G.R. No. L-34539 - Prudencio vs. Court of Appeals

Case Summary (G.R. No. L-34539)

Petitioner and Respondent Roles

Petitioners signed an amended real estate mortgage and the promissory note to secure a P10,000 loan negotiated by the Company with PNB; they acted as accommodation makers. The Company, through its attorney‑in‑fact Toribio, executed a Deed of Assignment in favor of PNB assigning Bureau of Public Works contract payments to PNB as security for the loan.

Key Dates and Transactions

October 7, 1954: Original mortgage for P1,000.
December 23, 1955: Petitioners signed the “Amendment of Real Estate Mortgage” to secure a P10,000 loan; on the same date the Deed of Assignment was executed by the Company in favor of PNB.
December 29, 1955: Promissory note for P10,000 dated, maturing April 27, 1956, signed by Toribio (as attorney‑in‑fact) and by petitioners who requested PNB to issue the loan check to the Company.
Bureau payments totaling P11,234.40 were made to the Company with PNB’s approval; a June 20, 1956 P5,000 request was denied by PNB. The Company abandoned the work and the Bureau rescinded the contract June 30, 1956. Petitioners sought cancellation of the mortgage by letter (November 14, 1958) and later filed suit (June 27, 1959).

Procedural History

Trial court denied petitioners’ relief, holding them jointly and severally liable with the Company’s partners for P11,900.19 plus interest and attorneys’ fees; it ordered foreclosure if judgment not satisfied. The Court of Appeals affirmed, treating the petitioners as solidary co‑debtors (accommodation makers liable as solidary) and rejecting the argument that PNB’s authorization of partial payments released the petitioners. The petitioners appealed.

Applicable Law and Constitutional Basis

Governing instruments and statutes: Negotiable Instruments Law (Section 29 on accommodation party liability; Section 52 on holder in due course), Civil Code provisions on mortgages (Article 2085 referenced by the Court), and applicable jurisprudence cited in the decision (e.g., Philippine Bank of Commerce v. Aruego; Ang Tiong v. Ting; Philippine Savings Bank v. Lantin). Applicable constitutional framework for the decision: the 1973 Constitution (the decision date is 1986, preceding the 1987 Constitution).

Issue Presented

Whether the petitioners, having signed as accommodation makers, remained liable on the promissory note and mortgage despite PNB’s authorization of Bureau payments to the Company in violation of the Deed of Assignment, and whether such conduct by PNB released the petitioners from liability and entitled them to cancellation of the mortgage.

Legal Character of Accommodation Makers

The Court restated settled law: an accommodation party signs an instrument without receiving value to lend his name to another and, as between immediate parties, is in effect a surety. However, Section 29 of the Negotiable Instruments Law makes the accommodation party liable to a holder for value; jurisprudence (Ang Tiong v. Ting) clarifies that when sued by a holder in due course or a holder for value, an accommodation party’s liability is primary and unconditional. Thus, ordinarily an accommodation maker cannot invoke defenses that would defeat the holder in due course.

Holder in Due Course Inquiry and PNB’s Status

Because an accommodation party’s liability is absolute only as against a holder in due course (or holder for value), the decisive question is whether PNB qualified as a holder in due course. A holder in due course must satisfy the requisites of Section 52, including taking the instrument in good faith and without notice of infirmities. The Court found PNB could not be treated as a holder in due course because: (1) PNB was an immediate party in privity with the petitioners and directly dealt with the accommodation makers, fully aware they signed only as accommodation makers; and (2) critically, PNB’s conduct—taking the Deed of Assignment yet approving Bureau payments directly to the Company contrary to the assignment’s terms—demonstrated lack of good faith and an intention not to adhere strictly to the assignment that induced the petitioners to sign.

Deed of Assignment, Violation, and Effect on Petitioners

The Deed of Assignment expressly conveyed Bureau payments to PNB and stated the assignment was irrevocable and subject to promissory‑note terms or other documents required by PNB. The petitioners relied on that deed in consenting to mortgage their property and sign the promissory note. PNB’s authorization of three Bureau payments to the Company (totaling P11,234.40), including one approved after the note’s maturity, contravened the assignment and modified the effective security and priority the petitioners relied on. Because PNB accepted and acted upon conditions (including Bureau’s suggested prioritization for wages and materials) without notifying petitioners, it effectively altered the tenor of the assignment and extended the term of the note to the detriment of the petitioners.

Legal Consequence: Extens

Case Syllabus (G.R. No. L-34539)

Procedural History

Petition for review to the Supreme Court seeking annulment and setting aside of the Court of Appeals decision (now Intermediate Appellate Court) which affirmed the trial court order.
Trial court denied petitioners’ complaint for cancellation of their real estate mortgage, held petitioners jointly and severally liable with principal debtors on the promissory note, awarded sums due with interest and attorney’s fees, and authorized foreclosure if judgment not paid within 90 days.
The Court of Appeals affirmed the trial court in toto, treating petitioners as accommodation makers and solidary co-debtors.
Petitioners assigned two errors to the Supreme Court and sought relief from the affirmed judgment.
The Supreme Court granted the petition, reversed and set aside the appellate and trial court decisions, absolved petitioners from liability on the promissory note and under the mortgage contract, ordered release of the mortgage, and awarded attorney’s fees of P3,000.00. Concurring Justices: Feria (Chairman), Fernan, Alampay, and Paras, JJ.

Factual Background

Petitioners Eulalio Prudencio and Elisa T. Prudencio were registered owners of a parcel of land in Sampaloc, Manila (T.C.T. 35161).
On October 7, 1954, petitioners mortgaged the property to Philippine National Bank (PNB) to guarantee a P1,000.00 loan extended to one Domingo Prudencio.
In 1955, Concepcion & Tamayo Construction Company (the Company) had a Bureau of Public Works contract for construction of the Puerto Princesa municipal building for P36,800.00 and needed funds.
Jose Toribio, petitioners’ relative and attorney-in-fact of the Company, requested petitioners to mortgage their property to secure a P10,000.00 loan the Company negotiated with PNB.
On December 23, 1955, petitioners executed an "Amendment of Real Estate Mortgage" mortgaging their property to PNB to guarantee the P10,000.00 loan; the terms of the original mortgage for P1,000.00 were made integral to the new mortgage; both documents were registered.
A promissory note dated December 29, 1955, maturing April 27, 1956, was signed by Jose Toribio as attorney-in-fact of the Company and by the petitioners; petitioners signed the portion requesting PNB to issue the check to the Company.
On December 23, 1955, Toribio executed a "Deed of Assignment" assigning all payments by the Bureau to the Company on account of the contract in favor of PNB; the assignment was expressed as irrevocable and subject to terms and conditions of the promissory note or other documents required by PNB.
Despite the assignment, the Bureau, with PNB’s approval, made three payments to the Company totaling P11,234.40, conditioned by the Bureau to be for labor and materials.
The Bureau’s last request for P5,000.00 on June 20, 1956 was denied by PNB because the loan was already overdue as of April 28, 1956.
The Company abandoned the work; on June 30, 1956 the Bureau rescinded the contract and assumed completion of the building.
On November 14, 1958, petitioners wrote PNB contending that PNB’s authorization of payments to the Company instead of application to the loan altered the contract’s conditions without petitioners’ knowledge and entitled them to cancellation of the mortgage.
Petitioners filed suit on June 27, 1959 seeking cancellation of the real estate mortgage; complaint later amended to exclude the defunct partnership and implead its partners Ramon C. Concepcion and Manuel M. Tamayo in their private capacities.

Trial Court and Court of Appeals Findings

The trial court denied petitioners’ request to be absolved from obligations under the mortgage, ordered petitioners to pay jointly and severally with Concepcion and Tamayo P11,900.19 plus 6% interest from June 27, 1959 until paid, and awarded P1,000.00 attorney’s fees; provided for sale of mortgaged properties if judgment unpaid within 90 days.
The Court of Appeals affirmed in toto, concluding that petitioners, as accommodation makers, were solidary co-debtors and that PNB’s authorization of partial payments to the Company (which were used in the construction) did not constitute a defense for other solidary debtors.
The Court of Appeals held PNB had no obligation to notify petitioners of its authorization of the three payments because petitioners were not parties to the Deed of Assignment and no stipulation required PNB to notify petitioners each time it authorized payment to the Company.

Issues Presented to the Supreme Court

First Assignment of Error: Whether the Court of Appeals erred in holding petitioners were solidary co-debtors instead of sureties.
Second Assignment of Error: Whether the Court of Appeals erred in holding petitioners were not released from obligation to PNB when PNB, without petitioners’ knowledge and consent, changed the tenor and condition of the assignment of payments made by the principal debtor and released payme