted to all legal remedies asrequired in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the

Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively.

Chi's liability would therefore arise only when the principal debtor fails to comply with his

obligation.[5]

Its motion to reconsider the decision having been denied by the public respondent in its

Resolution of 11 June 1986,[6]

petitioner filed the instant petition on 31 July 1986 submitting

the following legal issues:

"I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN

DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE

RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT

OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES

AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT

(EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI

HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO,

HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT

PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF

SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER

THE TRUST RECEIPT (EXH. C);

VIII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL.

RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X -1 TO X-11) AND TOWHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT

PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER."[7]

In the Resolution of 12 March 1990,[8]

this Court gave due course to the petition after the

filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the

latter by the petitioner; both parties were also required to submit their respective

memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine

Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for

the obligation sought to be enforced and if not, whether he may be considered a guarantor;

in the latter situation, whether the case should have been dismissed on the ground of lack of

cause of action as there was no prior exhaustion of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held

liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been

accepted by the latter after due presentment. The liability for the remaining ten (10) drafts

(Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for

acceptance. In short, both courts concluded that acceptance of the drafts by Philippine

Rayon was indispensable to make the latter liable thereon. We are unable to agree with this

proposition. The transaction in the case at bar stemmed from Philippine Rayon's application

for a commercial letter of credit with the petitioner in the amount of $128,548.78 to coverthe former's contract to purchase and import loom and textile machinery from Nissho

Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the

application. As correctly ruled by the trial court in it s Order of 6 March 1975:[9]

"x x x By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff

bank[10]

was under obligation to pay through its correspondent bank in Japan the drafts that

Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968,

pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn,

defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the

drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any

accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated

in the Application and Agreement of Commercial Letter of Credit Annex "A"."

A letter of credit is defined as an engagement by a bank or other person made at the request

of a customer that the issuer will honor drafts or other demands for payment upon

compliance with the conditions specified in the credit.[11]

Through a letter of credit, the bank

merely substitutes its own promise to pay for the promise to pay of one of its customers who

in return promises to pay the bank the amount of funds mentioned in the letter of credit plus

credit or commitment fees mutually agreed upon.[12]

In the instant case then, the drawee

was necessarily the herein petitioner. It was to the latter that the drafts were presented for

payment. In fact, there was no need for acceptance as the i ssued drafts are sight drafts.

Presentment for acceptance is necessary only in the cases expressly provided for in Section

143 of the Negotiable Instruments Law (NIL).[13]

The said section reads:

"SEC. 143. When presentment for acceptance must be made. -- Presentment for acceptance

must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for

acceptance is necessary in order to fix the maturity of the instrument; or(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business

of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the

bill liable."

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the

drawer;[14]

this may be done in writing by the drawee in the bill itself, or in a separate

instrument.[15]

The parties herein agree, and the trial court explicitly ruled, that the subject drafts

are sight drafts. Said the latter:

"x x x In the instant case the drafts being at sight, they are supposed to be payable upon

acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within whichto pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as

http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn5http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn5http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn5http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn6http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn6http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn6http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn7http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn7http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn7http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn8http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn8http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn8http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn9http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn9http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn9http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn10http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn10http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn10http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn11http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn11http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn11http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn12http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn12http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn12http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn13http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn13http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn13http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn14http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn14http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn14http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn15http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn15http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn15http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn15http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn14http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn13http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn12http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn11http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn10http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn9http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn8http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn7http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn6http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn5

8/11/2019 Nego Ch. 1-2 origs

13/60

indicated on their face (sic), and upon such acceptance should, have been paid forthwith.

These two drafts were not paid and although Philippine Rayon Mills ought to have paid the

same, the fact remains that until now they are still unpaid.[16]

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7

provides:

"SEC. 7. When payable on demand.-- An instrument is payable on demand --

(a) When so it is expressed to be payable on demand, or at sight, or on presentation;

or

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards theperson so issuing, accepting, or indorsing it, payable on demand." (underscoring supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of

any accepted draft, bill of exchange or indebtedness shall not be extinguished or

modified"[17]

does not, contrary to the holding of the public respondent, contemplate prior

acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even

necessary in the first place because the drafts which were eventually issued

were sight drafts. And even if these were not sight drafts, thereby necessitating acceptance,

it would be the petitioner -- and not Philippine Rayon -- which had to accept the same for the

latter was not the drawee. Presentment for acceptance is defined as the production of a bill

of exchange to a drawee for acceptance.[18]

The trial court and the public respondent,

therefore, erred in ruling that presentment for acceptance was an indispensable requisite for

Philippine Rayon's liability on the drafts to attach. Contrary to both courts pronouncements,

Philippine Rayon immediately became liable thereon upon petitioner's payment thereof.

Such is the essence of the letter of credit issued by the petitioner. A different conclusion

would violate the principle upon which commercial letters of credit are founded because in

such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,

respectively, would be placed at the mercy of Philippine Rayon even if the latter had already

received the imported machinery and the petitioner had fully paid for it. The typical setting

and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron &

CO., Inc.,[19]

thus:

1. "Commercial letters of credit have come into general use in international sales

transactions where much time necessarily elapses between the sale and the receipt by a

purchaser of the merchandise, during which interval great price changes may occur. Buyers

and sellers struggle for the advantage of position. The seller is desirous of being paid as

surely and as soon as possible, realizing that the vendee at a distant point has it in his powerto reject on trivial grounds merchandise on arrival, and cause considerable hardship to the

shipper. Letters of credit meet this condition by affording celerity and certainty of payment.

Their purpose is to insure to a seller payment of a definite amount upon presentation of

documents. The bank deals only with documents. It has nothing to do with the quality of the

merchandise. Disputes as to the merchandise shipped may arise and be litigated later

between vendor and vendee, but they may not impede acceptance of drafts and payment by

the issuing bank when the proper documents are presented."

The trial court and the public respondent likewise erred in disregarding the t rust receipt and

in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho,[20]

this Court

explains the nature of a trust receipt by quoting In re Dunlap Carpet Co.,[21]

thus:

"By this arrangement a banker advances money to an intending importer, and thereby lends

the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of

foreign commerce. Much of this trade could hardly be carried on by any other means; andtherefore it is of the first importance that the fundamental factor in the transaction, the

banker's advance of money and credit, should receive the amplest protection. Accordingly, in

order to secure that the banker shall be repaid at the critical point -- that is, when the

imported goods finally reach the hands of the intended vendee -- the banker takes the full

title to the goods at the very beginning; he takes it as soon as the goods are bought and

settled for by his payments or acceptances in the foreign country, and he continues to hold

that title as his indispensable security until the goods are sold in the United States and the

vendee is called upon to pay for them. This security is not an ordinary pledge by the importer

to the banker, for the importer has never owned the goods, and moreover he is not able to

deliver the possession; but the security is the complete title vested originally in the bankers,

and this characteristic of the transaction has again and again been recognized and protectedby the courts. Of course, the title is at bottom a security title, as it has sometimes been

called, and the banker is always under the obligation to reconvey; but only after his advances

have been fully repaid and after the importer has fulfilled the other terms of the contract."

As further stated in National Bank vs. Viuda e Hijos de Angel Jose,[22]

trust receipts:

"x x x [I]n a certain manner, x x x partake of the nature of a conditional sale as provided by

the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported

merchandise as soon as he has paid its price. The ownership of the merchandise continues to

be vested in the owner thereof or in the person who has advanced payment, until he has

been paid in full, or if the merchandise has already been sold, the proceeds of the sale should

be turned over to him by the importer or by his representative or successor in interest."

Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29

January 1973, a trust receipt transaction is defined as "any transaction by and between a

person referred to in this Decree as the entruster, and another person referred to in this

Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security

interests over certain specified goods, documents or instruments, releases the same to the

possession of the entrustee upon the latter's execution and delivery to the entruster of a

signed document called the trust receipt wherein the entrusteebinds himself to hold the

designated goods, documents or instruments in trust for the entruster and to sell or

otherwise dispose of the goods, documents or instruments with the obligation to turn over

to the entruster the proceeds thereof to the extent of the amount owing to the entruster or

as appears in the trust receipt or the goods, instruments themselves if they are unsold or not

otherwise disposed of, in accordance with the terms and conditions specified in the trust

receipt, or for other purposes substantially equivalent to any one of the following: x x x."

It is alleged in the complaint that private respondents "not only have presumably put said

machinery to good use and have profited by its operation and/or disposition but very recentinformation that (sic) reached plaintiff bank that defendants already sold the machinery

covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property

covered by the trust receipt, x x x and therefore acting in fiduciary (sic) capacity, defendants

have willfully violated their duty to account for the whereabouts of the machinery covered

by the trust receipt or for the proceeds of any lease, sale or other disposition of the same

that they may have made, notwithstanding demands therefore; defendants have

fraudulently misapplied or converted to their own use any money realized from the lease,

sale, and other disposition of said machinery."[23]

While there is no specific prayer for the

delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery

covered by the trust receipt, such relief is covered by the general prayer for "such further

and other relief as may be just and equitable on the premises."[24]

And although it is true that

the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no

legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in aseparate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee

http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn16http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn16http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn16http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn17http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn17http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn17http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn18http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn18http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn18http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn19http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn19http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn19http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn20http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn20http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn20http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn21http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn21http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn21http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn22http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn22http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn22http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn23http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn23http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn23http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn24http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn24http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn24http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn24http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn23http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn22http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn21http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn20http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn19http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn18http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn17http://elibrary.judiciary.gov.ph/thebookshelf/showdocsfriendly/1/30755#_ftn16

8/11/2019 Nego Ch. 1-2 origs

14/60

to turn over the proceeds of the sale of goods, documents or instruments covered by a trust

receipt to the extent of the amount owing to the entruster or as appears in the trust receipt

or to return said goods, documents or instruments if they were not sold or disposed of in

accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable

under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code.[25]

Under

Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the

criminal action, may be brought by the injured party in cases of defamation, fraud and

physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the

public respondent, that private respondent Chi's signature in the dorsal portion of the trustreceipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion

of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

"In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the

foregoing, we jointly and severally agree and undertake to pay on demand to the

PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL

BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in

any event connected with the default of and/or nonfulfillment in any respect of the

undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take

any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. ChiANACLETO R. CHI"

[26]

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause

"x x x we jointly and severally agree and undertake x x x," and the concluding sentence on

exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

"With respect to the second argument, we have our misgivings as to whether the mere

signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit C -1", will make

it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by

the plaintiff-appellant. A perusal of Exhibit "C-1" shows, that it was to be signed and

executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to

be witnessed by two persons, but no one signed in that capacity. The last sentence of the

guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have thepurported guarantee clause acknowledged before a notary public. All these show that the

alleged guaranty provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and

acknowledged still defendant-appellee Chi cannot be held liable thereunder because the

records show that the plaintiff-appellant had neither exhausted the property of the

defendant-appellant nor had it resorted to all legal remedies against the said defendant-

appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely

accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil

Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor

fails to comply with his obligation."[27]

Our own reading of the questioned solidary guaranty clause yields no other conclusion than

that the obligation of Chi is only that of a guarantor. This is further bolstered by the last

sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this casebecause the space therein for the party whose property may not be exhausted was not filled

up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised

by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that

the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a

contract of surety. It, however, described the guaranty as solidary between the guarantors;

this would have been correct if two (2) guarantors had signed it. The clause "we jo intly and

severally agree and undertake" refers to the undertaking of the two (2) parties who are to

sign it or to the liability existing between themselves. It does not refer to the undertaking

between either one or both of them on the one hand and the petitioner on the other

with respect to the liability described under the trust receipt. Elsewise stated, their liability is

not divisible as between them, i.e., it can be enforced to its full extent against any one ofthem.

Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should

be resolved against the petitioner. The trust receipt, together with the questioned solidary

guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's

participation therein is limited to the affixing of his signature thereon. It is, therefore, a

contract of adhesion[28]

as such, it must be strictly construed against the party responsible for

its preparation.[29]

Neither can We agree with the reasoning of the public respondent that this solidary guaranty

clause was effectively disregarded simply because it was not signed and witnessed by two (2)

persons and acknowledged before a notary public. While indeed, the clause ought to have

been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not

make his act an idle ceremony