Bognot vs. RRI Lending Corporation

Solidary liability cannot be inferred from a photocopy of a promissory note when the original is not produced in violation of the best evidence rule, and interest rates of 5% per month (60% per annum) are unconscionable, contrary to morals and public policy, and void ab initio, warranting equitable reduction to 1% per month (12% per annum).

In September 1996, petitioner Leonardo Bognot and his brother Rolando Bognot obtained a ₱500,000.00 loan from respondent RRI Lending Corporation, evidenced by a promissory note and secured by a post-dated check. The loan underwent monthly renewals, with the petitioner paying renewal fees and issuing new post-dated checks each time, until a final renewal period ending June 30, 1997. When Rolando’s wife attempted a subsequent renewal by taking home the loan documents to secure signatures but failed to return them or issue a replacement check, the respondent treated the loan as due and demandable. The respondent subsequently filed a collection suit against the Bognot siblings.

• The Original Loan and Monthly Renewals: In September 1996, petitioner Leonardo Bognot and his brother Rolando Bognot obtained a ₱500,000.00 loan from respondent RRI Lending Corporation, evidenced by a promissory note and secured by a post-dated check dated November 30, 1996. The loan was renewed on a monthly basis, with the petitioner paying a renewal fee of ₱54,600.00 for each renewal, issuing a new post-dated check, and executing a new promissory note, while the respondent cancelled and returned the previous checks.
• The March 1997 Renewal: In March 1997, the petitioner executed Promissory Note No. 97-035 payable on April 1, 1997, with Rolando as co-maker, and issued BPI Check No. 0595236 dated April 1, 1997 as security. This was subsequently renewed until June 30, 1997, evidenced by Official Receipt No. 797 dated May 5, 1997 and a Disclosure Statement dated May 30, 1997. The respondent superimposed the date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to reflect the new maturity date.
• The Failed Renewal by Mrs. Bognot: Several days before the June 30, 1997 maturity, Julieta Bognot (Rolando’s wife) applied for another renewal, issuing Promissory Note No. 97-051 and IBE Check No. 00012522 dated July 30, 1997 for the renewal fee. She requested the respondent’s clerk to release the existing promissory note, disclosure statement, and the petitioner’s check dated June 30, 1997 so she could secure the siblings’ signatures and provide a replacement check, but she never returned the documents or issued a new check.
• The Complaint and Defense: On November 27, 1997, the respondent filed a complaint for sum of money against the Bognot siblings. Only Leonardo filed an answer, claiming that the obligation had been fully paid in April 1997, denying the May 1997 renewal, and alleging that the promissory note had been tampered with. The RTC and CA found for the respondent, holding the siblings solidarily liable.

• Payment and Renunciation: Petitioner argued that his obligation was extinguished by payment, evidenced by his possession of the cancelled post-dated check dated April 1, 1997, which created a legal presumption under Article 1271 of the Civil Code that the creditor had renounced the credit.
• Material Alteration: Petitioner maintained that the superimposition of the due date "June 30, 1997" on Promissory Note No. 97-035 without his knowledge or consent constituted a material alteration that discharged his liability.
• Novation by Substitution: Petitioner claimed that novation occurred when Mrs. Bognot renewed the loan and assumed the indebtedness by executing a new promissory note and paying the renewal fees, thereby substituting herself as the new debtor and releasing him from liability.
• Nature of Liability: Petitioner contended that the CA erred in holding him solidarily liable with Rolando when the evidence did not support such finding.

• Non-Reviewability of Factual Issues: Respondent countered that the petitioner’s allegations involved factual questions regarding the appreciation of evidence and the lower courts’ findings of fact, which are not reviewable in a Rule 45 petition limited to questions of law.
• Existence of Indebtedness: Respondent argued that the existence of the loan obligation and its subsequent renewals were duly established by evidence other than the promissory note, including the petitioner’s admissions, the checks issued, official receipts, and the testimony of its general manager.

• Solidary Liability: Whether the Court of Appeals erred in holding the petitioner solidarily liable with his co-debtor based on a photocopied promissory note.
• Material Alteration: Whether the petitioner is relieved from liability by reason of the material alteration in the promissory note.
• Extinguishment by Payment: Whether the obligation was extinguished by payment or renunciation.
• Novation: Whether the obligation was extinguished by novation by substitution of debtors.

• Solidary Liability: Solidary liability was not established. The promissory note presented was a mere photocopy; the original was never produced despite being in the respondent’s custody. Under the best evidence rule, the photocopy was inadmissible to prove the stipulation of "jointly and severally" liability. Solidary liability cannot be inferred lightly and must be positively expressed; in the absence of admissible evidence, the petitioner’s liability is merely joint.
• Material Alteration: The defense fails. Even assuming the note was altered without consent, the existence of the obligation was sufficiently established by other documentary and testimonial evidence, including the loan application, the petitioner’s admissions, other checks issued, official receipts for renewal fees, and testimonial evidence. A promissory note is not the sole evidence of an obligation; checks and other written memoranda may prove indebtedness.
• Extinguishment by Payment: Payment was not proven. The burden of proving payment rests on the debtor. The return of the cancelled check dated April 1, 1997 was part of the respondent’s established practice of cancelling and returning checks upon loan renewal, not evidence of payment. Article 1271 creates only a prima facie presumption of renunciation, which is rebutted by evidence of this practice. Furthermore, a check is not legal tender, and its mere delivery does not discharge the obligation.
• Novation: The defense was belatedly raised and is procedurally barred. Even if considered, no valid novation occurred. Mrs. Bognot merely attempted to renew the loan; she did not substitute the petitioner as debtor. Novation requires the creditor’s express consent to release the original debtor, which was absent; mere acquiescence to a renewal does not constitute novation.

• Best Evidence Rule in Establishing Solidary Liability — When the subject of inquiry is the contents of a document, the original must be produced; exceptions under Section 3, Rule 130 of the Rules of Court apply only when the original is lost, destroyed, or cannot be produced without bad faith. Solidary liability cannot be inferred lightly; it must be positively and clearly expressed in the original document. In this case, because the respondent failed to produce the original promissory note and only offered a photocopy, the stipulation of "jointly and severally" liability was inadmissible, limiting the petitioner’s liability to joint.
• Unconscionable Interest Rates — Stipulated interest rates of 5% per month (60% per annum) are deemed excessive, iniquitous, unconscionable, and exorbitant, contrary to morals and public policy under Article 1306 of the Civil Code, and are void ab initio. Courts may equitably reduce such rates to 1% per month or 12% per annum in line with prevailing jurisprudence.
• Novation by Substitution of Debtors — Novation requires the express release of the original debtor and the assumption of the obligation by a new debtor with the creditor’s consent. Mere acquiescence to a renewal or extension, or the acceptance of a new promissory note from a third party without an express agreement releasing the original debtor, does not constitute novation.
• Burden of Proof in Payment — The debtor bears the burden of proving payment with legal certainty. The presumption under Article 1271 of the Civil Code (that the voluntary return of a private document evidencing a credit implies renunciation of the action) is merely prima facie and is rebutted by evidence showing a contrary practice, such as the cancellation and return of post-dated checks as part of a loan renewal process.
• Checks as Non-Legal Tender — Under Article 1249 of the Civil Code, a check is not legal tender and cannot constitute a valid tender of payment. The delivery of a negotiable instrument does not, by itself, operate as payment; the obligation remains suspended until the payment by commercial document is actually realized.

• "Solidary obligation cannot be inferred lightly. It must be positively and clearly expressed and cannot be presumed." — Articulates the strict requirement for proving solidary liability.
• "The stipulated interest rate of 5% per month, (or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus illegal. It is void ab initio for violating Article 1306 of the Civil Code." — Establishes the illegality of excessive interest rates.
• "A check is not legal tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment." — Clarifies the legal nature of checks in discharging obligations.

• Medel v. Court of Appeals, G.R. No. 131622, 358 Phil. 820 (1998) — Cited as controlling precedent for the principle that stipulated interest rates of 5.5% per month or 66% per annum are unconscionable and exorbitant, warranting annulment.
• Chua v. Timan, G.R. No. 170452, 584 Phil. 144 (2008) — Followed for the ruling that interest rates of 3% per month and higher are excessive and must be reduced to 12% per annum.
• Bank of the Philippine Islands v. Spouses Royeca, G.R. No. 176664, 581 Phil. 188 (2008) — Cited for the doctrine that a check is not legal tender and mere delivery does not discharge an obligation.
• Garcia v. Llamas, 462 Phil. 779 (2003) — Cited for the definition and requisites of novation by substitution, distinguishing between expromision and delegacion.
• Guinsatao v. Court of Appeals, G.R. No. 95083, 218 SCRA 708 (1993) — Cited for the principle that a promissory note is not the only evidence of indebtedness, which may be proven by other documentary evidence such as written memoranda or checks.

• Article 1207, Civil Code — Cited for the rule that solidary liability exists only when the obligation expressly so states, when the law so provides, or when the nature of the obligation so requires.
• Article 1249(2), Civil Code — Provides that the delivery of promissory notes or bills of exchange produces the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired.
• Article 1271, Civil Code — Establishes a prima facie presumption of renunciation of action when a private document evidencing a credit is voluntarily delivered by the creditor to the debtor.
• Article 1293, Civil Code — Defines novation by substitution of a new debtor, which may be made even without the knowledge of the original debtor but not without the consent of the creditor.
• Article 1306, Civil Code — Provides that contracting parties may establish stipulations as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
• Section 3, Rule 130, Rules of Court — Embodies the Best Evidence Rule, requiring the production of the original document when the subject of inquiry is its contents, subject to enumerated exceptions.

Antonio T. Carpio (Chairperson), Mariano C. Del Castillo, Jose Catral Mendoza, Marvic M.V.F. Leonen.