Title
Prudencio vs. Court of Appeals
Case
G.R. No. L-34539
Decision Date
Jul 14, 1986
Petitioners mortgaged property for a loan; bank altered terms without consent, leading to default. Supreme Court ruled in favor of petitioners, canceling mortgage and releasing liability.

Case Summary (G.R. No. L-45262)

Factual Background and Mortgage Transaction

The Prudencios owned a parcel of land in Sampaloc, Manila, which they mortgaged to PNB on October 7, 1954, to secure a P1,000 loan to Domingo Prudencio. In 1955, Concepcion & Tamayo Construction Company had a contract with the Bureau of Public Works (Bureau) for the construction of a municipal building in Puerto Princesa, Palawan, amounting to P36,800. Jose Toribio, acting as attorney-in-fact for the Company and a relative of the petitioners, requested the Prudencios to mortgage their property to secure a loan of P10,000 from PNB.

After persuasion, the Prudencios executed an amendment to the original real estate mortgage on December 23, 1955, to guarantee the new P10,000 loan granted to the Company by PNB. Both the original and amended mortgages were registered. The promissory note for the P10,000 loan, dated December 29, 1955, was signed by Jose Toribio as attorney-in-fact and by the Prudencios as accommodation makers, who also requested the bank to issue the loan proceeds to the Company. Simultaneously, Toribio executed a deed of assignment, assigning all payments to be made by the Bureau to the Company in favor of PNB.

Breach of Deed of Assignment and Alleged Violation

Despite the assignment, the Bureau, with PNB's approval, made three payments totaling P11,234.40 directly to the Company for labor and materials, rather than applying these to the loan. The final payment request of P5,000 by the Bureau was denied by PNB due to the loan's overdue status as of April 28, 1956. Subsequently, the Company abandoned the project, prompting the Bureau to rescind the contract on June 30, 1956.

On November 14, 1958, the Prudencios demanded cancellation of their mortgage, asserting that PNB's authorization of payments to the Company constituted a material alteration of their agreement and discharged them from liability under the mortgage. Failing in this demand, they filed a complaint on June 27, 1959 for cancellation of the mortgage.

Trial and Court of Appeals’ Rulings

The trial court dismissed the Prudencios’ complaint, holding them jointly and severally liable with the co-makers on the promissory note and ordering payment of P11,900.19 plus interest and attorney’s fees. The court likewise held that the mortgaged property could be sold at public auction if the judgment was unsatisfied within 90 days. The Court of Appeals affirmed the judgment in toto. It ruled the Prudencios were solidary co-debtors as accommodation makers and that partial payments authorized by PNB to the Company did not discharge the petitioners' liability. The Court of Appeals noted that laborers and material suppliers were preferred creditors with a lien on the contract price and that PNB had no obligation to notify petitioners of the payment authorizations since they were not parties to the deed of assignment and no provision required notification.

Petitioners’ Issues and Arguments

The Prudencios challenged the Court of Appeals’ rulings on two grounds:

  1. That they were sureties, not solidary co-debtors, such that any material alteration of the principal contract without their consent discharged their liability.
  2. That PNB changed the tenor and condition of the deed of assignment without their knowledge and consent by authorizing payments to the Company, effectively releasing them from the loan obligation and obligating cancellation of the mortgage.

They argued that as accommodation makers, their liability was akin to sureties and that PNB’s acceptance and approval of payments to the Company contrary to the assignment were material alterations that discharged them.

Accommodation Party Liability under the Negotiable Instruments Law

Under Section 29 of the Negotiable Instruments Law, an accommodation party who signs without receiving value and for the purpose of lending their name is liable on the instrument to a holder for value, even if the holder knows the accommodation nature. The Supreme Court explained that accommodation parties function as sureties but bear primary, unconditional liability toward holders for value or holders in due course. The Court cited prior rulings confirming that such liability is not lessened by mere classification as accommodation. An extension of payment term without their consent does not release them from liability vis-à-vis a holder for value.

Determination of PNB’s Status as Holder for Value and Holder in Due Course

To bar personal defenses such as release, PNB must qualify as a holder in due course or holder for value under the Negotiable Instruments Law. A holder for value must meet the holder in due course requirements except for notice of want of consideration. The Court held that although payees generally can be holders in due course, the PNB did not qualify in this case because:

  • PNB was an immediate party to the instrument, having directly dealt with the petitioners who signed as accommodation makers aware of the circumstances.
  • The key inducement for the Prudencios’ agreement was the Deed of Assignment, which PNB materially altered by approving payments directly to the Company contrary to its terms.
  • PNB did not act in good faith, a strict requirement for holder in due course status, as it knowingly violated the deed of assignment without notifying the Prudencios.
  • The approval of payments to the Company after the loan became overdue further evidenced PNB’s disregard for the petitioners’ interests.

On these facts, PNB could not be considered a holder in due course, rendering it vulnerable to personal defenses by the petitioners.

Effect of PNB’s Violation of the Deed of Assignment

The Deed of Assignment was irrevocable and subject to the terms of the promissory note. It contained no provisions permitting payment changes without petitioners’ consent. By authorizing direct payments to the Company contrary to the deed, PNB materially altered the contract without petitioners’ consent. Such material alteration released the petitioners, acting as sureties, from their obligations as accommodation makers.

The tribunal emphasized that the Prudencios had mortgaged their property solely to assist the Company, not for their own benefit. Their consent was dependent on the assignment arrangement which PNB breached. The mortgage, inseparable from the promissory note, thus became unenforceable under these changed conditions.

On the Bureau of Public Works’ Conditions and Preferential Claims

PNB claimed the Bureau imposed a condition prioritizing payments for labor and materials. Howev

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