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177

NEGOTUffiLEINSTRUMENTSLAW

Bothwellv. Corum, 135 Ky. 766, 123S.w. 291; Jett v. Standafer, 143Ky 787, 137 C.w. 513; 7 Cyc. 930; Montgomeryv, Bank, 16 Ky.LawRep. 445; 5 Am. & Eng. Ency. 283. . . .

Judgment reversed, and cause remanded for new trial.

d. Effect of notice before full payment.

SEC. 54. NOTICE BEFORE FULL AMOUNTPAID.-Wbere the transferee receives notice of an yinfirmity in the instrument or defect in the title of

the person negotiating th e same before he has paid

th e full amount agreed to be paid therefor, he will

be deemed a holder in du e course only to th e extent of th e amount theretofore paid by him.

Notice of defenses to a purchaser before he ha s acquired

title and before he has paid any portion of the purchase price

is fully operative to prevent him from being a holder in due

course. But where he receives such notice after he has par

tially paid the instrument, he is a holder in due course as to

such amount paid by him. Should he pay the remainder de

spite the notice he cannot thereafter recover such amount from

the maker because to that extent, he will be subject to the

defenses which the maker may have. The term "paid" in Section 54 includes any performance by the purchaser of the in

strument, whether such performance consists in th e payment

of money, th e giving of credit, the assumption of obligations,

the rendition of services, the transfer of title to property or the

performance of any other promise.P However, it applies only

where the obligation incurred by th e holder of th e note or bill

is such that, on discovering the infirmity thereof, he is relievedfrom all further legal obligation to make further payment. I t

does not apply where the holder has given for the instrument

a promise whichha must perform, in which case he would be

in the same position as one who ha d paid money or property at

the time of the transfer.v To illustrate:

23 Britton, op, cit ., 459.

1. Griswoldv. Morrison, 200 P. 62 (1921). This rule is incorporated in Sec. 3-303(c) of the Uniform Commercial Code.

HOLDER IN DUE COURSE

A issues a note payable to the order of B. I3 v-anta to bor

roWmoney frorr, C who is willing to lend him only ifB gets X tosign with him a note in favor of C. X agrees to do 80 on the

condition that B indorse to him p.;s note 8S collateral. So B

indorses Ns note to X. When Ns note falls due, Arefuaes to pay

X on the ground that B was guilty of fraud in procuring the

note . Subsequently, X's and B's note in favor ofC falls due andsinceB ha s defaulted, X ha s to pay th e full amount to C. N atu

rally, X wants now to recoup his loss by demanding payment

again from A of the first note. A invokes Sec tion 54. X cannot

be covered by this section because when he signed the note in

favor of C, he had become unconditionally obligated to the lat

te r to pay th e note when due and cannot be released from such

obligation by th e mere fact that the collateral he got from Bturned out to be a result of fraud. At the time X received notice

of the fraud, he had already given full value for Ns note. He

ha d become a holder in due course ofN8note at the time it was

negotiated to him by B. He can thus recover from A.

CASES:. .. .

PENNOYER v. DUBOIS 'STATE BANK35 Wyo. 319, 249 Pac. 795 (1926)

The Wyoming Live Stock Loan Company, through its agents.Roy and Jones, by fraud sold to GeorgeA. Pennoyer shares of itscapital stock. This stock was paid for by the purchaser's two notespayable to the order of the seller, dated July 21, 1920 and payable

six nonths from dateOn July 22, 1920, the payee negotiated the notes to the Dubois

State Bank. The bank paid for the notes by its issuance to the payeeof the notes, of its own certificate of deposit, for the full amount of

the notes, payable to the order ofWyoming Live Stock Loan Company, nine months from date

At the time of its purchase of the notes the purchasing bankhad no knowledgeof the fraud whichhad been practicedby the payeethereof upon the maker. On December 31, 1920, the WyomingLiveStock Loan Company, as payee of the certiflcate of deposit, negoti.ated it to the First National Bank ofCody, as collateral security fora loan. The record did not disclose the date of the I".egotiation.

After the execution and issuance ofthe notes the maker learnedof the fraud which had been practiced upon him by the agents of the



178

179HOLDER INDUECOURSE

NEGOTIABLE INSTRUMENTS LAW

payee. And when these notes matured, on January 21, 1921, and

were presented for payment by the holder, the Dubois State Bank,

the maker refused to pay and he then informed the bank of the facts'which constituted the fraud. Thus the bank had no notice of the

defense at the time it issued its certificate of deposit bu t did havenotice at the time it discharged its certificate of deposit by payment

on April 28, 1921, six days after it fell due on April 22, 1921.Ay ear later, inApril1922, the indorsee of the notes, the Dubois

State Bank, sued the maker of the notes, George A. Pennoyer. The

defendant claimed that plaintiff was not a holder in due course and

, that therefore his personal defense of fraud was available as against

: the plaintiff, There was judgment fur the plaintiff. The defendant

brings error.

KIMBALL, J . .. .

Section 3987, Wyo. C.S. 1920 (Negotiable Instruments Law,Sec. 64), provides:

"Where the transferee receives notice of any infirmity in the

instrument or defect in the title of the person negotiat ing the same

before he has paid the full amount agreed to be paid therefor, he willbe deemed a holder in du e course only to the extent of the amount

therefore paid by him."

Relying on this section, tne defendant argues that the plaintiff

is not a holder in due course. The contention is that the giving of the

certificates of deposit was not payment, bu t only a promise to pay,and, while the plaintiff had no notice of the fraud when it took the

notes and issued the certificates, it did have notice before it paid

anything on the certificates, and cannot be deemed a holder in due

course,. .

. The plain tiffs testimony to show lack of notice was con fined to the time when it took th e notes an d issued the certificates ofdeposit, If, to avoid the effect of th e statute, it was necessary forplaintiff to prove that it had no notice of the fraud when it paid th e

certificates of deposit, it failed to prove its case. Bu t the plaintiff

was unaffected by the statute if, when it acquired the notes, it "paid

the full amount agreed to be paid therefor." . . . Section 54 is in tended to define cases in which the holder must protect himself byrefusing to make .further payment. The section has always been con sidered as a declaratory of the law as it existed before the enact

ment of the statute. Crawford, Neg. Ins. Law (3d Ed.) Sec . 93;Brannan, Neg. Ins. Lsw (4th Ed.), p. 410. Th e law intended to be

codified is that announced in Dresser v. Missouri, etc ., Co., 93 U.S.

92,23 L. Ed. 815 . . .Dresser v, Missouri, atc., Co., supra, WIlS a clear case for appli

cation of the rule. The plaintiff ha d bought notes made by defendantaggregating $10.000. Plaintiff paid on acquiring the notes $500, and

promised orally to pay the balance . Before he ha d paid anything

more than $500, he received notice that the notes had been obtained

from the maker by fraud . This notice was accompanied by a prohibi tion to pay. It was held that plaintiff could recover from the maker

only $500 . This was because he could have protected himself, after

notice of fraud, by refusing to make further payment. The opinion iscarefully guarded so as no t to control cases where th e purchaser has

given a negotiable instrument, as witness the following excerpts:

"I t does not appear that, upon the purchase of the notes in

suit, the plHintiff gave his note or other obligation which might by

its transfer subject him to liability."

Referring to the contention that negotiabte paper.may be sold

for less that it s Iace value. the court said (italics ours):

''This is true, and if the plaintiff had bought the notes in suit

for $500, before maturity and without .notice of any defense, and

paid that sum, or given his negotiable note therefor, the authoritiescited show that the whole interest in the notes would have passed tohi.m, and he could have recovered the full amount due upon them."

Wh en the holder ha s given for the paper his promise which he

must perform, as for i.nstance, when he ha s incurred liability to athird person, it is quite clenr that he is in th e same position and

entitled to the same protection as one who paid for the paper inmoney or property at the time of the transfer. Citizens' Bank v.Shaw,14 S .D. 197, B4 u .w 779; Griswold v. Morrison , 53 Cal. App. 93, 200

p.62, In the California case ju st cited, speaking of the effect of Sec tion 54 of the Negotiable Instruments Law, the court said:

"In our opinin this provision is applicable only where the obli gation incurred by the holder of the note is such that, on discoveringthe infirmity in the instrument, he is relieved from all further legalobligation to make any further paym en t, as , for example, where thenote ha s been transferred to him in cons iderntion of his promise tomake future payments to his transferor. In that case, if it shouldturn out that, by reason of fraud on the part of the transferor, the



180 NEGOTIABLE INSTRUMENTS LAW

maker of the note had a defense thereto, the transferee would beunder no legal obligation to pay the balance of the amount that hehad agreed to pay to his transferor for the transfer."

We think this comment may be taken as a reasonable inter

pretation of the statute. How, then, does it affect the plaintiff whogave for the notes his negotiable certificates of deposit which wereoutstanding when rlaintiff received notice of th e defect in the title

of the notes? There can be no doubt that when the plaintiff gave the

certificates of deposit for the notes it took the notes for "value" within

the meaning of Sections 62 and 25 of the Negotiable Instruments

Law-the other conditions necessary tomake it a holder in due coursebeing present-and if it was under a legal obligation to pay th e certificates of deposit when they bearne due, its right to protection as aholder in due course was the same as if it had paid money for the

notes when it acquired them.It may be argued that when the piaintiff received notice of the

fraud it could have protected itself from liability on the certificatesof deposit by enjoining their transfer or having them impounded by

the court to await a decision on the question of fraud. We believe theduty of bringing proceedings for such a purpose was on the defen dant. It was he who had put the notes in circulation, and it was he

who contended that.the notes had been procured by fraud. I f he ex peded to defend on the ground that plaintiff had not paid for the

notes at the time they were transferred, he ought to have inquired

as to the nature of the consideration, and would then probably have

learned that plaintif f had given for the notes its own negotiable cer tificates of deposit. I f the defendant then thought that an actionshould be brought to prevent a transfer of the certificates of deposit,it would seem that such an action ought to have been commenced byth e defendant, who was prepared to assert and prove the fraud.Adams v. Soule, 33 Vt . 538, 660. Had the plaintiff purpoaely con cealed from defendant the fact that the notes had been taken in

exchange for certificates of deposit, and thus deprived the defen dant of the opportunity to ( d k e steps to protect himself, the casemight assume a different aspect. Simmons v. Hodges, 260 F. 424,427, 162 C.CA 494. When plaintiff was notified of the fraud, it had

no way of knowing that its certificates of deposit had not already

been transferred to hold ers 'in due course. An inquiry to ascertain

where the certificates were might have been a signal for their trans

fer. Even the commencement of an action for injunc tion against the

then holder might have been ineffectual. Southard v. Lantharn, 18N.M. 603, 138 P. 206, 60 L.R.A (N.S.) 871, an d note. In hringing

such an action the plaint iff would have to decide at his peril that

181HOLDERIN DUE COURSE

defendant's claim of fraud was true and face the burden of provingit. We cannot believe that the plaintiff was required to embroil itselfin such litigation. See Duncan v. Gilbert, 29 N.J. Law 521, 640. Casesdirectly in point on this question are not numerous. Where a checkhad been given for the note in suit, it is held that the drawer of the

check ha d no duty of stopping payment on the check after notice offraud in the note. Matlock v. Scheuerm an, 51 Ore. 49,93 P. 823, 17

L.R.A. (N.S.) 747; Miller v, Marks, 4& Utah. 257, 148 P. 412;Reitherman v. VI heeler (Mo. ApP.) 247 SW. 222. The reasoning in

those cases supports fully our views in this.We come now to c o n s i d ~ r what was necessary to be proved by

the plaintiff to show that it was not aff ected by Section 54 of the

Negotiable Instruments Law.When the notes matured and plaintiff's cause of action accrued,

the certificates of deposit were still outstanding and no t yet due. Ifplaintiff's status were to be determined by the conditions at that

time, there would be authority for holding that it was a holder indue course and not affected by Section 54. Duncan v. Gilbert, 29 N.J.Law 521, 639; Howlett v. Fitzgibbon (City Ct. NY), 1 N.Y.S . 321;Montgomery Garage Co. v, Manufacturers' L.I. ce , 94 N.J· Law 152,109 A. 295, 22 AL.R. 1224; Clayton v. Bank of 'East Chattanooga,

204 Ala . 64, 84 So. 271; Simmons v. Hodges, 250 F. 424, 162, C.CA

494; Ranchmen's Trust Co. v. Gill, 113 Kan. 261, 214 P.413,417. See

Digby v. Jones, 67 Mo. 104, 108. ". '.•F

Bu t there is authority for holding that the plaintiff to avoid

the effect of Section 54, and to sustain the burden of proving that itwas a holder in due course, was required to prove that the certifl cates of deposit had been negotiated and that the plaintiff had ei

ther paid or become liable to pay them to someone other than the

payee. This eeems to have been held or assumed to be the r ule in the

following caseS: Rueh v. Mitchell, 71 Iowa, 333, 32 N W. 367; Fluegel

v. Henschel, 7 N.D. 276, 74 N.w. 996, 66 Am. St . Rep. &42; Thoma.8v.

Stone, Walk. cs . (Mich.) 117; Davis v. Ward, 109 Cal. 186, 41 P.1010, 50 Am. St. Rep. 29; Wynn v. Carter, 20 Wl S . 107; City Bank v.

Bryan, 72 W. Va. 29,78 S.E. 400; Elmore County Bank v.Avant, 189Ala. 418, 66 So. 509; Security State Bank v. Brown, 110 Neb. 237,193 N.W. 336; Miller v. State Savings Bank, 227 Mich. 31&, 198 N.W.

996; Cartier v. Morrison, 232 Mich. 352, 205 NW. 108.Under any rule that can be gathered from the cases, both be

fore and since the Negotiable Instruments Law, the plaintiff's evidence met the burden of proof if it was sufficient to establish that

the First National Bank of Cody, to whom the certificates of depositwere paid by the plaintiff, was a holder in due course of euch certHl.

cates. By Section 3978, C.S. Wyo.1920 <.Negotiable Instruments Law,



183


Sec. 45), the negotiation ' of the certificates of d eposit to the First

National Bank of Cody is deemed prima facie to have been effectedbefore the certificates were overdue. By Section 3992, C.S. (Negotiable Instruments Law, Sec. 59):

"Every holder is deemed prima facie to be a holder in due course;bu t when it is ahown that the title of any person who has negotiated

the instrument was defective, the burden is on the holder to provethat he or some persou under whom he claims acquired the title as aholder in due course."

If the plaintiff was editled to the benefit of the presumptions

declared by these statutes, particularly the presumptions stated inthe first clause of Section 60 of the Negotiable Instruments Law,there can be no doubt that proof that the First National Bank of

Cody was the indorsee and holder of the certificates of deposit was aprima facie showing that it was a holder in due course, and aufficient to justify a finding of that fact, there being no other evidence torequire a different finding. The fact that the notes in suit had been

procured by fraud, when eatablished, or assumed, as it mu st be inthis case, destroyed the presumption that plaintiff was a holder in

due course of the notes (Glendo State Bank v. Abbott, 49 Wyo. 98,105,216 P. 700, 34AL.R. 294), but we cannot believe that it had the

effect of destroying presumptions in favor of the First National Bank

of Cody as the holder of the certificates of deposit. The defendant,

the victim of the fraud, was not a party to the certificates ofdeposit.If the plaintiff had been sued by the indorsee of the certificates ofdeposit, it is at least doubtful whether the fraud practiced in obtaining the notes could have been set up as a defense. See Wegener v.Emmetsburg Nat. Bank. 195 Iowa , 1267, 193 N.W: 927. We assume,

however, that the plaintiff, if sued by the indorsee of the certificates 'vf deposit, might have defended on the ground that the notes givenfor the certificates of deposit were worthless , and therefore the certificates of deposit without consideration. ·Mann v. Second-Nat. Bank,

30 Kan . 312, 1 P. 579. That defense would not have pu t upon the

holder of the certificates of deposi t the burden of proving that hewas a holder in due course. Failure of considerat ion does not render

the title defective. Brannan, supra, p. 538, and cases cited . The

indorsee of the certificates of deposit therefore, in a suit on the certificatea, would have had the benefit of the presumption that it wa s

0. holder in due course. For reasons at least as good as plaintiff inthis case was entitled to rely upon that presumption.

We ha ve deemed it proper to give to the last point most carefulconsideration, and to state ou r views at some length, because a different view, in which we regret we cannot concur, was reached byth e Supreme Court of Michigan in the recent case of Cartier v.

HOLDER IN DUE COURSE

Morr ison, 232 Mich. 352, 205 N.W. 108.We think the finding of the trial court that the plaintiff was a

holder in due course was supported by the evidence and cannot be

disturbed .The judgment will be affirmed.

e. Constructiue notice not suffi cient.

Just as a purchaser of a negoti able instrument is not put

on inquiry, ne ither he is charged with notice of defenses orequities disclosed by public records." nor is he affected by the

doctrine of lis pendens.2ll However, notice to an agent is charge

able against the principal.ZT

CASE:

FOSTER v. AUGUSTANNA COLLEGE AND THEOLOGICALSEMINARY OF ROCK ISLAND , ILL .

92 Oki i . 96, 218 Pac. 335 (1932)

On September 6, 1916, John F. Hopkins and Myra Hopkins

executed and del ivered to the Aurelius-Swanson Co., lnc ., the payeetheir negotiable note for $2,500, du e December 1;"1926. This notewas secured by mortgage and appended to said note, bu t not incorporated in the body of it, was the following recital: "Th is note issecured by first mortgage on" .. . (here followed th e description ofthe land mortgaged). The mortgage was duly recorded on Septem

be r 6, 1916 .On November 23, 1916, the mortgagee assigned the note and

mortgage to the plaintiff, Ira T. Foster, for full value. The not e Wll8

not indorsed bu t th e assignment of both the note and mortgage wdaccomplished solely by virtue of a separate instru:

nentof assign

ment. Both the note and the mortgage instrument were relayed to

Foster. The assignment of the mortgage was duly recorded on July

Metropotitan State Bank v. McNutt, 73 Colo, 291, 215 P. 151(1923). Th is is expressly provided by Sec. 3-304(4) of the Uniform

Commercia l Code.26 First Trust & Savings Bank v. U.S. Fidelity & Guaranty Co.,

200 N.W. 848 (1924); Ross v. Title Guarsntee & Trust Co., 29 P. 2d

236 (1934).2'T See Mechem, Agency, Sees. 1802-1854, (2d ed. Vol. 11).




only an accommodation party." 'Ib paraphraae, the accommodation,

party is liable to a holder for value as if the contract was not for'

accommodation:iI t is no t a valid defense that the accommodationparty did not receive any valuable consideration when he executedthe instrument. Nor is it correct to say that the holder for value isnot a holder in due course merely because at the time he acquired

the instrument, he knew that the indorser was only an accommodation party. (Footnotes omitted.)

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the makej- to protecthimself against the danger of in30lvency of the latter, cannot in aw

manner affect his liabilHy to the 'appellee, as the said remedy is.a

matter of concern exclusively between aeco'mmodation indorser arid 'accommodated party "So that the fact that the appellant stands onlyas a surety in relation to the maker, granting this to be true for thesake of argument, is immaterial to the claim of the appellee, anddoes not a whit diminish nor defeat the rights of the latter who is aholder for value. The liability of the appellant remains primary and

unconditional. 'Ib sanction the appellant's theory' is to give Unwarranted legal recognition to the patent absurdity of a situation where

an indorser, when sued on an instrument by a holder in due courseandlfor value, can escape liability on his indorsement by the convenient and expedient of interpcei-ig the defense that he is a mereaccommodatior. indorser.

Accordingly, th e judgm.ent a quo is affirmed in toto, atappellant's cost.

SADAYA v. SEVILLAL-17845, April 27, 1967; 19 SCRA 924

SANCHEZ, J .:

s ; ., .On March 28, 1949, V t o 8.eviHa, Oscar. Varona .and Simeon

Sa9liY.!'! .executed, joil)t.1y ll:pd ~ e v e r a l l y , , i i n I f a v ~ r of the Bank of thePhilippine Islands, .or its ?rder, a promissorY note .for PI5,OOO withinterest at 6% per annum, payable on demand. The entire amount ofP15,OOO, proceeds of the promissory note, was received from the bank

by Oscar Varona alone. Victor Sevilla and Simeon Sadaya signed the

promissory not,e as co-makers only as a favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the outstandin!;balance stood at P4,850. No payment was thereafter made,

On October 6, 1952, the bank collected from Sadaya the foregoing balance Which together with interest totaledP 5,746.12. Varonafailed to reimburse Sadaya despite repeated demands.

LIABILITY OF PARTlES

.Victor Sevilla died. Intestate estate proceedings were started

in the Court of First Instance of Rizal, Special Proceedi ng No. 1518.Francisco' Sevilla was named administrator.

In Special Proceeding No. 1518, Sadaya filed a creditor's claimfor the above sum of P5,746.12, plus attorney's fees in the sum -ofPl,500. The administrator resisted the claim upon the averment

Jhat' the,decea sed Victor Sevilla "did not receive any amount as con~ i d e r a t i o n for the promissory note," but signed it cnly as "surety forOscar Varona".

x x x x x.

Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim "in the a mount of 50% of P5,746.12 orP2,873.06, against the intestate estate of the deceased Victor Sevilla,"be approved.

1. That Victor Sevil la and Simeon Sad aya were joint and sev~ J ~ t ,acco}l1 II)-?diltion makers of the PI5,OOO promissory note in favorof the Bank of the Philippine Islands, need no t be essayed. As suchaccommodation makers, the individual obligation of each of them to

the .bank is no different from, and no greater and no less than that

contracted by Oscar Varona.'. 'For, .while these two did not receivevalue onthe promissory note,' they executed the same with, and forthe' purpose of lending their names to, Oscar Varona. Their liabilityto the bank upon the explicit terms of the promissory note is joint

and several. Better yet, the bank could have pursued it s right tocollect the unpaid balance against either Sevilla or Sadaya. And the

fact is that one of the last two, Simeon Sadaya, paid that balance.2. It is beyond debate that Simeon Sadaya could have sought

reimbursement of the total amount paid from Oscar Varona. This is

but right and just. Varona received full value of the promissory note.Sadaya received ~ ( ; t l i i r i g tberefrom.' He paid the bank because he"If ' " . . " • , .

was joint and several obligor. The .least that can be said is that, asbetween Varona and Sadaya, there is an implied contract of indem6ity: And Varona is bound by the obligation to reimburse Sadaya.

. , 3. The common creditor, the Bank of the Philippine Islands,now out of the way, we first look into the relation inter se amongst

the three cosigners of the promissory note. Their relation vis-a-vis

the Bank, we repeat, \S that of joint and several obligors. But canthe same thing be said about the relations of the three cosigners inrespect to each other?

Surely enough, as amongst the three, the obligation of Varona

and Sevilla to Sadaya who paid cannot be joint and several. For

indeed, had, payment been made by Oscar Varona, instead of SimeonSadaya, V ~ r o n a could not have had reason to seek reimbursement

from t ; i t h ~ r Sevilla or Sadaya, or both. After all, the proceeds of theu . , ..:. . . .



68180 NEGOTIABLE INSTRUMENTSLAW

loan went to Varona and the other two received nothing therefrom.. 4. On'principle, a solidary accommodation m a k e r - w h ~ made

payment-has the right to contribution, from his cc-accommodatioii

maker, in the absence of agreement to the contrary between' them,an d subject to conditions imposed by law. This right springs from animplied promise between the accommodation makers to share equally

the burdens that may ensue from their having consented to stamp.their signatures on the promissory note, For having lent their signa

tures to the principaldebtor, they clearly placed themselves-in so

far as payment made by one may create liability on the other-in the

category of mere joint guarantors of the former. This is as it shouldbe. Not one of them benefited by the promissory note . They stand 0(1

the same footing . In misfortune, their burdens should be equallyspread. ,

x x x x x x.

5. And now, to the requisites before one accommodation maker

can seek reimbursement from a co-accommodation maker. ,

By Article 18 of the Civil Code, in matters not covered by special laws, "their deficiency shall be supplied by the provisions of this

Code." Nothing extant in the Negotiable Instruments Law would

define the right of one accommodation maker to seek r e i m b u r s ~ -merit from another. Perforce, we must go to the Civil Code.

Because Sevilla and Sadaya, in themselves, are bu t co-guarantors of Varona, their case comes within the ambit of Article 2073of the Civil Code which reads:

"Art . 2073 , When there are two or more guarantors of the

same debt, the one among them who has paid may demand of each

I £If the others the share which "is pr'oportionaUy'owing' from him ,

I If any of the guarantors should be insolvent, the share shall beborne by the others, including the payer, in the same proportion.' The provisions of this alticl.e shall not be applicable, , ~ n l e s s thepayment has been made in uirtue of a judicial demand or unless theprincipal debtor is insolvent."

x x x x x .

All of the foregoing postulate the following rules: (1) A joint

and several accommodation maker of a negotiable promissory note

may demand from the principal debtor reimbursement for the amount

that he paid to the 'payee; and (2) a joint and several accommodation

maker who pays on the said promissory note may directly demand

reimbursement from hill co-a<.:commodation maker without first directing his action against the principal debtor provided that (a) he

made the payment by virtue of a judicial demand or (b) th e principal

LIABiLiTY OFPARTIES

debtor is insolvent.

The Court of Appeals found that Sadaya'a payment to the bank

"was made voluntarily an d without any judicial demand," and that

"there is an absolute absence of evidence showing that Varona is

insolvent." This combination of fact and lack of fact epitomizes the

fatal distance between payment by Sadaya and Sadaya's right todemand of Sevilla "the share which is proportionately owing fromhirrn...

For the reasons given, the judgment of the Court of Appealsunder review is hereby affirmed . No costs .

PRUDENCIO v. COURT OF APPEALS

L-34339 July 1, 1986; 143 SCRA 7

GUTIERREZ, J r., J .:

This is a petition for review seeking to annul and se t aside the

decision of the Court of Appeals, now the Intermediate AppellateCourt, affirming that order of the trial court which dismissed the

petitioners ' complaint for cancellation of their real estate mortgageand held them jointly and severally liable with the principal debtorson a promissory note which they signed as accommodation makers.

The factual background of this case is atated.jn the decision ofthe appellate court: '

"Appellants are the registered owners of a parcel of land lo

cated in Sarnpaloc, Manila, and covered by T.C.T. 35161 of the Reg

ister of Deeds of Manila . On October 7, 1954, this property was

mortgaged by the appellants to the Philippine National Bank, here

inafter called PNB, to guarantee a loa n ofPt,OOO.OO extended to one

Domingo Prudencio."Sometime in 1955, the Concepcion & Tamayo Construction

Company, hereinafter called Company, ha d a pending contract with

the Bureau of Public Works , hereinafter called the Bureau, for theconstruction of the municipal build ing in Puerto Princesa, Palawan,

in the amount of P36,800.00 and, as said Company needed funds forsaid construction, Jose Toribio, appellant's relative, and attorney

in-fact of the Company, ap proached the appellants asking them tomortgage their propertyto secure the loan of P 10,000.00 which the

Company "a s negotiating with the PNB."After some persuasion appellants signed on December 23, 1955

the 'Amendment of Real Estate Mortgage', mortgaging their said

property to the PNB to guaranty the loan of PI0,OOO.OO extended to

the Company. The terms and conditions of the original mortgage for



577

576 NE;GOTIAELE INSTRUMENTS LAW

MARCELO A. MESI NA v. INTERMEDIATEAPPELLATE COURT, et al.

L-70145, November 13, 1986; 145 SCRA 499

PARAS, J.:

x x x.

Respondent Jose Go, on Decem ber 29, 1983, purchased fromAssociated Bank CaShier'a Check No. 011302 for P800,OOO.OO. Unfortunately, Jose Go left said check on top of the desk of the bank

manager when he left the bank. The bank manager entrusted the

check for safekeeping to a bank official, a certain Albert Uy, who had

then a visitor in the per son of Alexander Lim . Uy had to answer a

phone call on a nearby telephone after which he proceeded to the

men's room. When he returned to his desk, his v isi tor Lim Was already gone. When Jose Go inquired for hi s cashier's check from AlbertUy, the check Was not in his folder and nowhere to be found. The

latter advised Jose Go to the bank to accomplish a "STOP PAYMENT"

order, which suggestion Jose Go imm ediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the

loss of the check, pointing to the person of Alexander Lim as the onewho could shed light on it.

The records of the police show that Associated Bank receivedthe lost check for clearing on December 31, 1983, coming from Pru

dential Bank, Escolta Branch. The check was immediately dishon'

ored by Associated Bank by sending it back to Prudential Bank, withthe words "Payment Stopped" stamped on it . Howevel; the same

was again returned to Associated Bank on January 4, 1984 and for

the second time ic was dishonored. Several days later, respondent

Associated Bank received a retter, dated January 9, 1984, from acertain Atty. Lorenzo Navarro demanding payment on the cashier 'scheck in question, which was being held by his client . He however

refused to reveal the name of his client and threatened to sue, if

payment is not made . Respondf:<nt bank, in its lettel; dated January20, 1984, replied saying the check belonged to Jose Go who lost it inthe bank and is la ying claim to it.

On February I, 1984, police sent a letter to the Manager ofPrudential Bank, Escolta Branch, requesting assistance in identify- _ing the person who tried to encash the check but said bank refused'

saying that it had to protect its client's interest and the identity

could only be revealed with the client's conformity. Unsure of what

to do with the matter, re spondent Associated Bank on February 2,1984 filed an action for lnter'pleader naming as respondent, Jose Go

LIABILI1Y OF PARTIES

and one John Doe, Atty. Navarro's then unnamed client. On evendate, respondent bank received summons and copy of the compliantfor damages of a certain Marcelo A. Mesina from the Regional Trial

Court (RTC) of Caloocan City filed on January 23, 1984 bearing the

number C-11139. Respondent bank moved to amend its complaint,having been notified for the first time of th e name of Atty. Navarro's

client and substituted Marcelo A. Mesina for John Doe. Simulta neously, respondent bank, thru representative Albert Uy, informedCpl. Gimao of the Western Police District that the lost check of Jose

Go is in the possession of Marcelo A. Mesina, herein petitioner. WhenCpl. Gimao went to Marcelo A. Mesina to ask how he came to possess the check, he said it was paid to him by Alexander Lim in a

"certain transaction" bu t refused to elucidate further. An information for theft (Annex J) wss instituted against Alexander Lim and

the corresponding warrant for his arrest was issued (Annex 6-A)which up to the date of the filing of this instant petition remains

unserved because of Alexander Lim's successful evasion thereof.Meanwhile, Jose Go filed his answer on February 24, 1984 in

the Interpleader Case and moved to participate as intervenor in the

complaint for damages. Albert Uy filed a motion for intervention

and answer in the complaint for Interpleader. On the scheduled dateof pretrial conference in the interpleader case, it was disclosed that

t h ~ . o h n Doe" impleaded as one of the defendanra is actually petitioner Marcelo A. Mesina. Petit ioner instead of filing his answer tothe complaint in the interpleader filed on May 17, 1984 an Omnibus

Motion to Dismiss E Abudante Cautela alleging lack of jurisdictionin view of the absence of an order to litigate, failure to state a cause

of action and lack of personality to sue. Respondent bank in the

other civil case (CC-11l39) for damages moved to dismiss suit inview of the existence alre ady of the Interpleader case .

The trial court in the interpleader case issued an order dated

July 13, 1984, denying the motion to dismiss of petitioner Mesinaand ruling the respondent bank's complaint sufficiently pleaded acause of action for interpleader. Petitioner filed his motion for reo

consideration which was denied by the trial court on September 26,1984. Upon motion for respondent Jose Go dated October 31, 1984,respondent judge issued an order on November 6, 1984 declaring

petitioner in default since his period to answer has already expiredand set the ex-parte presentation of respondent bank's evidence onNovember 7, 1984.

Petitioner Mesina filed a petition for certiorari with preliminary injunction with lAC to set aside 1) order of respondent courtdenying his omnibus Motion to Dismiss 2) order of respondent court

denying his Motion for Reconsideration and 3)order ofdefault against



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578 N E ~ ' 3 L E I N S T R U 1 { E N T S L A W him.

On January 22, 1985, LAC rendered its decision dismissingthe petition for certiorari. Petitioner Mesina filed his Motion for

Reconsideration which was also denied by the same court in its resolution dated Fermary 18, 1985.

Meanwhile, on same date (February 18, 1985), the trial courtin Civil Case No. 84-22515 (Interpleader) rendered a decision, the

dispositive portion reading as follows:

"WHEREFORE, in view of the foregoing, judgment is herebyrendered ordering plaintiff ASSociated Bank to replace Cashier's

Check No. 011302 in favor of Jose Go or its cash equivalent withlegal rate of interest from date of complaint, and with costs of suitagainst the latter.

SO ORDERED."

On March 29, 1985, the trial court in Civil Case No. C-l1l39,

for damages, issued an order, the pertinent portion of which states:

"The records of this case show that on August 20, 1984 proceedings in this case was (were) ordered suspended because the main

issue in Civil Case No. 8'4·22515 and in this instant case ar e the

same which is: who between Marcelo Mesina and Jose Go is entitled

to payment of Associated Bank's Cashier's Check No. CC-01I3027Said issue having been resolved already in Civil Case No. 84

22515,really this instant case has become moot and academic.

WHEREFORE, in view of the foregoing, the motion should beas it is hereby granted and this case is ordered dismissed.

In view of the foregoing ruling no more action should be taken

on the "Motion For Reconsideration (of the Order admitting the Intervention)" dated June 21,1984 as well as the Motion for Reconsideration dated September J.O, 1984.

SO ORDERED."

Petitioner now comes to Us, alleging that:

1. LAC erred in ruling that a cashier's check can be Counter manded even in the hands of B holder in due course.

2. LAC erred in countenancing the filing and maintenance ofan interpleader suit by a party who had earlier been sued on thesame claim.

3. rAC erred .in UPhOlding the trial court's order declaringpetitioner as in def9ult when there was no proper order for him toplead the interpleader complaint.

4. rAC went beyond the scope of its certiorari jurisdict ion by

LIABILITY OF PARTIES

making findings of facts in advance of trial.

Petitioner now interposes the following prayer:1. Reverse the decision of the lAC, dated January 22, 1985

and set aside the February 18, 1985 resolution denying the Motionfor reconside ration. .

2 . Ann ul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit in declaring petitioner indefault.

Petitioner's allegations hold no water. Theories and examplesadvanced by petitioner on causes and effects of a cashier's checksuch 8S 1) it cannot be countermanded in the hands of a holder indue course and 2) a cashier's check is a bill of exchange drawn by

the bank against itself-are general principles which cannot be aptly

applied to the case at bar, without considering other things . Peti

tioner failed to substantiate his claim that he is a holder in due

course and for consideration or value as shown by the established

facts of the case. Admittedly, petitioner became the holder of the

cashier's check as endorsed by Alexander Lim who stole the check.) { .refused to say how and why it was passed to him . He had therefore .not ice of the defect of his ti tle over the check from the start. The

holder of a cashier's check who is not a holder in due course cannot

.enforce such check .against the issuing-bank wH.'i't·h"dishonors the .· ' B ~ m S . '.If a payee of a cashier's check obtained it from the issuing

bank by fraud, or if there is some other reason why the payee is not

entitled to collect the check, the respondent bank would, of course,have the right to refuse payment of the check when presented by the

payee, since respondent bank was aware of the facts surrounding

the loss of the check in question. Moreover, there is no similarity inthe cases cited by petitioner since respondent bank did not issue the

cashier's check in payment of its obligation . Jose Go bought it fromrespondent bank for purposes of transferringhis funds from respondent bank

toanother bank near his establishment realizing

thatcarrying money in this form is safer than if it were in cash. The

check was Jose Go's property when it was misplaced or stolen, hence

he stopped its payment. At the outset, respondent bank knew it was

Jose Go's check and no one else since Go had not paid or indorsed ittoanyone. r'I'he bank was therefore liable to nobody ori 'the checkbut

Jose Go. The bank had no intention to issue it to petitioner but only

to buyer Jose Go. When payment on it wa s therefore stopped, respondent bank was nOL the one who did it but Jose Go, the owner ofthe check. Respondent bank could not be drawer and drawee forclearly, Jose Go owns the money it represents and he is therefore



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the drawer and the drawee in the same manner as ifhe has a current account and he issued a check against it; and from the momentsaid cashier's check was lost and/or stolen no one outside of Jose Gocan be termed a holder in due course because Jose Go ha d not

indorsed it in due course . The check in question suffers from the

infirmity of not having been properly negotiated and for value byrespondent Jose Go who as already been said if' the real owner ofsaid instruments.

In his second assignment of error, petitioner stubbornly inaiats that there is no showing of conflicting claims and interpleader

is out of the question. There is enough evidence to establish the contrary. Considering the aforementioned facts and circumstances, respondent bank merely took the necessary precaution not to make amistake as to whom to pay and therefore interpleader was its properremedy. It has been shown that the interpleader suit was filed byrespondent because petitioner and Jose Go were both laying their

claims on the check, petitioner asking payment thereon and Jose Goas the purchaser or owner. The allegation of petitioner that respondent bank had effectively relieved itself of its primary liability un

der the check by simply filing a complaint for interpleader is beliedby the willingness of respondent bank to issue a certificate of time

deposit in the amoun t of P800 ,OOO representing the cashier's check'in question in the name of the Clerk of Court of Manila to be awardedto whoever will be found by the court as validly entitled to it. Said

validity will depend on the strength of the parties' respective' rightsand titles thereto. Bank filed the interpleader suit not because petitioner sued it bu t because petitioner is laying claim to the same

check that Go is claiming. On the very day that the bank instituted

the case in interpleader, it was not aware of any suit for damages

filed by petitioner against it as supported by the fact that the

interpleader case was first entitled Associated Bank vs. Jose G<> andJohn Doe, bu t later on changed to Marcelo A Mesina for John Doewhen his name became known to respondent bank.

In his third assignment of error, petitioner assails the thenrespondent IAC in upholding the trial court's order declaring petitioner in default when there WB.$ no proper order for him to plead inthe interpleader case . Again, such contention is untenable. The trial

court issued an order, compelling petitioner and respondent Jose Goto file their Answers setting forth their respective claims. Subsequently, a Pre-Trial Conference was set with notice to par ties to submit position papers. Petitioner argues in his memorandum that this

order requiring petitioner to file his answer was issued without ju

risdiction allegin g that since he is presumably a holder in due courseand for value, how can he be compelled to litigate against Jose Go

LIABILITYOFPARTIES

who is not even a party to the check? Such argument is trite andridiculous if we have to consider that neither his name or Jose Go'sname appears on the check . Following such line of argument, petitioner is no t a party to the check either and therefore had no validclaim to the Check. Furthermore the Order of the trial court requiring the parties to me their answers is to all intents and purposes an

order to interplead, substantially and essentially and therefore incompliance with the provisions of Rule 63 of the Rules of Court.

What else 1S the purpose of a law suit but to litigate?The records of the case show that respondent bank had to re

sort to details in support of it s action for Interp leader . Before it re sorted to Interpleader, respondent bank took all precautionary and

necessary measures to bring out the truth . On the other hand, peti tioner concealed the circumstances known to him and now that pri vate respondent bank brought th ese circumstances out in court

(which eventually rendered it s decision in the light of these facts),petitioner charges it with "gratuitous e:x:cursions in these non-is sues." Respondent lAC cannot rule on whether respondent RTC committed an abuse of discretion or not, without being apprised of the

facta and reasons why respondent Associated Bank instituted the

Interpleader case. Both parties were given an opportunity to presenttheir sides. Petitioner chose to withhold substantial facts. Respondents were not forbidden to present their side ·- J9-i!'l .is the purposeof the Comment of respondent to the p'etition , IAC decided the question by considering both the facts submitted by peti tioner and thosegiven by respond.ents . IAC did not act therefore beyond the scope of

the remedy sought in the petition. 'WHEREFORE, finding that the instant petition is merely dila

tory, the same is hereby denied and the as sailed orders of the reo

spondent court are hereby affirmed in toto.

SO ORDERED.

NOTE: The clear implication from th e case is that if Mesina

had been a hold er in due course, the Court would have grant ed recov

ery. Wha.t provisions of the NIL would ju stify such a. recovery? Wouldnot the defense of Go be available against a holder in due course?

Why 1

b. Certification and its effects.

SEC. 187. CERTIFICATION OF CHECK; EF

FECT OF.-Where a check is certified by the bank

on which it is drawn, th e certification is equiva

lent to an acceptance.

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