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