G.R. No. 17230 - Velasco vs. Aw Yong Chiow Soo

Case Summary (G.R. No. 17230)

Factual Background

The defendant TAN LIUAN & CO. executed four promissory notes in favor of AW YONG CHIOW SOO for P12,000, P16,000, P38,000, and P21,000, each payable six months after date in 1919. On March 17, 1919, AW YONG CHIOW SOO drew a sight draft for 33,500 Yen on Jing Kee & Co., Kobe, in favor of the Philippine National Bank. The draft was at first refused by the bank until the plaintiff, at the bank's request, indorsed it and the bank cashed it. The plaintiff received no part of the proceeds, which were alleged to have been paid to TAN LIUAN & CO. The draft was later dishonored, and the plaintiff executed a promissory note to the Philippine National Bank for the draft amount, interest, and expenses.

Instruments and Written Agreements

On August 18, 1919, TAN LIUAN & CO. executed a written promise to indemnify the plaintiff, undertaking to pay within ten days after the plaintiff had been obligated to pay the draft the full amount plus costs, expenses, attorney's fees, and interest at ten percent from payment. On the same day the plaintiff executed a written acknowledgment that he held the claim against TAN LIUAN & CO. as collateral security for his indorsement and that he would reassign the claim to AW YONG CHIOW SOO if the draft were paid by the drawer or by AW YONG CHIOW SOO, and that if the plaintiff paid the draft any excess collected on the claim would be delivered to AW YONG CHIOW SOO. On August 22, 1919, AW YONG CHIOW SOO assigned and indorsed outright the four promissory notes, described and attached, to the plaintiff.

Procedural History

The plaintiff commenced suit on February 19, 1920, against the defendants alleging execution of the notes by TAN LIUAN & CO., indorsement by AW YONG CHIOW SOO to the plaintiff, presentment at maturity and refusal to pay by TAN LIUAN & CO., and proper notice of dishonor to AW YONG CHIOW SOO. AW YONG CHIOW SOO answered with a general denial and a separate defense that the draft was an accommodation paper, that the plaintiff indorsed it at the bank's request, that the plaintiff had agreed to hold the notes only as collateral and to reassign them if the draft were paid, that the plaintiff had not paid the draft nor attempted to collect from TAN LIUAN & CO., and that by virtue of the agreement the defendant had been released from liability and the action was premature.

Trial Court Proceedings and Judgment

The lower court tried the issues and rendered judgment against TAN LIUAN & CO., TAN LIUAN, and UY TENGPIAO for the full amount of the notes. The court ordered that the plaintiff should receive from that judgment only so much as would fully compensate him as indorser of the draft, specifically P46,135.70, and that any remainder collected should be paid to AW YONG CHIOW SOO. The court further entered judgment against AW YONG CHIOW SOO in the amount of P46,135.70 should TAN LIUAN & CO. fail to satisfy the judgment. AW YONG CHIOW SOO appealed only from the extent of the judgment as to its alleged liability.

Appellant's Contentions

The appellant AW YONG CHIOW SOO contended that it was not liable on the four promissory notes or for any portion of them. The appellant asserted that the draft was an accommodation, that the plaintiff indorsed the draft only upon agreement that the notes were delivered as collateral and would be re-transferred if the draft were paid, that the plaintiff had not paid the draft nor prosecuted collection, and that the agreements discharged the appellant from liability and rendered the action premature.

Issues Presented

The dispositive issues were whether the unqualified indorsement by AW YONG CHIOW SOO imposed legal liability on that defendant to the plaintiff as subsequent holder of the notes under Act No. 2031, The Negotiable Instruments Law, and whether parol evidence or the contemporaneous written statements could relieve AW YONG CHIOW SOO of indorser liability.

Ruling of the Supreme Court

The Court affirmed the judgment of the lower court. The Court held that AW YONG CHIOW SOO, having indorsed the promissory notes without qualification, remained liable to the plaintiff under the negotiable instruments law and that the contemporaneous writings did not discharge that legal liability.

Legal Basis and Reasoning

The Court applied provisions of Act No. 2031, The Negotiable Instruments Law governing negotiation and indorsement (SEC. 30, 31, 33, 38, 45, 63, 66). The Court observed that the indorsement by AW YONG CHIOW SOO was unqualified and that the law makes every unqualified indorser liable to subsequent holders in due course, including the warranty that the instrument will be accepted or paid and the engagement to pay if dishonored and proper proceedings are taken (SEC. 66). The Court stated that oral testimony cannot vary or defeat the terms of a written negotiable instrument. The Court noted SEC. 80 and SEC. 114 of the Act, to the effect that presentment for payment is not required to charge an indorser where the instrument was made or accepted for his accommodation and he had no reason to expect payment, and that notice of dishonor need not be given where the drawer has no right to expect honor. The Court found that three of the promissory notes had matured by August 18, 1919, that

Case Syllabus (G.R. No. 17230)

Parties and Procedural Posture

Jose Velasco, Plaintiff and Appellee sued Tan Liuan & Co., Tan Liuan, Uy Tengpiao, and Aw Yong Chiow Soo, Defendants on a complaint founded upon four promissory notes.
The action was tried in the lower court which rendered judgment against Tan Liuan & Co., Tan Liuan, and Uy Tengpiao, and directed recovery by Velasco limited to his indemnity for endorsing a draft.
Only Aw Yong Chiow Soo appealed from the adverse ruling against it.

Key Factual Allegations

Tan Liuan & Co. executed four promissory notes to Aw Yong Chiow Soo for P12,000, P16,000, P38,000, and P21,000, each payable six months after date.
On March 17, 1919, Aw Yong Chiow Soo drew a sight draft for 33,500 Yen on Jing Kee & Co. in favor of the Philippine National Bank, which refused to cash it until Velasco indorsed the draft.
The draft was dishonored on presentment and Velasco thereafter executed a promissory note to the Philippine National Bank for the draft amount, interest, and expenses.
Aw Yong Chiow Soo unqualifiedly indorsed the four promissory notes to Velasco and contemporaneously executed a written assignment of its credit against Tan Liuan & Co. to Velasco.
Tan Liuan & Co. made a written promise dated August 18, 1919, to reimburse Velasco within ten days after he became obligated to pay the draft, including costs and interest.

Agreements and Instruments

The four promissory notes were dated February 18, February 23, March 17, and March 27, 1919, and were made payable six months after their respective dates.
The August 18, 1919 written statement by Tan Liuan promised to pay Velasco all amounts, costs, and attorney's fees which Velasco should pay on account of his indorsement of the draft, with ten percent interest from payment.
The August 18, 1919 written statement by Velasco acknowledged receipt of the promissory notes as collateral security and agreed to reassign them to Aw Yong Chiow Soo if Velasco were relieved of liability.
The August 22, 1919 written assignment by Aw Yong Chiow Soo transferred its entire credit against Tan Liuan & Co., amounting to P87,000 and evidenced by the four promissory notes, to Velasco and authorized collection.

Plaintiff's Contentions

Velasco alleged the execution and indorsement of the promissory notes and alleged presentment at maturity to Tan Liuan & Co. and refusal to pay.
Velasco claimed entitlement to recover on the promissory notes as holder by virtue of the unqualified indorsements and the written assignments.

Defendant's (Appellant's) Defenses

Aw Yong Chiow Soo denied liability and pleaded that the draft was an accommodation, that Velasco indorsed it at request, and that Aw Yong Chiow Soo delivered the draft proceeds to Tan Liuan & Co.
Aw Yong Chiow Soo asserted an agreement that it would transfer its interest in the four notes to Velasco as collateral, that Velasco would re-transfer the notes if the drawer paid, and that any excess collections over Velasco's indemnity should be returned to Aw Yong Chiow Soo.
Aw Yong Chiow Soo further alleged that Velasco had not paid the draft nor made efforts to collect from Tan Liuan & Co., and therefore contended it was not liable and that the action was premature.

Statutory Framework

The Court relied upon Act N