Commercial Law

Eulalio Prudencio vs Court of Appeals

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G.R. No. L-34539 – 143 SCRA 7 – Mercantile Law – Negotiable Instruments Law – Consideration – Liability of Accommodation Party – Holder in Course

In 1955, Concepcion and Tamayo Construction Enterprise had a contract with the Bureau of Public Works. The firm needed fund to push through with the contract so it convinced spouses Eulalio and Elisa Prudencio to mortgage their parcel of land with the Philippine National Bank for P10,000.00. Prudencio, without consideration, agreed and so he mortgaged the land and executed a promissory note for P10k in favor of PNB. Prudencio also authorized PNB to issue the P10k check to the construction firm.

In December 1955, the firm executed a Deed of Assignment in favor of PNB which provides that any payment from the Bureau of Public Works in consideration of work done (by the firm) so far shall be paid directly to PNB – this will also ensure that the loan gets to be paid off before maturity.

Notwithstanding the provision in the Deed of Assignment, the Bureau of Public Works asked PNB if it can make the payments instead to the firm because the firm needs the money to buy construction materials to complete the project. Notwithstanding the provision of the Deed of Assignment, PNB agreed. And so the loan matured without PNB actually receiving any payment from the Bureau of Public Works. Prudencio, upon learning that no payment was made on the loan, petitioned to have the mortgage canceled (to save his property from foreclosure). The trial court ruled against Prudencio; the Court of Appeals affirmed the trial court.

ISSUE: Whether or not Prudencio should pay the promissory note to PNB.

HELD: No. PNB is not a holder in due course.

Prudencio is an accommodation party for he signed the promissory note as maker but he did not receive value or consideration therefor. He expected the firm (accommodated party) to pay the loan - this obligation was shifted to the Bureau of Public Works by way of the Deed of Assignment). As a general rule, an accommodation party is liable on the instrument to a holder for value/in due course, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. The exception is that if the holder, in this case PNB, is not a holder in due course. The court finds that PNB is not a holder in due course because it has not acted in good faith (pursuant to Section 52 of the Negotiable Instruments Law) when it waived the supposed payments from the Bureau of Public Works contrary to the Deed of Assignment. Had the Deed been followed, the loan would have been paid off at maturity.

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