111. SPS. VIOLAGO v.

BA FINANCE and VIOLAGO

GL
G.R. No. 158262, July 21, 2008
VELASCO, JR., J.:

Blurb:

Topic: Defenses and Equities > Consideration

Doctrine: The NIL considers every negotiable instrument prima facie to have been issued for a
valuable consideration, and when the holder is in due course, the presumption of consideration is
conclusive. The maker cannot set up the defense of nullity of the contract of sale, in relation to
which the negotiable instrument was issued, against a holder in due course.

SuperSummary: Petitioner Spouses Violago bought a car from VMSC through its President,
Respondent Avelino Violago (Avelino). Petitioners signed a promissory note (PN) for the
remaining balance and secured the PN with a mortgage over the car. VMSC indorsed the PN to
Respondent BA Finance, who paid the balance, and assigned BA Finance the rights over the
chattel mortgage. As the car had already been sold to another buyer, Petitioners made no
payments on the PN and BA Finance filed a suit for replevin. The RTC and CA held Petitioners
liable, and they appealed, alleging that the nullity of the sale meant that the PN was without
consideration.

The SC ruled that the defense of failure of consideration was not available against BA Finance.
The NIL considers every negotiable instrument prima facie to have been issued for a valuable
consideration, and when the holder is in due course, the presumption of consideration is
conclusive. The maker cannot set up the defense of nullity of the contract of sale, in relation to
which the negotiable instrument was issued, against a holder in due course, because the holder in
due course holds the instrument free from defenses available to prior parties among themselves.
Here, the PN was negotiable on its face and BA Finance was a holder in due course, as it was not
aware of the nullity of the sale at the time of indorsement, and thus in good faith. Petitioners
cannot invoke the defense of failure of consideration against BA Finance, and BA Finance can
seek payment on the PN.

Facts:
● Petitioner Spouses Violago bought a car from Violago Motor Sales Corporation (VMSC)
through Respondent Avelino Violago (Avelino), the President.
○ Petitioners paid a downpayment, with balance financed by respondent BA Finance.
● Petitioners signed a promissory note (PN), binding themselves to pay the remaining balance
on the purchase price of the car to VMSC.
○ A chattel mortgage over the car secured the amount.
● VMSC, through Avelino, indorsed the PN to BA Finance and assigned its rights over the PN
and chattel mortgage to BA Finance.
● The car had actually been sold to another Violago relative a year before the sale to
Petitioners, so VMSC made no delivery of the car to Petitioners.
○ Petitioners thus did not pay any of the monthly amortizations on the PN to BA
Finance.
○ The rights over the vehicle, preceding from the first buyer, eventually were assigned
to BA Finance, but 4 years after the PN was indorsed to BA Finance.
● BA Finance filed a suit for replevin against Petitioners, who answered that the non-delivery of
the vehicle meant that BA Finance was not a holder in due course.
 ○ Petitioners filed a third party complaint against Avelino, seeking that he be liable to
them if the RTC held them liable to BA Finance.
● The RTC and CA held Petitioners liable to BA Finance, and the CA absolved Avelino of
liability as Petitioners should have impleaded VMSC, the seller of the vehicle and creditor of
the PN.
● Hence the current case. Petitioners argue that:
○ The PN was without consideration due to the nullity of the sale of the vehicle.
○ The corporate veil should be pierced and Avelino held liable without impleading
VMSC.

Issue: W/N Petitioners are liable to BA Finance on the Promissory Note despite the nullity of the
sale - YES.

Ruling: YES. For the defense of failure of consideration to prosper, it must be invoked against a
holder not in due course.

On the negotiability of the PN

The PN is clearly negotiable under Sec. 1 of the NIL. It was in writing, signed by Petitioners, with an
unconditional promise to pay the remaining balance on the purchase price on specific dates, made
payable to the order of VMSC, and naming the drawees with certainty.

On BA Finance as a holder in due course

The 4 requisites of a holder in due course under Sec. 52 were present. The PN was (a) complete
and regular on its face; (b) was indorsed by VMSC to BA Finance before due; (c) in good faith and
for the value of the purchase balance, paid by BA Finance; and (d) without knowledge by BA that the
vehicle sold to Petitioners had previously sold to another person.

On the defense of failure of consideration

The NIL considers every negotiable instrument prima facie to have been issued for a valuable
consideration, and when the holder is in due course, the presumption of consideration is conclusive.
The maker cannot set up the defense of nullity of the contract of sale, in relation to which the
negotiable instrument was issued, against a holder in due course, because the holder in due course
holds the instrument free from defenses available to prior parties among themselves.

Since BA Finance is a holder in due course, the defense of failure of consideration is unavailable
against it and it may enforce payment of the instrument, even if the contract of sale is null and void.

Disposition:
● WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R.
CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third party
complaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino
Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs
against Avelino Violago.
● IOW, the defense of want of consideration was not viable.

Notes:
On piercing the corporate veil
● Avelino, the president of VMSC, a family-owned corporation, used his control over the
corporation to defraud Petitioners, which he did not refute.
● Avelino cannot hide behind the separate personality of VMSC to escape liability.