Violago v. BA Finance Corp.

ISSUE: W/N the holder of an invalid promissory note may be

considered a holder in due course
G.R. No. 158262 July 21, 2008 Lessons Applicable: Promissory
notes and checks (Negotiable Instruments Law) HELD: YES. CA reversed because Avelino and VMSC are the same
negotiable: Section 1. Form of Negotiable Instruments. – An
FACTS: 1983: Avelino Violago, President of Violago Motor Sales instrument to be negotiable must conform to the following
Corporation (VMSC), offered to sell a Toyota Cressida Model 1983 requirements: (a) It must be in writing and signed by the maker or
to increase the sales quota to his cousin, Pedro F. Violago and his drawer; (b) Must contain an unconditional promise or order to pay a
wife, Florencia. spouses would just have to pay a down payment of sum certain in money; (c) Must be payable on demand, or at a fixed
PhP 60.5K while the balance would be financed by BA Finance. The or determinable future time; (d) Must be payable to order or to
spouses would pay the monthly installments to BA Finance while bearer; and (e) Where the instrument is addressed to a drawee, he
Avelino would take care of the documentation and approval of must be named or otherwise indicated therein with reasonable
financing of the car. August 4, 1983: the spouses and Avelino signed certainty. Section 52. What constitutes a holder in due course.––A
a promissory note under which they bound themselves to pay jointly holder in due course is a holder who has taken the instrument under
and severally to the order of VMSC the amount of PhP 209,601 in 36 the following conditions: (a) That it is complete and regular upon its
monthly installments of PhP 5,822.25 a month, the first installment to face; (b) That he became the holder of it before it was overdue, and
be due and payable on September 16, 1983. Avelino prepared a without notice that it had been previously dishonored, if such was the
Disclosure Statement of Loan/Credit Transportation which showed fact; (c) That he took it in good faith and for value; (d) That at the
the net purchase price of the vehicle, down payment, balance, and time it was negotiated to him he had no notice of any infirmity in the
finance charges. VMSC then issued a sales invoice in favor of the instrument or defect in the title of the person negotiating it. (a) the
spouses with a detailed description of the Toyota Cressida car. In “Promissory Note”, Exhibit “A”, is complete and regular; (b) the
turn, the spouses executed a chattel mortgage over the car in favor “Promissory Note” was endorsed by the VMSC in favor of the
of VMSC as security for the amount of PhP 209,601. VMSC, through Appellee; (c) the Appellee, when it accepted the Note, acted in good
Avelino, endorsed the promissory note to BA Finance without faith and for value; (d) the Appellee was never informed, before and
recourse. After receiving the amount of PhP 209,601, VMSC at the time the “Promissory Note” was endorsed to the Appellee, that
executed a Deed of Assignment of its rights and interests under the the vehicle sold to the DefendantsAppellants was not delivered to the
promissory note and chattel mortgage in favor of BA Finance. latter and that VMSC had already previously sold the vehicle to
Meanwhile, the spouses remitted the amount of PhP 60,500 to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to
VMSC through Avelino spouses were unaware that the same car Generoso Lopez, who assigned his rights to the BA Finance
had already been sold in 1982 to Esmeraldo Violago, another cousin Corporation (Cebu Branch), the same occurred only on May 8, 1987,
of Avelino Since VMSC failed to deliver the car, Pedro did not pay much later than August 4, 1983, when VMSC assigned its rights over
any monthly amortization to BA Finance. March 1, 1984: BA Finance the “Chattel Mortgage” by the Defendants-Appellants to the
filed with the RTC a complaint for Replevin with Damages against Appellee. Hence, Appellee was a holder in due course Since BA
the spouses RTC: favored BA finance , however, declared that they Finance is a holder in due course, petitioners cannot raise the
are entitled to be indemnified by Avelino CA: affirmed - promissory defense of non-delivery of the object and nullity of the sale against
note was a negotiable instrument and that BA Finance was a holder the corporation. VMSC is a family-owned corporation of which
in due course Avelino was president. Avelino committed fraud in selling the vehicle
to petitioners, a vehicle that was previously sold to Avelino’s other
cousin, Esmeraldo Avelino clearly defrauded petitioners. His actions 1. Whether or not the PN is negotiable?
were the proximate cause of petitioners’ loss. He cannot now hide 2. Whether or not BA FINANCE is a holder in due course?
behind the separate corporate personality of VMSC to escape from
liability for the amount adjudged by the trial court in favor of HELD:
petitioners. obligation was incurred in the name of the corporation,
1. The PN is negotiable.
the petitioner [Arcilla] would still be personally liable therefor because
for all legal intents and purposes, he and the corporation are one and
The promissory note is clearly negotiable. The appellate court
the same was correct in finding all the requisites of a negotiable instrument
present. The NIL provides:
VIOLAGO V. BA FINANCE CORPORATION
G. R. No. 158262 Section 1. Form of Negotiable Instruments. – An
559 SCRA 69 instrument to be negotiable must conform to the
JULY 21, 2008 following requirements:
FACTS: (a) It must be in writing and signed by the maker or
drawer;
Respondent A. Violago, president of VMSC, offered to sell a (b) Must contain an unconditional promise or order to
car to Petitioners. Petitioners agreed together with the terms of pay a sum certain in money;
payment thereof. Petitioners never knew that the same was already (c) Must be payable on demand, or at a fixed or
sold to another. Thereafter, Respondent A. Violago and Petitioners determinable future time;
signed a PROMISSORY NOTE (PN) under which the latter bound (d) Must be payable to order or to bearer; and
themselves to pay jointly and severally to the Order of VMSC in (e) Where the instrument is addressed to a drawee,
monthly installments. VMSC then issued a sales invoice in favor of the he must be named or otherwise indicated therein with
Petitioners with a detailed description of the car. In turn, Petiioners reasonable certainty.
executed a chattel mortgage over the car in favor of VMSC as security.
The promissory note clearly satisfies the requirements of a
VMSC, through Respondent A. Violago, endorse the PN to BA negotiable instrument under the NIL. It is in writing; signed by the
FINANCE without recourse. Thereafter, VMSC executed a deed of Violago spouses; has an unconditional promise to pay a certain
assignment of its rights and interests under the PN and chattel amount, i.e., PhP 209,601, on specific dates in the future which could
mortgage in favor of BA FINANCE. Later on, Petitioners demand the be determined from the terms of the note; made payable to the order
delivery of the car but Respondent A. Violago failed to comply. Since of VMSC; and names the drawees with certainty. The indorsement by
VMSC repeatedly failed to comply to deliver the car, Petitioners did VMSC to BA Finance appears likewise to be valid and regular.
not pay any monthly amortization to BA FINANCE.
2. BA FINANCE is a holder in due course.
As a result, BA FINANCE filed a case of Replevin with
damages against Petitioners. Sec. 52 of the NIL provides:
ISSUE:
 Section 52. What constitutes a holder in due course.– defense of nullity of the contract of sale. Thus, petitioners are liable to
–A holder in due course is a holder who has taken the respondent corporation for the payment of the amount stated in the
instrument under the following conditions: instrument.
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was State Investment House Inc. vs. CA
overdue, and without notice that it had been
previously dishonored, if such was the fact; GR No. 101163 January 11, 1993
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had Bellosillo, J.:
no notice of any infirmity in the instrument or defect in
the title of the person negotiating it. Facts:
Nora Moulic issued to Corazon Victoriano, as security for
The law presumes that a holder of a negotiable instrument is pieces of jewellery to be sold on commission, two postdated checks in
a holder thereof in due course. 16 In this case, BA Finance meets all the amount of fifty thousand each. Thereafter, Victoriano negotiated
the foregoing requisites to wit: the checks to State Investment House, Inc. When Moulic failed to sell
the jewellry, she returned it to Victoriano before the maturity of the
(a) the PN is complete and regular; checks. However, the checks cannot be retrieved as they have been
(b) the PN was endorsed by the VMSC in favor of the Appellee; negotiated. Before the maturity date Moulic withdrew her funds from
(c) the Appellee, when it accepted the Note, acted in good faith and the bank contesting that she incurred no obligation on the checks
for value; because the jewellery was never sold and the checks are negotiated
(d) the Appellee was never informed, before and at the time the PN without her knowledge and consent. Upon presentment of for
was endorsed to the Appellee, that the vehicle sold to the Defendants- payment, the checks were dishonoured for insufficiency of funds.
Appellants was not delivered to the latter and that VMSC had already
previously sold the vehicle to Esmeraldo Violago. Issues:
1. Whether or not State Investment House inc. was a holder of the
Hence, Appellee was a holder in due course. check in due course
2. Whether or not Moulic can set up against the petitioner the defense
In the hands of one other than a holder in due course, a that there was failure or absence of consideration
negotiable instrument is subject to the same defenses as if it were
non-negotiable. A holder in due course, however, holds the instrument
free from any defect of title of prior parties and from defenses available Held:
to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. Since BA Finance is a holder in Yes, Section 52 of the NIL provides what constitutes a holder in due
due course, petitioners cannot raise the defense of non-delivery of the course. The evidence shows that: on the faces of the post dated
object and nullity of the sale against the corporation. checks were complete and regular; that State Investment House Inc.
bought the checks from Victoriano before the due dates; that it was
The NIL considers every negotiable instrument prima facie to taken in good faith and for value; and there was no knowledge with
have been issued for a valuable consideration. In Salas, we held that regard that the checks were issued as security and not for value. A
a party holding an instrument may enforce payment of the instrument prima facie presumption exists that a holder of a negotiable instrument
for the full amount thereof. As such, the maker cannot set up the is a holder in due course. Moulic failed to prove the contrary.
No, Moulic can only invoke this defense against the petitioner if it was Held:
a privy to the purpose for which they were issued and therefore is not On their faces, the post-dated checks were complete and regular; SIHI
a holder in due course. bought the checks from the payee (Victoriano) before their due dates;
SIHI took the checks in good faith and for value, albeit at a discounted
No, Section 119 of NIL provides how an instruments be discharged. price; and SIHI was never informed not made aware that the checks
Moulic can only invoke paragraphs c and d as possible grounds for were merely issued to payee as security and not for value. Complying
the discharge of the instruments. Since Moulic failed to get back the
with the requisites of Section 52 of the Negotiable Instruments Law,
possession of the checks as provided by paragraph c, intentional
SIHI is a holder in due course. As such, it holds the instruments free
cancellation of instrument is impossible. As provided by paragraph d,
the acts which will discharge a simple contract of payment of money from any defect of title of prior parties, and from defenses available to
will discharge the instrument. Correlating Article 1231 of the Civil Code prior parties among themselves. SIHI may enforce full payment of the
which enumerates the modes of extinguishing obligation, none of checks. The defense of failure or absence of consideration is not
those modes outlined therein is applicable in the instant case.Thus, available as SIHI was not privy to the purpose for which the checks
Moulic may not unilaterally discharge herself from her liability by mere were issued. That the post-dated checks were merely issued as
expediency of withdrawing her funds from the drawee bank. She is security is not a ground for the discharge of the instrument as against
thus liable as she has no legal basis to excuse herself from liability on a holder in due course. It is not one of the grounds outlined in Section
her check to a holder in due course. Moreover, the fact that the 119 of the NegotiableInstrument Law, for the instrument to be
petitioner failed to give notice of dishonor is of no moment. The need discharged. It must be noted that the drawing and negotiation of a
for such notice is not absolute; there are exceptions provided by Sec check have certain effects aside from the transfer of title or the
114 of NIL. incurring of liability in regard to the instrument by the transferor. The
holder who takes the negotiated paper makes a contract with the
State Investment House vs. CA
parties on the face of the instrument. There is an implied
GR 101163
11 January 1993 representation that funds or credit are available for the payment of the
First Division, Bellosillo (J) instrument in the bank upon which it is drawn. Consequently, the
withdrawal of the money from the drawee bank to avoid liability on the
Facts: checks cannot prejudice the rights of holders in due course. The
Nora B. Moulic issued to Corazon Victoriano checks, as security for drawer, Moulic, is liable to the holder in due course, SIHI.
pieces of jewelry sold on commission. Victoriano negotiated the
checks to the State Investment House Inc. (SIHI). Moulic failed to sell
the pieces of jewelry, so he returned them to the payee before the STATE INVESTMENT HOUSE V. CA
maturity of the checks. The checks, however, could not be retrieved
as they had already been negotiated. Before the check’s maturity FACTS:
dates, Moulic withdrew her funds from the drawee bank. Upon Moulic issued checks as security to Victoriano, for pieces of jewelry
presentment of the checks for payment, they were dishonored for to be
insufficiency of funds. SIHI sued to recover the value of the checks. sold on commission. Moulic failed to sell the pieces of jewelry
Issue: , so she returned them to Victoriano. The checks however could
Whether the personal defense of failure or absence of consideration not be recovered
is available, or conversely, whether SIHI is a holder in due course. by Moulic as these have been discounted already in favor of p
etitioner. Consequently, before the maturity dates, Moulic Charles Fossum vs Fernandez Hermanos et al
withdrew her funds from her account. Thereafter, petitioner 44 Phil 713 – Commercial Law – Negotiable Instruments Law –
presented the checks for payment but these were dishonored. This Presumption as to who is a “Holder in Due Course”
prompted the petitioner to initiate an action
against Moulic. FACTS: In 1919, the Fernandez Hermanos (FH) contracted with the
American Iron Products Company, Inc. (AIP), for the latter to build a
HELD: shaft for one of the ships managed by FH. In consideration thereof, a
A prima facie presumption exists that a holder of a negotiable time draft with the Philippine National Bank (PNB), a negotiable
instrument is a holder in due course. The burden of proving that instrument, was executed by FH in the amount of $2,250.00 payable
State is not a holder in due course is upon Moulic. In this regard, in 60 days. But later, FH dishonored the draft because AIP was not
she failed to do so. able to comply with the specifications of the shaft ordered by FH.
Nevertheless, Charles Fossum, the agent of AIP here in the
The evidence shows that the dated checks were complete and Philippines and the person with whom FH was transacting with, was
regular; petitioner bought the checks from Victoriano before their due able to obtain the draft from the bank without consideration (for free).
dates; it took the checks in good faith and for value; and it was never Fossum then instituted an action against FH to recover the amount
informed nor made aware that these checks were merely issued to covered by the draft.
payee as security. Fossum maintains that he is a holder in due course; that he inherited
that status from the previous holder (PNB, named payee in the draft);
Consequently, State is a holder in due course. Moulic cannot that as such, he is entitled to payment.
set up the defense that there was failure or want of
consideration. It can only invoke the defense if State was a privy to ISSUE: Whether or not Fossum is a holder in due course.
the purpose for which they were issued and therefore is not a holder
in due course. HELD: No. In the first place, Fossum, as an agent of AIP, is well
aware that the draft is unenforceable because it has no
Furthermore, the mere fact that the checks were issued as security is consideration, the shaft being substandard. AIP did not comply with
not its obligation thus the draft was dishonored – and Fossum was well
sufficient ground to discharge the instrument as against a holde aware of this as part of the original party.
r in due course. Under Sec. 59 of the Negotiable Instruments Law, there is indeed a
presumption that every holder is a holder in due course, this covers a
And also, Moulic was responsible for the dishonor of her check payee or an indorsee (for bearer instruments, the bearer). This
s. She presumption does not apply to Fossum because he was not a payee
withdrew her funds from her account and could not have expe nor an indorsee. He’s not an indorsee because the bank merely
cted her checks to be honored by then. delivered the draft to him and the delivery was even without
consideration.
But if the presumption previously applied to PNB, wasn’t that
acquired by Fossum?
No. The presumption only covers the present holder, and not the HELD:
previous holder. When a holder delivers/indorses the instrument, he It devolved around Fernandez Hermanos to allege and prove its
loses that presumption. It will then become incumbent upon the claim that which was delivered and received didn't comply with the
person who received the instrument to prove that the previous holder specifications and didn't answer the purposes for which it was
is a holder in due course especially in this case when the current intended. It alleged that the
holder, Fossum, cannot be granted the presumption in Sec. 59, chain didn't meet the specifications given by the contract. Non
which is merely prima facie by the way, because of the fact that he etheless, there was failure to identify the so-called defects of the
was an original party fully notified of the failure of the consideration. chain. It was uponFernandez Hermanos to show that indeed the
At any rate, PNB itself is not a holder in due course due to the timely chain was defective. But as the trial court found out, there was a
dishonor of the draft by FH. failure of proof.
Further even assuming PNB is a holder in due course, there is a
well-known rule of law that if the original payee of a note
unenforceable for lack of consideration repurchases (in this case, the Araneta vs. Perez 14 SCRA 498
draft was not even repurchased, it was merely delivered back) the
instrument after transferring it to a holder in due course, the paper FACTS:
again becomes subject in the payee’s hands to the same defenses
to which it would have been subject if the paper had never passed On June 16, 1961, Antonio M. Perez executed a promissory
through the hands of a holder in due course. The same is true where note wherein he agreed to pay J. Antonio Araneta, or order, the sum
the instrument is re-transferred to an agent of the payee. of P3,700.00 119 days from said date, or on October 13, 1961, and if
it is not paid on the date of maturity, to pay interest at 9% per annum
on the amount of the loan, and P370.00 as attorney's fees in addition
FOSSUM V. FERNANDEZ to costs and other disbursements taxable under the Rules of Court.
44 PHIL 675
The note having become due and Antonio M. Perez having
FACTS: failed to pay it despite demand made upon him to do so, Araneta
Fernandez Hermanos placed an order with the products compa filed on October 31, 1961 a complaint in the Municipal Court of
ny for the manufacturing of a chain given a set of Manila to collect its import under the terms therein stipulated.
specifications. The chain was duly
prepared and delivered. A draft was drawn by the company a Perez alleged that the proceeds of the note was applied by
nd was him to the payment of the medical treatment of his minor daughter
accepted by Fernandez Hermanos. Thereafter, the draft was n Angela Perez y Tuason, who is the beneficiary of the trust then
egotiated with Fossum who demanded administered by Araneta as trustee.
payment on the instrument but was refused
by Fernandez on alleged failure of the chain delivered to satisf ISSUE:
y the specifications given.
Whether or not the maker of the note is bound himself to pay
personally the promissory note?
HELD:

Yes. Under Section 60 of the Negotiable Instruments Law, the maker

of a promissory note cannot escape liability by alleging that he spent
the money for the medical treatment of his daughter, the beneficiary
of the trustee who is the payee of the note, since it is not the payee's
concern to know how said proceeds should be spent, inasmuch as
that is the sole concern of the maker, and payee's interest is merely
to see that the note be paid according to its terms.