THE LAW ON

NEGOTIABLE INSTRUMENTS
CASE DIGEST

CYRRA Q. BALIGNASAY
BSA-4
 Mercado VS. Espiritu, 37 Phil. 215
Case Digest

[G.R. No. L-11872. December 1, 1917.]

DOMINGO MERCADO and JOSEFA MERCADO, Plaintiffs-Appellants, v. JOSE ESPIRITU,
administrator of the estate of the deceased Luis Espiritu, Defendant-Appellee.

FACTS

Margarita Espiritu was the owner of a 48 hectare land. In 1897, she died and the land was left
to her husband (Wenceslao Mercado) and her children, Domingo Mercado, Josefa Mercado and
3 other siblings.

Apparently however, during the lifetime of Margarita in 1894, she executed a deed of sale
transferring about 71% of her land (covering 15 cavanes of seeds) to her brother Luis Espiritu
(father of Jose Espiritu) for P2,000.00. After her death, Wenceslao had a hard time making ends
meet for his family and so he took out a loan from Luis in the amount of P375.00. The loan was
secured by the remainder of the lot. Later, that loan was increased to P600.00.

In May 1910, Luis entered into a notarized agreement with Domingo and Josefa whereby the
two, while purporting to be of legal age, acknowledged the sale and the loan previously entered
into by their parents with Luis. In the same agreement, the siblings agreed that for and in
consideration of the amount of P400.00, they are transferring the remainder 29% (covering 6
cavanes of seeds) to Luis.

But later, the siblings contested the said agreement. Luis later died and he was substituted by
Jose. It is the contention of Domingo et al that the agreement is void because they were only
minors, 19 and 18 years of age respectively, when the contract was entered into in May 1910
(21 being the age of minority at that time).

ISSUE

Whether or not the agreement between Luis and Domingo et al in May 1910 is valid despite the
minority of the latter party.

RULING

Yes. In the first place, their minority of Domingo and Josefa was not proven with certainty
because of the loss of official records (got burned down). However, even assuming that they
were indeed minors, they are bound by their declaration in the notarized document where they
presented themselves to be of legal age. Domingo claimed he was 23 years old in the said
document. The Supreme Court declared: the sale of real estate, made by minors who pretend
to be of legal age, when in fact they are not, is valid, and they will not be permitted to excuse
themselves from the fulfillment of the obligations contracted by them, or to have them
annulled in pursuance of the provisions of Law.

Further, there was no showing that the said notarized document was attended by any violence,
intimidation, fraud, or deceit.

The ruling was in accordance with the provisions on law on estoppel and Rule 123, Section 6
paragraph A which states that “whenever a party has, by its own declaration, act or omission,
intentionally and deliberately led another party to believe a particular thing to be true, and to
act upon such belief, he cannot, in any litigation arising out of such declaration, cannot be
permitted to falsify it.
 Clark VS. Seliner, 42 Phil. 384
Case Digest

[G.R. No. 16477. November 22, 1921.]

R. N. CLARK, Plaintiff-Appellant, v. GEORGE C. SELLNER, Defendant-Appellee.

FACTS

The defendant, in conjunction with two other persons, signed the following note in favor of the
plaintiff:

"P12,000.00 MANILA, July 1, 1914.

"Six months after date, for value received, we jointly and severally promise to pay to the order
of R. N. Clark at his office in the city of Manila, the sum of twelve thousand pesos, Philippine
currency, with interest thereon in like currency from date until paid at the rate of ten per cent
per annum, payable quarterly.

"If suit is necessary to collect this note, we hereby agree to pay as attorney's fees ten per
centum of the amount found due.

  (Sgd.) "W. H. CLARKE,

[INTERNAL REVENUE "JOHN MAYE.
"By W. H. CLARKE,
STAMP.]  
his attorney.
    "GEO. C. SELLNER."

The note matured, but its amount was not paid.

Counsel for the defendant allege that the latter did not receive in that transaction either the
whole or any part of the amount of the debt; that the instrument was not presented to the
defendant for payment; and that the defendant, being an accommodation party, is not liable
unless the note is negotiated, which was not done, as shown by the evidence.
With regard to the first point, the liability of the defendant, as one of the signers of the note, is
not dependent on whether he has, or has not, received any part of the amount of the debt. The
defendant is really and expressly one of the joint and several debtors on the note, and as such
he is liable under the provisions of section 60 of Act No. 2031, entitled The Negotiable
Instruments Law which provisions should be applied in this case in view of the character of the
instrument. As to presentment for payment, such action is not necessary in order to charge the
person primarily liable, as is the defendant. (Sec. 70, Act No. 2031.)
And as to whether or not the defendant is an accommodation party, it should be taken into
account that by putting his signature to the note, he lent his name, not to the creditor, but to
those who signed with him placing himself with respect to the creditor in the same position and
with the same liability as the said signers. It should be noted that the phrase "without receiving
value therefor," as used in section 29 of the aforesaid Act, means "without receiving value by
virtue of the instrument" and not, as it apparently is supposed to mean, "Without receiving
payment for lending his name." If, as in the instant case, a sum of money was received by virtue
of the note, it is immaterial, so far as the creditor is concerned, whether one of the signers has,
or has not, received anything in payment of the use of his name. In reality the legal situation of
the defendant in this case may properly be regarded a9 that of a joint surety rather than that of
an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note,
pay the debt, demand the collateral security and dispose of it to his benefit; but there is no
proof whatever that this was done. As to the plaintiff, he is the "holder for value," under the
phrase of said section 29, for he had paid the money to the signers at the time the note was
executed and delivered to him. Who is the "holder" is defined in section 191 of the said law
thus:

"‘Holder’ means the payee or endorsee of a bill or note, who is in possession of it, or the bearer
thereof." And as such holder, he has the right to demand payment of the debt from the signer
of the note, even though he knows that said person is merely an accommodation party (section
29 above cited), assuming the defendant to be such, which, as has been stated, is not the case.

The trial judge took into account the fact that at the time of the maturity of the note, the
collateral security given to guarantee the payment was worth more than what was due on the
note, but it depreciated to such an extent that, at the time of the institution of this action, it
was entirely valueless. And taking this circumstance, together with the fact that this case was
not commenced until after the lapse of four years from the date on which the payment fell due,
and with the further fact that the defendant had not received any part of the amount
mentioned in the note, he was of the opinion, and so decided, that the defendant could not be
held liable. The theory of the judge a quo was that the plaintiff’s failure to enforce the guaranty
for the payment of the debt, and his delay in instituting this action constitute laches, which had
the effect of extinguishing his right of action.
We see no sufficient ground for applying such a theory to the case before us. As stated, the
defendant’s position being, as it is, that of a joint surety, he may, at any time after the maturity
of the note, make payment, thus subrogating himself in the place of the creditor with the right
to enforce the guaranty against the other signers of the note for the reimbursement of what he
is entitled to recover from them. The mere delay of the creditor in enforcing the guaranty has
not by any means impaired his action against the defendant. It should not be lost sight of that
the defendant’s signature on the note is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he, the defendant, will be personally
responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its value, or
discharged, such an act would have wholly or partially released the surety; but it must be born
in mind that it is a recognized doctrine in the matter of suretyship that with respect to the
surety, the creditor is under no obligation to display any diligence in the enforcement of his
rights as a creditor. His mere inaction indulgence, passiveness, or delay in proceeding against he
principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of
such funds as were available, constitute no defense at all for the surety, unless the contract
expressly requires diligence and promptness on the part of the creditor, which is not the case in
the present action. There is in some decisions a tendency toward holding that the creditor’s
laches may discharge the surety, meaning by laches a negligent forbearance. This theory,
however, is not generally accepted and the courts almost universally consider it essentially
inconsistent with the relation of the parties to the note. (21 R. C. L., 1032- 1034.)
We find that in the judgment appealed from there were committed the errors assigned, and
that the defendant is under obligation to pay the plaintiff the amount of the debt, as prayed for
in the complaint.

The judgment appealed from must, therefore, be, as is hereby, reversed. Let an order be issued
to the effect that the plaintiff have and recover from the defendant the sum of twelve thousand
pesos (P12, 000), as principal debt, plus one thousand two hundred pesos (P1, 200), the sum
agreed upon as attorney’s fees, and 10 per cent interest on the principal debt from July 1, 1914,
until it is fully paid, deducting therefrom the sum of three hundred pesos (P300) already paid
on account, as stated in the complaint. This decision is rendered without special
pronouncement as to costs. So ordered.

ISSUE

Whether or not defendant is liable as accommodation party.

RULING

On the first issue, the liability of Sellner as one of the signers of the note, is not dependent on
whether he has or has not, received any part of the debt. The defendant is really and expressly
one of the joint and several debtors of the note and as such he is liable under the provisions of
Section 60 of the Negotiable Instruments Law.

As to the presentment for payment, such action is not necessary in order to charge the person
primarily liable, as is the defendant Sellner. As to whether or not Sellner is an accommodation
party, it should be taken into account that by putting his signature to the note, he lent his
name, not to the creditor, but to those who signed with him placing him in the same position
and with the same liability as the said signers. It should be noted that the phrase “without 
receiving  value  therefore”  as  used  in  section  29 means “without receiving value by virtue of
the instrument” and not, as it apparently is supposed to mean, “without receiving payment for
lending his name.”  It is immaterial as far as the creditor is concerned, whether one of the
signers has or has not received anything in payment for the use of his name.  In this case, the
legal situation of Sellner is that of a joint surety who upon the maturity of the note, pay the
debt, demand the collateral security and dispose of it to his benefit.  As to the plaintiff, he is a
holder for value.
 De Ocampo v. Gatchalian, 3 SCRA 596
Case Digest

[G.R. No. L-15126. November 30, 1961]

VICENTE R. DE OCAMPO & CO., Plaintiff-Appellee, vs. ANITA GATCHALIAN, ET AL., Defendants-
Appellants.

FACTS

Matilde Gonzales was a patient of the De Ocampo Clinic owned by Vicente De Ocampo. She
incurred a debt amounting to P441.75. Her husband, Manuel Gonzales designed a scheme in
order to pay off this debt: In 1953, Manuel went to a certain Anita Gatchalian. Manuel
purported himself to be selling the car of Vicente De Ocampo. Gatchalian was interested in
buying said car but Manuel told her that De Ocampo will only sell the car if Gatchalian shows
her willingness to pay for it. Manuel advised Gatchalian to draw a check of P600.00 payable to
De Ocampo so that Manuel may show it to De Ocampo and that Manuel in the meantime will
hold it for safekeeping. Gatchalian agreed and gave Manuel the check. After that, Manuel never
showed himself to Gatchalian.

Meanwhile, Manuel gave the check to his wife who in turn gave the check to De Ocampo as
payment of her bills with the clinic. De Ocampo received the check and even gave Matilde her
change (sukli). On the other hand, since Gatchalian never saw Manuel again, she placed a stop-
payment on the P600.00 check so De Ocampo was not able to cash on the check. Eventually,
the issue reached the courts and the trial court ordered Gatchalian to pay De Ocampo the
amount of the check. Gatchalian argued that De Ocampo is not entitled to payment because
there was no valid indorsement. De Ocampo argued that he is a holder in due course because
he is the named payee.

ISSUE

Whether or not De Ocampo is a holder in due course.

RULING

No. Section 52 of the Negotiable Instruments Law, defines 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 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 Supreme Court emphasized that if one is such a holder in due course, it is immaterial that
he was the payee and an immediate party to the instrument. The Supreme Court however ruled
that De Ocampo is not a holder in due course for his lack of good faith. De Ocampo should have
inquired as to the legal title of Manuel to the said check. The fact that Gatchalian has no
obligation to De Ocampo and yet he’s named as the payee in the check should have apprised
De Ocampo; that the check did not correspond to Matilde Gonzales’ obligation with the clinic
because of the fact that it was for P600.00 – more than the indebtedness; that why was Manuel
in possession of the check – all these gave De Ocampo the duty to ascertain from the holder
Manuel Gonzales what the nature of the latter’s title to the check was or the nature of his
possession.