Maulini vs. Serrano

As between immediate parties to a negotiable instrument, parol evidence is admissible to show an absolute lack or failure of consideration for an indorsement, or that the indorsement was made merely as an agency/vehicle to transfer naked title, because such evidence does not vary the terms of an existing contract but denies that any contract of indorsement ever existed. An indorser is not an accommodation party where the alleged accommodation is to the indorsee rather than to the maker or indorser.

Antonio G. Serrano was a Manila broker who negotiated loans between lenders and borrowers, receiving compensation from borrowers, while Fernando Maulini was a lender who used Serrano's services. The controversy implicated the Negotiable Instruments Law, Act No. 2031, and section 285 of the Code of Civil Procedure, which limits the use of parol evidence to alter, change, modify, or contradict the terms of a written instrument.

On June 5, 1912, a promissory note was executed in Manila by Padern, Moreno & Co., Jose Padern, and Angel Gimenez, jointly and severally promising to pay to the order of Antonio G. Serrano on or before September 5, 1912 the sum of P3,000 for value received for commercial operations. The note renounced notice and protest; it provided that if the sum was not completely paid on September 5, 1912, it would draw interest at 1½ per cent per month from the date due until complete payment; and it obligated the makers to pay an additional P500 as attorney's fees in case of failure to pay. It was signed by F. Moreno for Padern, Moreno & Co., by F. Moreno for Jose Padern, and by Angel Gimenez. On the back of the note, Serrano indorsed: "Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A.G. Serrano." Maulini and others later brought an action upon this contract of indorsement.

According to the parol evidence provisionally admitted at trial, Serrano was a broker doing business in Manila. Part of his business consisted in looking up and ascertaining persons who had money to loan as well as those who desired to borrow money and, acting as a mediator, negotiating a loan between the two. He had done much business with Maulini and the borrower, as well as with many other people in Manila, prior to the transaction. By custom in such transactions, the broker obtained compensation for his services from the borrower, the lender paying nothing; sometimes this was a certain per cent of the sum loaned, and at other times it was a part of the interest the borrower was to pay, the borrower paying 1½ per cent and the broker ½ per cent. The method usually followed was for the broker to deliver the money personally to the borrower, take the note in his own name, and immediately transfer it by indorsement to the lender.

In this case, the arrangement was made at the special request of the indorsee and simply as a favor to him. Maulini stated to the broker that he did not wish his name to appear on the books of the borrowing company as a lender of money and that he desired the broker to take the note in his own name and immediately transfer title to him by indorsement. This was done, and the note was at once transferred to the lender. According to the evidence, there never was a moment when Serrano was the real owner of the note; it was always Maulini's note, he having furnished the money which was the consideration for the note directly to the maker and being the only person with any interest in it. Serrano acted solely as an agent, a vehicle by which the naked title to the note passed from the borrower to the lender. The only payment the broker received was for his services in negotiating the loan; he was paid nothing for becoming responsible as an indorser, and Maulini did not lose, pay, or forego anything, or alter his position, by reason of the indorsement.

The trial court provisionally received this parol evidence but ultimately held that it was not admissible to alter, vary, modify, or contradict the terms of the contract of indorsement, and refused to consider it. It also held that it was immaterial whether there was consideration for the transfer, because the indorser, under the evidence offered, was an accommodation indorser.

• Lack of Consideration: Appellant Serrano maintained that the indorsement was wholly without consideration and that, between the immediate parties, parol evidence was admissible to show an absolute lack or failure of consideration.
• Agency and Naked Transfer: Appellant argued that he acted merely as a broker or agent for the indorsee, as a vehicle by which the naked title to the note passed from the maker to the indorsee, and that he never became the real owner of the note.
• No Accommodation Indorsement: Appellant contended that he was not an accommodation indorser because the accommodation, if any, was to the indorsee, not to the maker, and he received nothing for becoming responsible as indorser.
• Parol Evidence Rule: Appellant maintained that section 285 of the Code of Civil Procedure did not bar the evidence, since it was offered to deny the existence of any indorsement contract rather than to vary, alter, modify, or contradict its terms.

• Parol Evidence — Lack of Consideration: Whether, under the Negotiable Instruments Law, an indorser of a negotiable promissory note may, in an action brought by his indorsee, show by parol evidence that the indorsement was wholly without consideration.
• Parol Evidence — Agency and Denial of Contract: Whether parol evidence is admissible to show that the indorser acted as agent for the indorsee and as a mere vehicle of transfer of naked title, so that no contract of indorsement ever existed between them.
• Accommodation Indorsement: Whether the indorser was an accommodation indorser under section 29 of Act No. 2031 where the alleged accommodation was made to the indorsee rather than to the maker.
• Section 285, Code of Civil Procedure: Whether the parol evidence rule in section 285 of the Code of Civil Procedure barred the evidence offered by the indorser.

• Parol Evidence — Lack of Consideration: Yes. Between immediate parties, the consideration of a negotiable promissory note or any contract connected with it is open to attack for absolute lack or failure of consideration.
• Parol Evidence — Agency and Denial of Contract: Yes. The evidence was admissible because it denied that any agreement of indorsement ever existed, rather than varying the terms of an admitted agreement.
• Accommodation Indorsement: No. Serrano was not an accommodation indorser; the accommodation contemplated by section 29 is to the maker or indorser, not to the payee or indorsee.
• Section 285, Code of Civil Procedure: No. The prohibition did not apply, since it prevents alteration, change, modification, or contradiction of the terms of a written instrument admittedly existing, not proof that no contract ever existed.

• Parol Evidence — Lack of Consideration: The Court held that the trial court erred in refusing to consider the provisionally admitted evidence. The consideration of a negotiable promissory note, or of any of the contracts connected with it, like any other written instrument, is open to attack between the immediate parties for the purpose of showing an absolute lack or failure of consideration. The evidence showed that Serrano was a broker who customarily took notes in his own name and immediately indorsed them to lenders; that in this case he did so at Maulini's special request and as a favor, because Maulini did not wish his name to appear on the borrowing company's books as lender; that Serrano was never the real owner of the note; that Maulini furnished the money directly to the maker and was the only person interested in the note; that Serrano acted solely as an agent or vehicle for the transfer of naked title; that Serrano received only compensation for negotiating the loan and nothing for becoming responsible as indorser; and that Maulini lost, paid, or forewent nothing and did not alter his position. No consideration therefore supported the indorsement.
• Parol Evidence — Agency and Denial of Contract: The Court held that the trial court erred in excluding the evidence under section 285. The purpose of section 285 is to prevent alteration, change, modification, or contradiction of the terms of a written instrument admittedly existing, except in the cases specified. The evidence was not offered to vary, alter, modify, or contradict the terms of an agreement admitted to exist; it was offered to deny that there ever existed any agreement whatever, to wipe out all apparent relations between the parties, and to show that the minds of the parties never met on the terms of a contract of indorsement and that no consideration ever passed. The Court compared the situation to a claim of forgery, where parol evidence is admissible to prove that the indorser never made any such contract and that no relation existed between him and the indorsee. Although Serrano did not claim forgery, he claimed that the indorsement was obtained in a manner that rendered the contract as completely inoperative between the parties as if it had been forged. Parol evidence was therefore admissible.
• Accommodation Indorsement: The Court held that the trial court misunderstood section 29 of Act No. 2031. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. The accommodation referred to is not one to the person who takes the note—the payee or indorsee—but one to the maker or indorser. In this case, the indorsement was a favor to Maulini, the indorsee, not to the maker, and was not made to better secure payment. Where an indorsement is made as a favor to the indorsee, who requests it, not to better secure payment but to relieve himself from a distasteful situation, the situation does not create an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement.
• Section 285, Code of Civil Procedure: The Court held that the prohibition in section 285 did not apply. Its purpose is to prevent alteration, change, modification, or contradiction of the terms of a written instrument admittedly existing, except in the cases specifically named in the section. The case was not one where the evidence varied, altered, modified, or contradicted the terms of an admitted contract of indorsement. The evidence was offered to show that no contract of indorsement ever existed, that the minds of the parties never met, that they never mutually agreed to enter into such a contract, and that there never existed a consideration upon which such an agreement could be founded. The evidence sought to deny the reality of any indorsement and to wipe out all apparent relations between the parties, not to vary the terms of a relation admittedly existing. It was therefore admissible.

• Parol Evidence Rule — Immediate Parties to a Negotiable Instrument — Between immediate parties to a negotiable instrument, the consideration of the instrument or of any contract connected with it is open to attack, and parol evidence is admissible to show an absolute lack or failure of consideration. The Court applied this rule to allow Serrano to prove that his indorsement to Maulini was without consideration.
• Parol Evidence Rule — Denial of the Existence of a Contract — The parol evidence rule does not bar evidence offered not to vary, alter, modify, or contradict the terms of an admitted written agreement, but to deny that any agreement ever existed. The Court applied this distinction because Serrano's evidence sought to show that no contract of indorsement ever came into existence between him and Maulini.
• Accommodation Party under Section 29, Negotiable Instruments Law — An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person; such a person is liable on the instrument to a holder for value notwithstanding the holder's knowledge that the party is only an accommodation party. The accommodation must be to the maker or indorser, not to the payee or indorsee. The Court applied this definition to hold that Serrano was not an accommodation indorser because the alleged accommodation was to Maulini, the indorsee.
• Consideration in Negotiable Instruments Between Immediate Parties — The consideration of a negotiable promissory note, or of any contract connected with it, is open to attack between immediate parties for absolute lack or failure of consideration. The Court applied this to reverse the judgment against Serrano.

• "In the first place, the consideration of a negotiable promissory note, or of any of the contracts connected therewith, like that of any other written instrument, is, between the immediate parties to the contract, open to attack, under proper circumstances, for the purpose of showing an absolute lack or failure of consideration." — States the controlling rule on consideration between immediate parties.
• "The prohibition in section 285 of the Code of Civil Procedure does not apply to a case like the one before us. The purpose of that prohibition is to prevent alternation, change, modification or contradiction of the terms of a written instrument, admittedly existing, by the use of parol evidence, except in the cases specifically named in the section." — Holds the parol evidence rule inapplicable; the Court distinguishes varying terms from denying the existence of a contract.
• "The accommodation to which reference is made in the section quoted is not one to the person who takes the note — that is, the payee or indorsee, but one to the maker or indorser of the note." — Defines the accommodation party under section 29 and rejects the trial court's classification of Serrano.
• "The evidence was not offered to vary, alter, modify, or contradict the terms of an agreement which it is admitted existed between the parties, but to deny that there ever existed any agreement whatever; to wipe out all apparent relations between the parties, and not to vary, alter or contradict the terms of a relation admittedly existing; in other words, the purpose of the parol evidence was to demonstrate, not that the indorser did not intend to make the particular indorsement which he did make; not that he did not intend to make the indorsement in the terms made; but, rather, to deny the reality of any indorsement; that a relation of any kind whatever was created or existed between him and the indorsee by reason of the writing on the back of the instrument; that no consideration ever passed to sustain an indorsement of any kind whatsoever." — Explains the ratio for admitting parol evidence: the evidence denied the existence of any indorsement contract rather than varying its terms.

• Section 29, Act No. 2031 (Negotiable Instruments Law) — Defines an accommodation party as one who has signed as maker, drawer, acceptor, or indorser without receiving value and for the purpose of lending his name to some other person, and makes such party liable to a holder for value notwithstanding the holder's knowledge. The Court held that the trial court misapplied this provision because the accommodation must be to the maker or indorser, not to the payee or indorsee, and Serrano's indorsement was a favor to Maulini.
• Section 285, Code of Civil Procedure — Prohibits the use of parol evidence to alter, change, modify, or contradict the terms of a written instrument, except in specified cases. The Court held it inapplicable because the evidence was offered to deny the existence of any contract of indorsement, not to vary the terms of an admitted contract.

Arellano, C.J., Johnson, and Trent, JJ.

• Torres, J. — The source text labels his separate opinion as "concurring," but he concluded that the judgment appealed from should be affirmed and expressed regret at dissenting from the majority. He reasoned that if Serrano had intervened only as a broker or agent, he could have qualified the indorsement with the words "without recourse" or similar words under section 38 of Act No. 2031; having signed as a general indorser for value received, he was liable under section 66. The parol evidence should not have been admitted, or if admitted, should not have been considered, because it would alter, modify, contradict, or annul the written indorsement. He also invoked sections 24, 25, 26, 28, 52, 55, 56, 57, 58, 59, and 63 of Act No. 2031, arguing that the plaintiff was a holder in due course and that absence or failure of consideration is not a defense against such a holder.
• Araullo, J. — Dissented; the provided text does not set out separate reasoning.