Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.

Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to another merely as security,
and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the
obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to
be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of
Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September
1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc.
(STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that
it be paid in cash instead, although MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry
was never sold and the checks were negotiated without her knowledge and consent. She also
instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility
for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and
ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the
trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period
prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on
MOULIC within the reglementary period it would be of no consequence as the checks should never
have been presented for payment. The sale of the jewelry was never effected; the checks, therefore,
ceased to serve their purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the
pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in
due course.1

In this regard, Sec. 52 of the Negotiable Instruments Law provides —

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: (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 was 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.

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course.2 Consequently, the burden of proving that STATE is not a
holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due
dates;3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and,
(d) petitioner was never informed nor made aware that these checks were merely issued to payee as
security and not for value.

Consequently, STATE is indeed 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;
STATE may, therefore, enforce full payment of the checks.4

MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for
which they were issued and therefore is not a holder in due course.

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. For the only grounds are those outlined in Sec. 119 of
the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a)

By payment in due course by or on behalf of the principal debtor; (b) By payment in
due course by the party accommodated, where the instrument is made or accepted
for his accommodation; (c) By the intentional cancellation thereof by the holder; (d)
By any other act which will discharge a simple contract for the payment of money; (e)
When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of
the instrument. But, the intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by tearing it up,5 burning it,6 or writing the
word "cancelled" on the instrument. The act of destroying the instrument must also be made by the
holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated
checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what
these acts are, e.g., Art. 1231 of the Civil Code7 which enumerates the modes of extinguishing
obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is the creditor while its drawer is the
debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the
time the jewelry was returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the 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 checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The
need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable
Instruments Law:

Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not
required to be given to the drawer in the following cases: (a) Where the drawer and
the drawee are the same person; (b) When the drawee is a fictitious person or a
person not having capacity to contract; (c) When the drawer is the person to whom
the instrument is presented for payment: (d) Where the drawer has no right to expect
or require that the drawee or acceptor will honor the instrument; (e) Where the
drawer had countermanded payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she
returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could not have expected her checks to
be honored. In other words, she was responsible for the dishonor of her checks, hence, there was
no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or
indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it.8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering
or hampering transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single
case.9

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.10 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. In the instant case, such
withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the
checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the
drawee bank to meet her obligation on the checks,11 so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of
Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1
million.12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor.13 The step thus taken by
the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for
the sale of the property and its action cannot be taken to mean a waiver of its right to demand
payment for the whole debt.14 For, while Act 3135, as amended, does not discuss the mortgagee's
right to recover such deficiency, it does not contain any provision either, expressly or impliedly,
prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a
creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an
obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil
Code15 does not allow the creditor to recover the deficiency from the sale of the thing pledged.
Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of
foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary will be void".16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be
concluded that the creditor loses his right recognized by the Rules of Court to take action for the
recovery of any unpaid balance on the principal obligation simply because he has chosen to
extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him
by the mortgagor in the contract of mortgage.17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC
and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance
of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
course, STATE, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new
one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the
total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to
any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 123031. October 12, 1999]

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs. COURT OF APPEALS, VICENTE ALEGRE, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari assails respondent appellate courts Decision,[1] dated
December 8, 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial
Court of Makati, Branch 132. The dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is hereby rendered ordering defendant [herein

petitioner] to pay plaintiff [herein private respondent]:

(1) the principal sum of P514,390.94 with legal interest thereon computed from
August 6, 1991 until fully paid; and

(2) the costs of suit.

SO ORDERED.[2]

Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in
money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred
thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27,
1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven
centavos (P516,238.67) covered private respondents placement plus interest at twenty and a half
(20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five
hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in
favor of the private respondent as proceeds of his matured investment plus interest. The CHECK
was drawn from petitioners current account number 0011-0803-59, maintained with the Bank of
the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal Commercial
Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the
annotation, that the Check (is) Subject of an Investigation. BPI took custody of the CHECK
pending an investigation of several counterfeit checks drawn against CIFCs aforestated checking
account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on
several occasions, that he be paid in cash. CIFC refused the request, and instead instructed private
respondent to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent,
through counsel, made a formal demand for the payment of his money market placement. In turn,
CIFC promised to replace the CHECK but required an impossible condition that the original must
first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint[3] for recovery of a sum of
money against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a
separate civil action[4] for collection of a sum of money with the RTC-Makati, Branch 147. The
collection suit alleged that BPI unlawfully deducted from CIFCs checking account, counterfeit
checks amounting to one million, seven hundred twenty-four thousand, three hundred sixty-four
pesos and fifty-eight centavos (P1,724,364.58). The action included the prayer to collect the
amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a
motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by CIFC
to enforce a right, for contribution and indemnity, with respect to Alegres claim. CIFC asserted
that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss the
third-party complaint on the ground of pendency of another action with RTC-Makati, Branch
147. Acting on the motion, the trial court dismissed the third-party complaint on November 4,
1992, after finding that the third party complaint filed by CIFC against BPI is similar to its ancillary
claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22,
1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK,
retained the original copy and forwarded only a certified true copy to RCBC. When Arieta was
recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and deducted the said
amount from the account of CIFC, but the proceeds, as well as the CHECK remained in BPIs
custody. The banks move was in accordance with the Compromise Agreement[5] it entered with
CIFC to end the litigation in RTC-Makati, Branch 147. The compromise agreement, which was
submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P 20,000
litigation expenses as full and final settlement of all of plaintiffs claims as contained in the
Amended Complaint dated September 10, 1992. The aforementioned amount shall be credited
to plaintiffs current account No. 0011-0803-59 maintained at defendants Main Branch upon
execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant: otherwise
 stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up
the defense of payment/discharge stipulated in par. 2 above.[6]
On July 27, 1993, BPI filed a separate collection suit[7] against Vicente Alegre with the RTC-
Makati, Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena
and Lita A. Anda and forged several checks of BPIs client, CIFC. The total amount of counterfeit
checks was P 1,724,364.58. BPI prevented the encashment of some checks amounting to two
hundred ninety five thousand, seven hundred seventy-five pesos and seven centavos
(P295,775.07). BPI admitted that the CHECK, payable to Vicente Alegre for P514,390.94, was
deducted from BPIs claim, hence, the balance of the loss incurred by BPI was nine hundred
fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos (P914,198.57), plus
costs of suit for twenty thousand (P20,000.00) pesos. The records are silent on the outcome of this
case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente
Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the
decision of the trial court.
Hence this appeal,[8] in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court
holding that petitioner was not discharged from the liability of paying the value of the subject
check to private respondent after BPI has debited the value thereof against petitioners current
account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article
1249 of the Civil Code in the instant case. The applicable law being the Negotiable
Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts findings that
the petitioner was guilty of negligence and delay in the performance of its obligation to the
private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts decision
ordering petitioner to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts dismissal of
petitioners third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE
PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF
PETITIONER AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law
(NIL) are the pertinent laws to govern its money market transaction with private respondent, and
not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses that it had already been
discharged from the liability of paying the value of the CHECK due to the following
circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined under the
Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily liable
for the payment of the check, and consequently, the drawer, herein petitioner, was
discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioners
account amounted to and/or constituted a discharge of the drawers (petitioners) liability
under the instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:

Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is

delivered for acceptance destroys the same, or refuses within twenty-four hours after
such delivery or such other period as the holder may allow, to return the bill accepted
or non-accepted to the Holder, he will be deemed to have accepted the same.

Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses
from the forged checks allegedly committed by the private respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the payment of debts. It provides that:

The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency, which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in
abeyance.

Considering the nature of a money market transaction, the above-quoted provision should be
applied in the present controversy. As held in Perez vs. Court of Appeals,[10] a money market is a
market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or dealer in
open market. In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.[11]
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as June
17, 1991, the same was dishonored by non-acceptance, with BPIs annotation: Check (is) subject
of an investigation. These facts were testified to by BPIs manager. Under these circumstances, and
after the notice of dishonor,[12] the holder has an immediate right of recourse against the
drawer,[13] and consequently could immediately file an action for the recovery of the value of the
check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money,
which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs. Court of
Appeals,[14] this Court held:

Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citation
omitted). A check, whether a managers check or ordinary check, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused receipt by the obligee or creditor. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized
(Art. 1249, Civil Code, par. 3.)[15]

Turning now to the second issue, when the bank deducted the amount of the CHECK from
CIFCs current account, this did not ipso facto operate as a discharge or payment of the
instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was not
delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it incurred
from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of the value of
the check was agreed upon by CIFC and BPI. The parties intended to amicably settle the collection
suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a compromise agreement,
which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant;
otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff however (sic) set-
up the defense of payment/discharge stipulated in par. 2 above.[16]
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.[17] It is an agreement between two or more
persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing.[18] The compromise agreement could not bind a party
who did not sign the compromise agreement nor avail of its benefits.[19] Thus, the stipulations in
the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money
could not be the subject of an agreement between CIFC and BPI. Although Alegres money was in
custody of the bank, the banks possession of it was not in the concept of an owner. BPI cannot
validly appropriate the money as its own. The codal admonition on this issue is clear:

Art. 1317 -

No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it
is ratified, expressly or impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.[20]

BPIs confiscation of Alegres money constitutes garnishment without the parties going through
a valid proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to
subject to his claim the property of the defendant in the hands of a third person or money owed to
such third person or a garnishee to the defendant.[21] The garnishment procedure must be upon
proper order of RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit
filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation
to the private respondent. Tender of payment involves a positive and unconditional act by the
obligor of offering legal tender currency as payment to the obligee for the formers obligation and
demanding that the latter accept the same.[22] Tender of payment cannot be presumed by a mere
inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action,
the following requisites must concur: (a) identity of parties or at least such as to represent the same
interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded
on the same acts; and (c) the identity in the two cases should be such that the judgment which may
be rendered in one would, regardless of which party is successful, amount to res judicata in the
other.[23]
The trial courts ruling as adopted by the respondent court states, thus:

A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International
Finance Corporation vs. Bank of the Philippine Islands now pending before Branch
147 of this Court and the Third Party Complaint in the instant case would readily
show that the parties are not only identical but also the cause of action being asserted,
which is the recovery of the value of BPI Check No. 513397 is the same. In Civil
Case No. 92-1940 and in the Third Party Complaint the rights asserted and relief
prayed for, the reliefs being founded on the facts, are identical.

xxx

WHEREFORE, the motion to dismiss is granted and consequently, the Third Party
Complaint is hereby ordered dismissed on ground of lis pendens.[24]
 We agree with the observation of the respondent court that, as between the third party claim
filed by the petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary claim against
the bank in Civil Case No. 92-1940, there is identity of parties as well as identity of rights asserted,
and that any judgment that may be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise
stated, the defendant shall not be liable to the plaintiff.[25] Clearly, this stipulation expressed that
CIFC had already abandoned any further claim against BPI with respect to the value of BPI Check
No. 513397. To ask this Court to allow BPI to be a party in the case at bar, would amount to res
judicata and would violate terms of the compromise agreement between CIFC and BPI. The
general rule is that a compromise has upon the parties the effect and authority of res judicata, with
respect to the matter definitely stated therein, or which by implication from its terms should be
deemed to have been included therein.[26] This holds true even if the agreement has not been
judicially approved.[27]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171998 October 20, 2010

ANAMER SALAZAR, Petitioner,

vs.
J.Y. BROTHERS MARKETING CORPORATION, Respondent.

DECISION

PERALTA, J.:

Before us is a petition for review seeking to annul and set aside the Decision1 dated September 29,
2005 and the Resolution2 dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No.
83104.

The facts, as found by the Court of Appeals, are not disputed, thus:

J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling
sugar, rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent,
was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the
positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and
Kallos procured from J. Y. Bros. 300 cavans of rice worth ₱214,000.00. As payment, Salazar
negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996
issued by Nena Jaucian Timario in the amount of ₱214,000.00 with the assurance that the check is
good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However,
upon presentment, the check was dishonored due to "closed account."

Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a
replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena
Jaucian Timario in the amount of ₱214,000.00 but which, just the same, bounced due to insufficient
funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount
due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa before the Regional
Trial Court of Legaspi City, docketed as Criminal Case No. 7474.

After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to
evidence. On November 19, 2001, the court a quo rendered an Order, the dispositive portion of
which reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the
crime charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D.
Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of ₱214,000.00.
Costs against the accused.

SO ORDERED.

Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to
present evidence thereon. The motion was denied. Accused went up to the Supreme Court on a
petition for review on certiorari under Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its
Decision dated September 23, 2003, the High Court ruled:

IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19,
2001 and January 14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi
City, Branch 5, is hereby DIRECTED to set Criminal Case No. 7474 for the continuation of trial for
the reception of the evidence-in-chief of the petitioner on the civil aspect of the case and for the
rebuttal evidence of the private complainant and the sur-rebuttal evidence of the parties if they opt to
adduce any.

SO ORDERED.3

The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil
aspect of the criminal case.

On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:

WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D.

Salazar the civil aspect of the above-entitled case. No pronouncement as to costs.

Place into the files (archive) the record of the above-entitled case as against the other accused Nena
Jaucian Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her
apprehension, and fix the amount of the bail bond for her provisional liberty at 59,000.00 pesos.

SO ORDERED.5
The RTC found that the Prudential Bank check drawn by Timario for the amount of ₱214,000.00 was
payable to the order of respondent, and such check was a negotiable order instrument; that
petitioner was not the payee appearing in the check, but respondent who had not endorsed the
check, much less delivered it to petitioner. It then found that petitioner’s liability should be limited to
the allegation in the amended information that "she endorsed and negotiated said check," and since
she had never been the holder of the check, petitioner's signing of her name on the face of the
dorsal side of the check did not produce the technical effect of an indorsement arising from
negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by
a Solid Bank check which, however, was also subsequently dishonored; that since the Solid Bank
check was a crossed check, which meant that such check was only for deposit in payee’s account, a
condition that rendered such check non-negotiable, the substitution of a non-negotiable Solid Bank
check for a negotiable Prudential Bank check was an essential change which had the effect of
discharging from the obligation whoever may be the endorser of the negotiable check. The RTC
concluded that the absence of negotiability rendered nugatory the obligation arising from the
technical act of indorsing a check and, thus, had the effect of novation; and that the ultimate effect of
such substitution was to extinguish the obligation arising from the issuance of the Prudential Bank
check.

Respondent filed an appeal with the CA on the sole assignment of error that:

IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY
INDORSING THE CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT
PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT ARISING FROM NEGOTIATION;
AND (C) DID NOT INCUR CIVIL LIABILITY.6

After petitioner filed her appellees' brief, the case was submitted for decision. On September 29,
2005, the CA rendered its assailed Decision, the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is
REVERSED and SET ASIDE, and a new one entered ordering the appellee to pay the appellant the
amount of ₱214,000.00, plus interest at the legal rate from the written demand until full payment.
Costs against the appellee.7

In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later
replaced by a Solid Bank check issued by Timario, also indorsed by petitioner as payment for the
300 cavans of rice bought from respondent. The CA, applying Sections 63,8 669 and 2910 of the
Negotiable Instruments Law, found that petitioner was considered an indorser of the checks paid to
respondent and considered her as an accommodation indorser, who was liable on the instrument to
a holder for value, notwithstanding that such holder at the time of the taking of the instrument knew
her only to be an accommodation party.

Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2,
2006.

Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE

ISSUANCE OF THE SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL
BANK CHECK WHICH WOULD HAVE RESULTED TO THE NOVATION OF THE
OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK.
 2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
REGIONAL TRIAL COURT OF LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST
THE PETITIONER THE CIVIL ASPECT OF THE CRIMINAL ACTION ON THE GROUND OF
NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF THE PRUDENTIAL
BANK CHECK.

3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION

TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION WHEN IT DENIED THE
MOTION FOR RECONSIDERATION OF THE PETITIONER ON THE GROUND THAT THE
ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN
THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT
SUCH ISSUE HAD NOT BEEN RESOLVED AS YET.11

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the
respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that
discharged the latter check; that respondent's acceptance of the Solid Bank check, notwithstanding
its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility,
under Article 315 of the Revised Penal Code, the drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof in the amount of ₱214,000.00; and that a check is a
contract which is susceptible to a novation just like any other contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or
accepted for his accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his
own right. (Emphasis ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

xxxx

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the
dishonored Prudential bank check resulted to novation which discharged the latter check is
unmeritorious.
In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co.,
Inc.,12 we stated the concept of novation, thus:

x x x Novation is done by the substitution or change of the obligation by a subsequent one which
extinguishes the first, either by changing the object or principal conditions, or by substituting the
person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never presumed; there must be an express intention to
novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to
dissolve the old obligation as the moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and new obligation be total on every
point such that the old obligation is completely superceded by the new one. The test of
incompatibility is whether they can stand together, each one having an independent existence; if
they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation
and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a
new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.
Novation is merely modificatory where the change brought about by any subsequent agreement is
merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to
pay; in this instance, the new agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.)

The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the
old, changes only the terms of payment, adds other obligations not incompatible with the old ones or
the new contract merely supplements the old one.13

In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim
that novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was
subsequently replaced by a Security Bank check,15 and said:

There are only two ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the
new obligations must be incompatible on every point. The test of incompatibility is whether or not
1avv phi 1

the two obligations can stand together, each one having its independent existence. If they cannot,
they are incompatible and the latter obligation novates the first. In the instant case, there was no
express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from
liability. Neither is there incompatibility because both checks were given precisely to terminate a
single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct
obligations, such is inapplicable to this case.16

In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as there was no express agreement to establish
that petitioner was already discharged from his liability to pay respondent the amount of
₱214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed, there
must be an express intention to novate. In fact, when the Solid Bank check was delivered to
respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of the
existing obligation to respondent to pay ₱214,000.00 subject of the replaced Prudential Bank check.
Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility,
since the two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying
the amount of ₱214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from
respondent. Indeed, there was no substantial change in the object or principal condition of the
obligation of petitioner as the indorser of the check to pay the amount of ₱214,000.00. It would
appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her
obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being
a crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a
new obligation in lieu of the old obligation arising from the issuance of the Prudential Bank check,
since there was an essential change in the circumstance of each check.

Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable
Instruments Law is silent with respect to crossed checks,18 although the Code of Commerce makes
reference to such instruments.19We have taken judicial cognizance of the practice that a check with
two parallel lines in the upper left hand corner means that it could only be deposited and could not
be converted into cash.20 Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the
payee named therein.21 The change in the mode of paying the obligation was not a change in any of
the objects or principal condition of the contract for novation to take place.22

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

WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution
dated March 2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.

SO ORDERED.