Garcia v.

Llamas, 417 SCRA 292

Summary

The case involves a complaint for sum of money filed by respondent Dionisio Llamas against petitioner
Romeo Garcia and Eduardo de Jesus for a Php 400,000 loan with a 15% interest per month, which
remained unpaid despite repeated demands by the respondent. The petitioner resisted the complaint,
claiming that he signed the promissory note as an accommodation party for de Jesus, who had already
paid the loan by means of a check, and that the issuance and acceptance of the check had novated or
superseded the note.

The trial court ruled in favor of the respondent, while the Court of Appeals affirmed the decision, stating
that no novation had taken place and that the petitioner's defense as an accommodation party was not
valid. The court held that for novation to take place, there must be a previous valid obligation, the
parties concerned must agree to a new contract, the old contract must be extinguished, and there must
be a valid new contract. However, the parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and acceptance of the check or that the check would take the place of
the note.

Additionally, the promissory note was non-negotiable, and the petitioner could not avail himself of the
provisions of the Negotiable Instruments Law (NIL) on the liabilities and defenses of an accommodation
party. Moreover, an accommodation party is liable for the instrument to a holder for value, even if the
latter knew the former to be only an accommodation party at the time of taking. The relation between
an accommodation party and the party accommodated is one of principal and surety, and a surety is
bound equally and absolutely with the principal and is deemed an original promissory debtor from the
beginning. The liability is immediate and direct.

Digested Case

Facts: A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner Romeo
Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him. They bound
themselves jointly and severally to pay the loan on or before January 23, 1997 with a 15% interest per
month. The loan remained unpaid despite repeated demands by respondent.

Petitioner resisted the complaint alleging that he signed the promissory note merely as an
accommodation party for de Jesus and the latter had already paid the loan by means of a check and that
the issuance of the check and acceptance thereof novated or superseded the note.
The trial court rendered a judgment on the pleadings in favor of the respondent and directed petitioner
to pay jointly and severally respondent the amounts of Php 400, 000 representing the principal amount
plus interest at 15% per month from January 23, 1997 until the same shall have been fully paid, less the
amount of Php 120,000 representing interests already paid.

The Court of Appeals ruled that no novation, express or implied, had taken place when respondent
accepted the check from de Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and de
Jesus. Respondent’s acceptance of the check did not serve to make de Jesus the sole debtor because
first, the obligation incurred by him and petitioner was joint and several; and second, the check which
had been intended to extinguish the obligation bounced upon its presentment.

Issues:

(1) Whether or not there was novation of the obligation

(2) Whether or not the defense that petitioner was only an accommodation party had any basis.

Held: For novation to take place, the following requisites must concur: (1) There must be a previous valid
obligation; (2) the parties concerned must agree to a new contract; (3) the old contract must be
extinguished; and (4) there must be a valid new contract.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check or that the check would take the place of the note.

(2) By its terms, the note was made payable to a specific person rather than bearer to or order—a
requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities
and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in
writing and evidence of such intangible rights as may have been created by the assent of the parties. The
promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.

Even granting that the NIL was applicable, still petitioner would be liable for the note. An
accommodation party is liable for the instrument to a holder for value even if, at the time of its taking,
the latter knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and surety. It is a
settled rule that a surety is bound equally and absolutely with the principal and is deemed an original
promissory debtor from the beginning. The liability is immediate and direct.