Salazar vs. J.Y. Brothers Marketing Corporation

The substitution of a dishonored negotiable check with a crossed check does not constitute novation absent an express intention to discharge the original obligation, because crossing a check merely relates to the mode of payment and does not alter the object or principal conditions of the underlying obligation.

Freelance sales agent Anamer Salazar, along with Isagani Calleja and Jess Kallos, procured 300 cavans of rice worth ₱214,000.00 from J.Y. Brothers Marketing Corporation. Payment was made via a Prudential Bank check issued by Nena Jaucian Timario and endorsed by Salazar. Upon presentment, the check was dishonored for a closed account. A replacement Solid Bank check, also issued by Timario and endorsed by Salazar, was delivered to respondent but was similarly dishonored for insufficient funds. Respondent subsequently filed an estafa charge against Salazar and Timario.

• The Purchase and First Check: Salazar, Calleja, and Kallos purchased 300 cavans of rice worth ₱214,000.00 from J.Y. Brothers Marketing Corporation. Salazar endorsed a Prudential Bank check issued by Timario as payment. The check was dishonored upon presentment due to a closed account.
• The Replacement Check: To settle the dishonored Prudential Bank check, a Solid Bank check, also issued by Timario and endorsed by Salazar, was delivered to respondent. This replacement check was a crossed check and was dishonored for insufficient funds.
• The Estafa Case: Respondent charged Salazar and Timario with estafa. The RTC acquitted Salazar but initially held her civilly liable. After the Supreme Court remanded the case for reception of evidence on the civil aspect, the RTC dismissed the civil liability, finding that the substitution of a non-negotiable crossed check for a negotiable check constituted an essential change amounting to novation, thereby extinguishing the obligation from the first check.
• The CA Reversal: The CA reversed the RTC, ruling that Salazar was an accommodation indorser liable on the instrument to a holder for value under the Negotiable Instruments Law.

• Novation by Substitution: Petitioner argued that respondent's acceptance of the Solid Bank check in replacement of the Prudential Bank check amounted to novation, discharging the obligation arising from the first check.
• Change in Negotiability: Petitioner maintained that replacing a negotiable check with a non-negotiable crossed check constituted an essential change in the circumstance of the instrument, creating a new obligation in lieu of the old one.
• Grave Abuse of Discretion: Petitioner contended that the CA committed grave abuse of discretion in denying the motion for reconsideration on the ground that the issue had been passed upon, when it had allegedly not yet been resolved.

• Accommodation Indorser Liability: Respondent echoed the CA's findings that petitioner was an accommodation indorser liable on the dishonored checks to a holder for value under Sections 63, 66, and 29 of the Negotiable Instruments Law.

• Novation: Whether the issuance and acceptance of a crossed Solid Bank check in replacement of a dishonored negotiable Prudential Bank check resulted in novation that discharged the obligation arising from the first check.
• Effect of Crossing a Check: Whether the substitution of a negotiable check with a crossed check constitutes an essential change in the object or principal condition of the obligation sufficient to effect novation.

• Novation: No novation occurred. Extinctive novation is never presumed and requires an express intention to novate or total incompatibility between the old and new obligations. Petitioner's endorsement of the replacement check demonstrated recognition of the existing obligation, and both checks were issued to pay the exact same debt of ₱214,000.00, negating any incompatibility.
• Effect of Crossing a Check: Crossing a check merely relates to the mode of payment, signifying that the drawer intended the check for deposit only by the rightful payee. A change in the mode of payment does not alter the object or principal condition of the obligation and is insufficient to constitute novation. Consequently, the obligation secured by the original check was not extinguished, and petitioner remains liable as an accommodation indorser.

• Extinctive Novation — Defined as the extinguishment of an existing obligation and the creation of a new one in its stead. It requires: (1) a previous valid obligation, (2) an agreement of all parties to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Extinctive novation is never presumed; there must be an express intention to novate, or the acts of the parties must clearly demonstrate intent to dissolve the old obligation. Implied novation requires total incompatibility between the old and new obligations. Applied in this case to rule that the substitution of checks did not constitute novation, there being no express intent to discharge the original obligation and no incompatibility between the two checks, which were both intended to pay the same debt.
• Crossed Checks — A check with two parallel lines in the upper left corner, indicating that it could only be deposited and not converted into cash. The effect of crossing a check relates to the mode of payment, meaning the drawer intended the check for deposit only by the payee named therein. Applied to clarify that while a crossed check may affect negotiability and mode of payment, substituting a crossed check for a regular check does not alter the object or principal condition of the underlying obligation to justify novation.

• "The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one."
• "The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place."

• Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc. — Cited for the concept and requisites of extinctive and modificatory novation, establishing that extinctive novation is never presumed and requires either express intention or total incompatibility between obligations.
• Nyco Sales Corporation v. BA Finance Corporation — Followed. Cited for the rule that novation is never presumed and the test of incompatibility, holding that substituting a dishonored check with another check to pay the same obligation does not constitute novation absent an express agreement to discharge the original debtor.
• Bank of America, NT & SA v. Associated Citizens Bank — Cited for the definition and effect of crossed checks, specifically that crossing a check relates to the mode of payment and indicates it is for deposit only.

• Section 119, Negotiable Instruments Law — Enumerates how a negotiable instrument is discharged. Applied to determine that the Prudential Bank check was not discharged under any of the enumerated modes, particularly absent an act that would discharge a simple contract for the payment of money (i.e., novation).
• Article 1231, Civil Code — Enumerates the modes of extinguishing obligations, including novation. Applied in conjunction with Section 119 of the NIL to analyze whether the substitution of checks extinguished the obligation.
• Sections 63, 66, and 29, Negotiable Instruments Law — Define a person deemed an indorser, the liability of a general indorser, and the liability of an accommodation party, respectively. Applied by the CA and affirmed by the Supreme Court to hold petitioner liable as an accommodation indorser to a holder for value.
• Article 541, Code of Commerce — Referenced regarding the practice of crossing checks, indicating that the maker or holder may direct payment to a certain banker or institution by writing across the face of the check.

Carpio (Chairperson), Nachura, Leonardo-De Castro, and Mendoza.