Philippine Bank of Commerce vs. Aruego

Relief from an order of default or a default judgment requires proof of both excusable neglect and a meritorious defense; absent a meritorious defense, relief is properly denied. Under the Negotiable Instruments Law, an acceptor who does not disclose his principal is personally liable, and an accommodation party who signs as drawee/acceptor is primarily and personally liable; a commercial paper conforming to the definition of a bill of exchange remains such even if payment was made before acceptance.

Jose M. Aruego published "World Current Events," a periodical printed by Encal Press and Photo Engraving. To facilitate payment for the printing, Aruego obtained a credit accommodation from the Philippine Bank of Commerce. For each printing, the printer drew a draft against the bank, which was later sent to Aruego for acceptance; as added security, the bank required Aruego to execute a trust receipt over the periodicals, obliging him to hold them in trust, sell them, and turn over the proceeds to answer for obligations arising from the drafts. The dispute implicated the Negotiable Instruments Law provisions on representative capacity, accommodation parties, and bills of exchange.

Jose M. Aruego published "World Current Events," a periodical printed by Encal Press and Photo Engraving. To facilitate payment of printing costs, Aruego obtained a credit accommodation from the Philippine Bank of Commerce. For every printing, Encal Press and Photo Engraving collected the cost by drawing a draft against the bank; the draft was later sent to Aruego for acceptance. As added security, the bank required Aruego to execute a trust receipt in its favor, under which he undertook to hold the periodicals in trust, sell them, and turn over the proceeds to answer for all obligations arising from the drafts.

On December 1, 1959, the bank instituted Civil Case No. 42066 in the Court of First Instance of Manila, Branch XIII, against Aruego for recovery of about P35,000.00 with daily interest from November 17, 1959 until fully paid, a commission of 3/8% for every thirty days or fraction thereof, attorney's fees equivalent to 10% of the total amount due, and costs. The complaint contained twenty-two causes of action covering twenty-two transactions between the bank and Aruego from August 28, 1950 to March 14, 1951. Aruego received a copy of the complaint and summons on December 2, 1959. On December 14, 1959, he filed an urgent motion for extension of time to plead, set for hearing on December 16, 1959; the court denied the motion at the hearing. On December 17, 1959, Aruego filed a motion to dismiss, arguing that the complaint stated no cause of action because the amounts of the bills of exchange had already been paid by the bank to the drawer without his knowledge or consent, and because he was merely an accommodating party for the drawer, liable only if the drawer failed to pay. The trial court dismissed the complaint on December 22, 1959, and Aruego received a copy on December 24, 1959.

On January 13, 1960, the bank filed a motion for reconsideration. On March 7, 1960, the trial court set aside its order of dismissal and set the case for hearing on March 15, 1960 at 8:00 a.m. Aruego received a copy of that order on March 11, 1960 at 5:00 p.m., according to the affidavit of Deputy Sheriff Mamerto de la Cruz. The next day, March 12, 1960, Aruego filed a motion to postpone the trial on the ground that no answer had yet been filed and the issues had not been joined; on the same date, he filed his answer. In the answer, he alleged that he signed the document upon which the bank sued in his capacity as President of the Philippine Education Foundation, that his liability was only secondary, and that he believed he was signing only as an accommodation party.

On March 15, 1960, the bank filed an ex parte motion to declare Aruego in default, contending that he should have filed his answer on March 11, 1960 and that his March 12 answer was one day late. On March 19, 1960, the trial court declared him in default. Aruego learned of the order on March 21, 1960, and on March 22, 1960, he moved to set it aside. He alleged that although the March 7 order was received on March 11 at 5:00 p.m., he could not reasonably have been expected to file his answer within office hours on that day, especially because the order was brought to counsel's attention only in the early hours of March 12, 1960; he also claimed a good and substantial defense. He attached the deputy sheriff's affidavit and his own affidavit. The trial court denied the motion on March 25, 1960.

On May 6, 1960, the trial court rendered judgment ordering Aruego to pay the bank P35,444.35, representing the total amount of his obligation under the twenty-two causes of action as of November 15, 1957, and P10,000.00 as attorney's fees. On June 1, 1960, Aruego filed a motion to set aside the judgment by default, reiterating the same grounds he had raised in his motion for relief from the order of default. The bank opposed the motion, and on June 11, 1960, the trial court denied it. Aruego then appealed both the order denying relief from default and the order denying relief from the default judgment.

The bank's suit was precipitated by Aruego's failure to pay the amounts covered by the drafts. The trial court found that Aruego had received the order setting aside the dismissal on March 11, 1960 at 5:00 p.m. and filed his answer on March 12, 1960, and that the drafts he accepted bore only his signature as "JOSE ARUEGO (Acceptor)" without disclosure of the Philippine Education Foundation Company as principal.

• Default and Excusable Neglect: Aruego argued that the lower court erred in holding him in default because the order setting aside the dismissal was received at 5:00 p.m. on March 11, 1960, making it impossible to file an answer within office hours that day, and he filed his answer the next day.
• Answer Already on File: Aruego argued that the lower court erred in entertaining the motion to declare him in default although an answer was already on file, without first disposing of that answer in an appropriate action.
• Relief from Default and Default Judgment: Aruego argued that the lower court erred in denying his petition for relief from the order of default and from the judgment by default.
• Representative Capacity: Aruego maintained that he signed the bills of exchange in a representative capacity as President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," and not as principal obligor.
• Accommodation Party: Aruego contended that he signed only as an accommodation or additional party obligor to add security to the bank, and that he should be liable only after the drawer is shown to be incapable of paying.
• Nature of the Instruments: Aruego argued that although the documents were labelled bills of exchange, they were legally mere instruments evidencing indebtedness of the drawee because payment was made before acceptance, with Aruego only as additional security.

• Timeliness of Answer: The bank argued that Aruego should have filed his answer on March 11, 1960, and that his March 12, 1960 answer was one day late, warranting default.
• Opposition to Relief: The bank opposed Aruego's motions to set aside the order of default and the judgment by default, as well as his motion for reconsideration of the order dismissing his appeal.

• Excusable Neglect and Default: Whether the trial court erred in declaring Aruego in default and in denying relief, considering that the order setting aside the dismissal was received at 5:00 p.m. and the answer was filed the next day.
• Answer Already on File: Whether the trial court erred in entertaining the motion to declare Aruego in default despite an answer already being on file.
• Meritorious Defense — Representative Capacity: Whether Aruego had a meritorious defense in claiming that he signed the drafts as President of the Philippine Education Foundation Company.
• Meritorious Defense — Accommodation Party: Whether Aruego had a meritorious defense in claiming that he signed only as an accommodation party and should be liable only after the drawer's inability to pay.
• Meritorious Defense — Nature of the Instruments: Whether Aruego had a meritorious defense in claiming that the drafts were not bills of exchange because payment was made before acceptance.
• Relief from Default Judgment: Whether the trial court erred in denying Aruego's petition for relief from the order of default and from the judgment by default.

• Excusable Neglect and Default: The failure to file the answer on the last day was excusable, because the order was received at 5:00 p.m. and courts then closed at 5:00 p.m.; Aruego filed his answer the next day. Relief was nevertheless denied because he failed to show a meritorious defense.
• Answer Already on File: The assigned error does not warrant reversal. Even with an answer on file, relief from default required a meritorious defense, which Aruego failed to show.
• Meritorious Defense — Representative Capacity: No. Under Section 20 of the Negotiable Instruments Law, one who signs in a representative capacity without disclosing his principal is personally liable; Aruego signed only as "JOSE ARUEGO (Acceptor)" without disclosing the Philippine Education Foundation Company.
• Meritorious Defense — Accommodation Party: No. Under Section 29 of the Negotiable Instruments Law, an accommodation party is liable to a holder for value even if the holder knew him to be only an accommodation party; as drawee/acceptor, Aruego was primarily and personally liable.
• Meritorious Defense — Nature of the Instruments: No. Under Section 126 of the Negotiable Instruments Law, a commercial paper conforming to the definition of a bill of exchange is a bill of exchange; acceptance affects the liabilities of the parties, not the nature of the instrument.
• Relief from Default Judgment: Denial affirmed. Because Aruego had no meritorious defense, granting relief would result in a new trial that would serve no purpose and waste the time of the courts and parties.

• Excusable Neglect and Default: The Court applied the rule that relief from a judgment taken through mistake, inadvertence, surprise, or excusable neglect requires the movant to show both that his failure to answer was due to fraud, accident, mistake, or excusable negligence and that he has a meritorious defense. The record showed Aruego received the order setting aside the dismissal on March 11, 1960 at 5:00 p.m., when courts then held office only until 5:00 p.m., so it was impossible for him to file his answer that same day; he filed it the following day, March 12, 1960. His failure to answer on the last day was therefore excusable. However, the Court found he failed to show a meritorious defense, so relief was properly denied.
• Answer Already on File: The decision does not separately resolve this assigned error; the affirmance rested on the absence of a meritorious defense. Because Aruego's defenses were ineffective, the default and denial of relief stood.
• Meritorious Defense — Representative Capacity: The Court cited Section 20 of the Negotiable Instruments Law. Under that provision, if the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable if duly authorized; but the mere addition of words describing him as an agent or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. An inspection of the drafts accepted by Aruego showed that nowhere did he disclose that he was signing as a representative of the Philippine Education Foundation Company. He signed merely as "JOSE ARUEGO (Acceptor)." For failure to disclose his principal, he was personally liable for the drafts he accepted.
• Meritorious Defense — Accommodation Party: The Court defined an accommodation party under Section 29 of the Negotiable Instruments Law as one who has signed the instrument as maker, drawer, 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 that the holder knew him to be only an accommodation party. In lending his name, the accommodation party is in effect a surety for the accommodated party; he lends his name to enable the accommodated party to obtain credit or raise money, receives no part of the consideration, but assumes liability to other parties to accommodate another. In this case, Aruego signed as drawee/acceptor. Under the Negotiable Instruments Law, a drawee is primarily liable. He therefore became primarily and personally liable for the drafts.
• Meritorious Defense — Nature of the Instruments: The Court cited Section 126 of the Negotiable Instruments Law, which defines a bill of exchange as an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. As long as a commercial paper conforms with that definition, it is considered a bill of exchange. The nature of acceptance is important only in determining the kind of liabilities of the parties involved, not in determining whether a commercial paper is a bill of exchange. Aruego's argument that the drafts were mere evidence of indebtedness because payment was made before acceptance was therefore without merit.
• Relief from Default Judgment: Because Aruego had no meritorious defense, his appeal could not prosper. The Court reasoned that granting his prayer would result in a new trial that would serve no purpose and would merely waste the time of the courts and the parties, since the defense was nil or ineffective. The order denying relief from the judgment by default was accordingly affirmed.

• Relief from Default Requires Excusable Neglect and Meritorious Defense — To obtain relief from an order of default or a default judgment, the defendant must show that his failure to answer was due to fraud, accident, mistake, or excusable negligence and that he has a meritorious defense. Both requisites must concur. In this case, excusable neglect was established because the order reinstating the complaint was received at 5:00 p.m. and the answer was filed the next day, but relief was denied because no meritorious defense was shown.
• Representative Capacity Under Section 20 of the Negotiable Instruments Law — A person who signs an instrument in a representative capacity is not personally liable if he was duly authorized and discloses his principal. However, the mere addition of words describing him as an agent or as filling a representative character, without disclosing the principal, does not exempt him from personal liability. Aruego signed only as acceptor without disclosing the Philippine Education Foundation Company, so he was personally liable.
• Accommodation Party Liability Under Section 29 of the Negotiable Instruments Law — An accommodation party is one who signs as maker, drawer, or indorser, without receiving value, for the purpose of lending his name to another. He is liable to a holder for value even if the holder knew him to be only an accommodation party. In lending his name, he is in effect a surety for the accommodated party. Aruego signed as drawee/acceptor, and a drawee is primarily liable, so he became primarily and personally liable.
• Definition of a Bill of Exchange Under Section 126 of the Negotiable Instruments Law — A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. A commercial paper conforming to this definition is a bill of exchange; acceptance affects only the liabilities of the parties, not the nature of the instrument. The drafts remained bills of exchange despite payment before acceptance.
• Primary Liability of a Drawee/Acceptor — Under the Negotiable Instruments Law, a drawee is primarily liable. By signing as acceptor/drawee, Aruego became primarily and personally liable for the drafts.

• "It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a meritorious defense." — States the two-prong requirement for relief from default: excusable neglect and a meritorious defense.
• "The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on the following day." — Explains why the late filing was excusable, even though relief was ultimately denied for lack of a meritorious defense.
• "An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company." — Supports the finding that Aruego did not disclose his principal and was therefore personally liable under Section 20 of the Negotiable Instruments Law.
• "An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party." — Provides the canonical definition and liability rule for an accommodation party under Section 29 of the Negotiable Instruments Law.

• Bank of Philippine Islands vs. de Coster, 47 Phil. 594 — Cited for the rule that a party seeking relief from a judgment taken through mistake, inadvertence, surprise, or excusable neglect must show a meritorious defense; the Court noted this is substantially the same as Section 3, Rule 18 of the New Rules of Court.
• Ferrer vs. Yang Sepeng, 60 SCRA 149 — Cited for the proposition that granting the defendant's prayer would result in a new trial that would serve no purpose and would merely waste the time of the courts and the parties because the defense is nil or ineffective.

• Section 20, Negotiable Instruments Law — Governs representative capacity. It provides that one who signs for or on behalf of a principal is not liable if duly authorized, but the mere addition of representative words without disclosing the principal does not exempt him from personal liability. Applied to Aruego because he did not disclose the Philippine Education Foundation Company as principal.
• Section 29, Negotiable Instruments Law — Defines an accommodation party and makes such party liable to a holder for value even if the holder knew him to be only an accommodation party. Applied to Aruego, who signed as drawee/acceptor and was primarily liable.
• Section 126, Negotiable Instruments Law — Defines a bill of exchange. Applied to hold that the drafts remained bills of exchange despite payment before acceptance; acceptance affects liabilities, not the nature of the instrument.
• Section 3, Rule 18, New Rules of Court — Cited in the footnote as substantially the same as the rule in Bank of Philippine Islands vs. de Coster requiring a meritorious defense for relief from default.

Teehankee (Chairman), Makasiar, Guerrero, and Melencio-Herrera, JJ., concurred.