Great Asian Sales Center Corporation vs. Court of Appeals

A corporation that assigns its receivables to a financing company under a "with recourse" stipulation in the Deeds of Assignment is liable to pay the assignee the full value of the dishonored checks upon default of the drawers, pursuant to the Civil Code on contracts, independent of the warranties of an endorser under the Negotiable Instruments Law; the surety who signed a comprehensive and continuing surety agreement is solidarily liable to the same extent as the principal.

Great Asian Sales Center Corporation is a domestic corporation engaged in buying and selling general merchandise, particularly household appliances. Bancasia Finance and Investment Corporation is a financing company that extends credit facilities through discounting of accounts receivable, as authorized under the Financing Company Act. Tan Chong Lin is the President of Great Asian who signed two surety agreements guaranteeing Great Asian's debts to Bancasia. The dispute arose from discounting arrangements in which Great Asian sold its customers' postdated checks to Bancasia at a discount to generate immediate cash, a transaction governed by both the Financing Company Act and the Civil Code on contracts.

Great Asian Sales Center Corporation is engaged in the business of buying and selling general merchandise, particularly household appliances. On March 17, 1981, its board of directors approved a resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr., to secure a loan from Bancasia Finance and Investment Corporation in an amount not exceeding P1.0 million, and to sign all papers, documents, or promissory notes necessary to secure the loan, including the power to mortgage corporate properties. On February 10, 1982, the board approved a second resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2.0 million at prevailing discounting rates, designating Arsenio as the authorized signatory to sign, execute, and deliver any and all instruments, documents, and checks necessary or incidental to secure the discounting line, with full authority to agree on terms and conditions as he deemed fit and proper.

On March 4, 1981, Tan Chong Lin, President of Great Asian, signed a Surety Agreement in favor of Bancasia, guaranteeing solidarily the debts of Great Asian. On January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing Surety Agreement with the same purpose. Both surety agreements bound Tan Chong Lin to pay, jointly and severally with Great Asian, all notes, drafts, bills of exchange, overdrafts, and other obligations of every kind that Great Asian may owe Bancasia, the first capped at P1.0 million and the second at P2.0 million.

Pursuant to the board resolutions, Arsenio signed four Deeds of Assignment of Receivables assigning to Bancasia fifteen postdated checks issued by various customers of Great Asian in payment for appliances and merchandise. The first Deed, executed on January 12, 1982, covered four postdated checks with a total face value of P244,225.82, with maturity dates not later than March 17, 1982; two were dishonored. The second Deed, also dated January 12, 1982, covered four checks totaling P312,819.00, with maturity dates not later than April 1, 1982; all four were dishonored. The third Deed, dated February 11, 1982, covered eight checks totaling P344,475.00, with maturity dates not later than April 30, 1982; all eight were dishonored. The fourth Deed, dated March 5, 1982, covered one check with a face value of P200,000.00, maturing on March 18, 1982; it too was dishonored. The total amount of the fifteen dishonored checks is P1,042,005.00. Great Asian assigned the checks to Bancasia at a discount rate of less than 24% of the face value.

The Deeds of Assignment uniformly stipulated that if the receivables could not be paid by the obligors, Great Asian unconditionally and irrevocably agreed to pay the same, with a 3% penalty on the total amount unpaid until fully paid, and attorney's fees equivalent to 25% of the total amount due. The last Deed contained an additional stipulation treating any violation of the assignor's warranties as deliberate misrepresentation, giving rise to immediate responsibility on Great Asian to make good the obligation. Arsenio endorsed all fifteen checks by signing his name at the back; eight bore his endorsement below the stamped name of "Great Asian Sales Center," while the rest bore only his signature. The drawee banks dishonored all fifteen checks upon maturity for reasons including "account closed," "payment stopped," "account under garnishment," and "insufficiency of funds."

After the first dishonor, Bancasia's counsel sent Tan Chong Lin a demand letter dated March 18, 1982 by registered mail. A subsequent letter dated June 16, 1982 was personally delivered to Tan Chong Lin, notifying him of the dishonor of all fifteen checks and demanding payment. Neither Great Asian nor Tan Chong Lin paid. On May 21, 1982, Great Asian filed a verified petition for voluntary insolvency with the Court of First Instance of Manila, attaching a schedule of liabilities listing Bancasia as a creditor in the amount of P1,243,632.00, described as a "financing accommodation." Great Asian subsequently withdrew the insolvency petition. On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin.

The trial court found that the two board resolutions authorized Arsenio to obtain the loan accommodation and discounting line, that the fifteen checks totaling P1,042,005.00 were discounted with Bancasia pursuant to those resolutions, and that Great Asian admitted its existing liability to Bancasia in its verified petition for insolvency. The Court of Appeals sustained these findings, crediting the documentary evidence — the Deeds of Assignment, the board resolutions, the surety agreements, and the demand letters — over the appellants' bare denial, and noting that Tan Chong Lin never protested the transactions despite his position as President of Great Asian.

• Proper Parties: Petitioner argued that the proper parties against whom the collection action should be brought are the drawers and indorser of the checks, being the real parties in interest, and not Great Asian or Tan Chong Lin.
• Discharge Under the Negotiable Instruments Law: Petitioner maintained that Great Asian was discharged from liability because Bancasia failed to comply with the provisions of the Negotiable Instruments Law on notice of dishonor of the checks.
• Personal Capacity of Arsenio: Petitioner contended that Arsenio signed the Deeds of Assignment and endorsed the checks in his individual and personal capacity, without stating or indicating the name of his supposed principal, and that the legal consequences of such signing should bind Arsenio personally, not Great Asian.
• Nature of the Transaction: Petitioner asserted that the assignment of the checks was a purchase and sale thereof, not a loan accommodation or credit line, such that ownership of the checks passed to Bancasia, which must now sue the drawers and indorser as the parties primarily liable.
• Material Alteration of Surety's Risk: Petitioner argued that the warranties in the Deeds of Assignment enlarged or increased the risk assumed by Tan Chong Lin under the Surety Agreements, thereby releasing him from liability.
• No Admission Through Insolvency Petition: Petitioner claimed that the inclusion of Bancasia in the schedule of creditors in the insolvency petition was not an admission of liability but merely an acknowledgment that Bancasia had sent a demand letter, and that no claim was filed and proved by Bancasia in the insolvency court.
• Lack of Authority and Consideration: Petitioner raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment, as well as the absence of consideration and consent of all parties to the Surety Agreements signed by Tan Chong Lin.

• Nature of the Transactions: Respondent countered that the subject deeds of assignment are individual transactions which, being collectively evidentiary of the loan accommodation and credit line it granted to Great Asian, should not be taken singly and distinct therefrom, a proposition backed by documentary evidence including the Deeds of Assignment, board resolutions, surety agreements, and demand letters.
• Comprehensive Surety Coverage: Respondent maintained that the Comprehensive and Continuing Surety Agreements were broad enough to contemplate each and every condition, term, or warranty which the principal parties may have agreed on, and that Tan Chong Lin, having affixed his signature thereto, was expected to have read and understood the same.

• Authority of Corporate Officer: Whether Arsenio had authority to execute the Deeds of Assignment and thus bind Great Asian.
• Liability Under the Civil Code: Whether Great Asian is liable to Bancasia under the Deeds of Assignment for breach of contract pursuant to the Civil Code, independent of the Negotiable Instruments Law.
• Surety's Liability: Whether Tan Chong Lin is liable to Bancasia under the Surety Agreements.

• Authority of Corporate Officer: Yes. The two board resolutions expressly authorized Arsenio to secure a loan accommodation and discounting line from Bancasia and to sign all implementing documents, including the Deeds of Assignment, binding Great Asian as principal.
• Liability Under the Civil Code: Yes. Great Asian's liability arose from the "with recourse" stipulation in the Deeds of Assignment, a contractual obligation under the Civil Code separate and distinct from the warranties of an endorser under the Negotiable Instruments Law, and the suspensive condition — the drawers' failure to pay — had occurred.
• Surety's Liability: Yes. The Surety Agreements were comprehensive and continuing, expressly encompassing all obligations of every kind that Great Asian may owe Bancasia, and the warranties in the Deeds of Assignment did not materially alter or increase Tan Chong Lin's risk, nor did they constitute a novation that would release the surety.

• Authority of Corporate Officer: Under Section 23 of the Corporation Code, corporate powers are exercised by the board of directors, which may designate officers to sign loan documents or deeds of assignment. The first board resolution expressly authorized Arsenio, as Treasurer, to apply for a "loan accommodation or credit line" with Bancasia not exceeding P1.0 million and to sign any and all papers, documents, and promissory notes, including mortgage deeds. The second board resolution expressly authorized Great Asian to obtain a "discounting line" with Bancasia not exceeding P2.0 million and designated Arsenio as the authorized signatory to "sign, execute and deliver any and all instruments, documents, checks, sureties, etc. necessary or incidental to secure" the discounting line, with full authority to agree on terms and conditions as he deemed fit. The Deeds of Assignment — which sold fifteen postdated checks at a discount to generate instant cash — were precisely the discounting transactions envisioned in the board resolutions. On the face of the Deeds, the assignor was expressly identified as "Great Asian Sales Center, a domestic corporation, herein represented by its Treasurer Arsenio Lim Piat, Jr.," refuting the claim that Arsenio signed in his personal capacity. Bancasia had the right to rely on the board resolutions, which specifically named Bancasia as the financing institution. The signature of Arsenio on the Deeds was effectively the signature of the board of directors, binding on Great Asian, which exhibited bad faith in disowning the Deeds after receiving valuable consideration.

• Liability Under the Civil Code: The Deeds of Assignment uniformly stipulated that if the receivables could not be paid by the obligors, Great Asian unconditionally agreed to pay the same, with a 3% penalty and 25% attorney's fees. This "with recourse" stipulation constituted a conditional obligation under Article 1181 of the Civil Code, the suspensive condition being the drawers' failure to pay. When the condition occurred, Great Asian's obligation to pay Bancasia arose from the contracts themselves, pursuant to Articles 1157 and 1159 of the Civil Code, which provide that obligations arising from contracts have the force of law between the contracting parties. The parties had the right to adopt this stipulation under Article 1306, which is separate and distinct from the warranties of an endorser under the Negotiable Instruments Law. Whether or not Bancasia gave notice of dishonor, Great Asian remained liable because of the "with recourse" stipulation. Bancasia chose to sue for breach of contract under the Civil Code rather than as endorsee under the Negotiable Instruments Law — a valid option. After paying Bancasia, Great Asian would be subrogated back as creditor of the receivables and could proceed against the drawers. Even assuming notice of dishonor was required, no prejudice resulted: under Section 114(d) and (e) of the Negotiable Instruments Law, notice of dishonor need not be given to the drawer where the drawer has no right to expect the bank to honor the instrument or where the drawer has countermanded payment — circumstances present in all fifteen checks ("account closed," "account under garnishment," "insufficiency of funds," or "payment stopped"). Under common law, as incorporated through Section 196 of the Negotiable Instruments Law, delay in notice of dishonor discharges the drawer only to the extent of the loss caused by the delay. The claim of lack of consideration was rebutted by the Deeds' express recital of "valuable consideration," the presumption under Article 1354 of the Civil Code that consideration exists and is lawful unless the debtor proves otherwise, the testimony of Bancasia's Loan Section Manager that Bancasia paid Great Asian at a discount rate of less than 24%, and Great Asian's own admission of indebtedness in its insolvency petition. The transaction was properly characterized as a discounting of receivables, not a loan accommodation, but it was precisely because the transaction was a sale or discounting — embodied in separate Deeds of Assignment — that the Civil Code provisions on contracts applied rather than the Negotiable Instruments Law.

• Surety's Liability: The Surety Agreements expressly bound Tan Chong Lin to pay, jointly and severally with Great Asian, all notes, drafts, bills of exchange, overdrafts, and other obligations of every kind that Great Asian may now or hereafter owe Bancasia. The condition on which Tan Chong Lin's obligation hinged — the principal's failure to pay — had occurred, making him automatically liable to the same extent as Great Asian. Tan Chong Lin contended that the warranties in the Deeds of Assignment materially altered his risk, but these were the usual warranties made by one who discounts receivables. The Surety Agreements themselves, written on Bancasia's letterhead, stated that Great Asian "has obtained and/or desires to obtain loans, overdrafts, discounts and/or other forms of credits" from Bancasia, putting Tan Chong Lin on notice that he was guaranteeing discounting transactions. As President of Great Asian, he could not feign ignorance of the corporation's business activities. Under Article 1215 of the Civil Code, what releases a solidary debtor is novation, compensation, confusion, or remission — none of which occurred. The warranties did not increase or enlarge Tan Chong Lin's risk, and there was no novation. The provisions of the Surety Agreements were broad enough to include the obligations under the warranties, expressly encompassing "all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor." Pursuant to Article 1207 of the Civil Code, the stipulations mandated the solidary liability of Tan Chong Lin with Great Asian. The award of attorney's fees was justified both by the stipulation in the Deeds of Assignment (25%) and by Article 2208 of the Civil Code, because petitioners acted in gross and evident bad faith in refusing to pay a plainly valid, just, and demandable claim. The 3% penalty was construed as a one-time penalty because the Deeds were silent on whether it was a running monthly or annual penalty. Legal interest at 12% per annum was awarded from the filing of the complaint, pursuant to Eastern Shipping Lines, Inc. vs. Court of Appeals, because the records showed no written demand on Great Asian prior to the filing of the complaint; Bancasia made an extrajudicial demand only on Tan Chong Lin, the surety, not on the principal debtor.

• With Recourse Stipulation in Assignment of Receivables — A "with recourse" stipulation in a Deed of Assignment of receivables obligates the assignor to pay the assignee the full value of the assigned checks upon the drawers' default. This is a contractual obligation under the Civil Code (Articles 1157, 1159, 1306), separate and distinct from the warranties of an endorser under the Negotiable Instruments Law. The assignee may elect to sue for breach of contract under the Civil Code rather than as endorsee under the NIL, and the assignor's liability attaches regardless of whether notice of dishonor was given. After payment, the assignor is subrogated back as creditor of the receivables and may proceed against the drawers.

• Authority of Corporate Officers Under Board Resolutions — Under Section 23 of the Corporation Code, corporate powers are exercised by the board of directors, which may designate officers to sign loan documents or deeds of assignment. A financing company has the right to rely on board resolutions that expressly name it as the financing institution and designate a specific officer as authorized signatory. The signature of the authorized officer on implementing documents is effectively the signature of the board, binding on the corporation. A corporation cannot disown deeds signed by its own treasurer pursuant to express board authority after receiving valuable consideration.

• Comprehensive and Continuing Surety Agreement — A surety who signs a comprehensive and continuing surety agreement expressly covering "all obligations of every kind which the principal may now or may hereafter owe the creditor" is solidarily liable for all obligations arising from the principal's discounting transactions, including those arising from warranties in the Deeds of Assignment. The usual warranties made by one who discounts receivables do not materially alter or increase the surety's risk, and no novation occurs. Under Article 1215 of the Civil Code, only novation, compensation, confusion, or remission by the creditor releases a solidary debtor. The surety's liability arises automatically upon the principal's default.

• Discounting vs. Loan Accommodation — If accounts receivable, such as postdated checks, are sold for a consideration less than their face value, the transaction is one of discounting, governed by the Financing Company Act, and the assignee is immediately subrogated as creditor of the accounts receivable. If the receivables are merely used as collateral for a loan, the transaction is a simple loan, and the lender is not subrogated as creditor until default and foreclosure. The distinction determines the applicable legal regime: discounting falls under the Financing Company Act and the Civil Code on contracts, while a simple loan is governed by the Civil Code provisions on loan.

• Notice of Dishonor Not Required in Certain Cases — Under Section 114(d) and (e) of the Negotiable Instruments Law, notice of dishonor need not be given to the drawer where the drawer has no right to expect or require the bank to honor the instrument, or where the drawer has countermanded payment. Checks dishonored for "account closed," "account under garnishment," "insufficiency of funds," or "payment stopped" fall within these exceptions. Under common law, as incorporated through Section 196 of the Negotiable Instruments Law, delay in notice of dishonor discharges the drawer only to the extent of the loss caused by the delay.

• "The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law." — This passage articulates the central ratio decidendi: the "with recourse" stipulation creates a contractual obligation independent of NIL warranties, making notice of dishonor irrelevant to the assignor's liability.

• "The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy considerations militate against according finance companies the rights of a holder in due course." — This defines the policy rationale for why endorsement in discounting transactions does not confer holder-in-due-course status on financing companies, protecting consumers who issue checks for installment purchases against defenses arising from defective goods.

• "Having affixed his signature thereto, the appellant Tan Chong Lin is expected to have, at least, read and understood the same." — This statement, drawn from the Court of Appeals' ruling and quoted in the decision, underscores the principle that a surety who signs a comprehensive agreement is bound by its broad terms and cannot claim ignorance of the principal's discounting transactions, especially when the surety is the corporation's own president.

• "There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or new), that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of Assignment." — This establishes the permissibility of "with recourse" stipulations under both the NIL and the Financing Company Act, confirming the parties' freedom to contract under Article 1306 of the Civil Code in the context of discounting receivables.

• Sesbreño vs. Court of Appeals, 222 SCRA 466 (1993) — Cited for the proposition that a negotiable instrument, instead of being negotiated, may be assigned. Assignment of a negotiable instrument is the principal mode of conveying accounts receivable under the Financing Company Act.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 (1994) — Cited as the basis for awarding legal interest at 12% per annum from the time the complaint was filed, in the absence of a prior written demand on the principal debtor.
• Abrogar vs. Intermediate Appellate Court, 157 SCRA 57 — Cited by the Court of Appeals for the proposition that an award of attorney's fees must be supported by a statement of rationale in the body of the decision; the trial court's failure to provide such rationale led the CA to delete the award. The Supreme Court subsequently reinstated attorney's fees on different grounds (stipulation in the Deeds of Assignment and evident bad faith under Article 2208 of the Civil Code).

• Section 23, Corporation Code of the Philippines — Vests in the board of directors the exercise of corporate powers, including the authority to borrow funds or dispose of corporate assets and to designate officers to sign implementing documents. Applied to confirm that the two board resolutions validly authorized Arsenio to execute the Deeds of Assignment binding Great Asian.
• Article 1157, Civil Code — Enumerates the sources of obligations, including contracts. Applied to establish that Great Asian's obligation to pay Bancasia arose from the Deeds of Assignment as contractual obligations.
• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Applied to enforce the "with recourse" stipulation against Great Asian.
• Article 1306, Civil Code — Authorizes contracting parties to establish stipulations, clauses, terms, and conditions as they deem convenient, provided not contrary to law, morals, good customs, public order, or public policy. Applied to uphold the "with recourse" stipulation as a valid contractual provision.
• Article 1181, Civil Code — Defines conditional obligations, where the acquisition of rights depends upon the happening of the event constituting the condition. Applied to characterize the drawers' failure to pay as the suspensive condition triggering Great Asian's obligation.
• Article 1207, Civil Code — Provides that solidary liability exists when the obligation expressly so states or when the law or nature of the obligation requires solidarity. Applied to confirm Tan Chong Lin's solidary liability under the express terms of the Surety Agreements.
• Article 1215, Civil Code — Enumerates novation, compensation, confusion, or remission as the acts by the creditor that release a solidary debtor. Applied to reject the claim that the warranties in the Deeds of Assignment released the surety, none of the enumerated grounds being present.
• Article 1354, Civil Code — Presumes that the cause of a contract exists and is lawful unless the debtor proves the contrary. Applied to reject Great Asian's claim of lack of consideration for the Deeds of Assignment.
• Article 2208, Civil Code — Authorizes the award of attorney's fees in cases where the defendant acted in gross and evident bad faith in refusing to satisfy a plainly valid, just, and demandable claim. Applied to justify the award of 25% attorney's fees.
• Sections 114(d) and (e), Negotiable Instruments Law — Provide that notice of dishonor need not be given to the drawer where the drawer has no right to expect the bank to honor the instrument or where the drawer has countermanded payment. Applied to show that notice of dishonor was not required for any of the fifteen checks.
• Section 186, Negotiable Instruments Law — Provides that delay in presentment of checks discharges the drawer, but is silent on delay in notice of dishonor. Distinguished from the common law rule on delay in notice of dishonor.
• Section 196, Negotiable Instruments Law — Provides that cases not covered by the Act shall be governed by existing legislation or, in default thereof, by the rules of the Law Merchant. Applied to incorporate the common law rule that delay in notice of dishonor discharges the drawer only to the extent of loss caused by the delay.
• Section 3(a), Financing Company Act of 1998 (and old R.A. No. 5980) — Defines financing companies as corporations organized to extend credit facilities by discounting or factoring commercial papers or accounts receivable. Applied to characterize the transactions as discounting of receivables within the statutory mandate of financing companies.
• Section 1(h), SEC Implementing Rules of the Financing Company Act of 1998 — Defines "discounting" as a type of receivables financing whereby evidences of indebtedness are purchased or assigned in an amount less than their face value. Applied to confirm that the Deeds of Assignment constituted discounting transactions.
• Sections 15 and 17, Insolvency Law (Act No. 1956) — Require the insolvent petitioner to submit a schedule of debts containing a full and true statement of all debts and liabilities, verified as full, correct, and true. Applied to establish that Great Asian's listing of Bancasia as a creditor in its insolvency petition constituted a judicial admission of indebtedness.

Vitug (Acting Chairman) and Panganiban, JJ., concurred. Melo (Chairman), J., was on leave. Sandoval-Gutierrez, J., took no part.