Violago vs. BA Finance Corporation

A holder in due course of a negotiable instrument holds it free from personal defenses available among prior parties, and the maker cannot set up nullity of the underlying contract of sale against such holder; the veil of corporate fiction may be pierced to hold a corporate president personally liable when he uses the corporation to defraud buyers, even if the corporation itself was not impleaded in the suit.

Petitioners-spouses Pedro and Florencia Violago are cousins of respondent Avelino Violago, who was president of Violago Motor Sales Corporation (VMSC), a family-owned corporation engaged in the sale of motor vehicles. In 1983, Avelino offered to sell the spouses a Toyota Cressida on installment terms, with the balance to be financed by respondent BA Finance Corporation. The arrangement involved the spouses executing a promissory note and chattel mortgage in favor of VMSC, which would then endorse the note to BA Finance. The dispute arose from the fact that the vehicle sold to the spouses had already been sold to another cousin, Esmeraldo Violago, and was never delivered to the petitioners.

Sometime in 1983, Avelino Violago, president of Violago Motor Sales Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and Pedro's wife, Florencia. Avelino explained that he needed to sell a vehicle to increase VMSC's sales quota, and that the spouses would only pay a down payment of PhP 60,500 while the balance would be financed by BA Finance Corporation. The spouses would pay monthly installments to BA Finance, while Avelino would handle the documentation and financing approval. Under these terms, the spouses agreed to purchase a Toyota Cressida Model 1983 from VMSC.

On August 4, 1983, the spouses and Avelino signed a promissory note binding themselves jointly and severally to pay to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25, the first installment due on September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation showing the net purchase price, down payment, balance, and finance charges. VMSC issued a sales invoice in favor of the spouses, and the spouses executed a chattel mortgage over the car in favor of VMSC as security for the PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse, and after receiving PhP 209,601, executed a Deed of Assignment of its rights and interests under the promissory note and chattel mortgage in favor of BA Finance. The spouses remitted PhP 60,500 to VMSC through Avelino.

The sales invoice was filed with the LTO-Baliwag Branch, which issued Certificate of Registration No. 0137032 in Pedro's name on August 8, 1983. Unbeknownst to the spouses, the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldo's name by the LTO-San Rafael Branch. Despite the spouses' demand for delivery and Avelino's repeated assurances, the vehicle was never delivered. Because VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance.

On March 1, 1984, BA Finance filed a complaint for Replevin with Damages against the spouses before the RTC, Branch 116, Pasay City, praying for delivery of the vehicle or payment of PhP 199,049.41 plus penalty at 3% per month, attorney's fees, liquidated damages, and costs. The RTC issued an Order of Replevin on March 28, 1984. The spouses were declared in default for failing to file an answer, and on December 3, 1984, the RTC rendered a decision in favor of BA Finance. A writ of execution issued on January 11, 1985, followed by an alias writ. Meanwhile, Esmeraldo conveyed the vehicle to Jose V. Olvido, who was issued a certificate of registration by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose executed a chattel mortgage over the vehicle in favor of Generoso Lopez as security for a loan of PhP 260,664, which promissory note was later endorsed to BA Finance's Cebu City branch.

On August 21, 1989, the spouses filed a Motion for Reconsideration and Motion to Quash Writ of Execution, arguing lack of valid service of summons. The RTC denied the motions, prompting the spouses to file a petition for certiorari under Rule 65 before the CA. On May 31, 1991, the CA nullified the RTC's order, and this decision became final. On January 28, 1992, the spouses filed their Answer, alleging non-delivery of the vehicle, prior sale to Esmeraldo, that BA Finance was not a holder in due course under Section 59 of the NIL, and that BA Finance's recourse should be against VMSC. On February 25, 1995, the spouses filed a Third Party Complaint against Avelino, praying that he be held liable to them in the event of liability to BA Finance, as well as for damages. VMSC was not impleaded as third-party defendant. Avelino moved to dismiss, contending he was not a party to the transaction personally but VMSC was; his motion was denied.

The RTC rendered a Decision on March 5, 1994, finding for BA Finance against the spouses but declaring them entitled to indemnification by Avelino. The spouses and Avelino both appealed to the CA. The spouses argued that the promissory note was negotiable and that the NIL, not the Civil Code, should apply; that the sale was null and void for failure of consideration since VMSC was not the owner of the vehicle; and that BA Finance was not a holder in due course since it knew, through its Cebu City branch, that the car was never delivered. The CA ruled that the promissory note was negotiable and that BA Finance was a holder in due course, applying Sections 8, 24, and 52 of the NIL. The CA faulted the spouses for failing to implead VMSC as an indispensable party in the third-party complaint, and set aside the trial court's order holding Avelino liable without prejudice to a separate action against VMSC and Avelino.

• Negotiability and Holder in Due Course Status: Petitioners argued that the promissory note is a negotiable instrument and that the NIL, not the Civil Code, should govern; they alternatively invoked Article 1318 of the Civil Code, asserting that their consent was vitiated by fraud, rendering the promissory note without legal effect despite its negotiation.
• Failure of Consideration: Petitioners maintained that since VMSC was not the owner of the vehicle at the time of sale, the sale was null and void for failure in the "cause or consideration" of the promissory note, which was the sale and delivery of the vehicle.
• BA Finance Not a Holder in Due Course: Petitioners alleged that BA Finance was not a holder in due course because it knew, through its Cebu City branch, that the car was never delivered to the spouses.
• Piercing the Corporate Veil: Petitioners prayed that the veil of corporate fiction be set aside and that Avelino be adjudged directly liable to BA Finance, and for damages for the fraud committed upon them.

• Personal Non-Liability: Avelino contended that he was not a party to the transaction personally, but VMSC was, and prayed for dismissal of the complaint against him and for moral damages and costs of suit from the spouses.
• Indispensable Party: The CA, on behalf of the appellate reasoning adopted by BA Finance's position, reasoned that VMSC was an indispensable party whose absence rendered the third-party complaint proceedings null and void.

• Holder in Due Course: Whether the holder of an invalid negotiable promissory note may be considered a holder in due course.
• Validity of Chattel Mortgage: Whether a chattel mortgage should be considered valid despite vitiation of consent of, and the fraud committed on, the mortgagors by Avelino, and the clear absence of object certain.
• Piercing the Corporate Veil: Whether the veil of corporate entity may be invoked and sustained despite the fraud and deception of Avelino.

• Holder in Due Course: Yes. BA Finance is a holder in due course under Section 52 of the NIL, as the promissory note was complete and regular on its face, BA Finance took it before it was overdue, in good faith and for value, and without notice of any infirmity or defect in title.
• Validity of Chattel Mortgage: N/A. The decision did not squarely rule on the chattel mortgage issue as separately framed; the Court focused on the negotiability of the promissory note and the holder-in-due-course status of BA Finance, which rendered personal defenses unavailable.
• Piercing the Corporate Veil: Yes. The veil of VMSC's corporate fiction was pierced, and Avelino was held personally liable for fraud committed against the spouses, even though VMSC was not impleaded in the third-party complaint.

• Holder in Due Course: The promissory note satisfied all requisites of a negotiable instrument under Section 1 of the NIL: it was in writing, signed by the spouses, contained an unconditional promise to pay a sum certain (PhP 209,601), was payable at determinable future dates, and was payable to the order of VMSC. The indorsement by VMSC to BA Finance was valid and regular. Under Section 52 of the NIL, a holder in due course must take the instrument (a) complete and regular on its face, (b) before overdue and without notice of dishonor, (c) in good faith and for value, and (d) without notice of any infirmity or defect in title. The CA found, and the Supreme Court agreed, that all four requisites were met. Although BA Finance's Cebu City branch later acquired an interest in the same vehicle through Jose Olvido's chattel mortgage to Generoso Lopez, that transaction occurred on May 8, 1987 — much later than August 4, 1983, when VMSC assigned its rights to BA Finance. The law presumes a holder to be a holder in due course (Section 59, NIL). Under Section 57, a holder in due course holds the instrument free from any defect of title of prior parties and from personal defenses available among them. Accordingly, petitioners could not raise the defense of non-delivery of the vehicle or nullity of the sale against BA Finance. The NIL considers every negotiable instrument prima facie issued for valuable consideration (Section 24). Petitioners are liable to BA Finance for the amount stated in the instrument.

• Validity of Chattel Mortgage: The decision did not separately resolve the chattel mortgage issue as framed by petitioners. The Court's analysis subsumed the chattel mortgage within the broader question of negotiability and holder-in-due-course status, concluding that personal defenses — including vitiation of consent and absence of object — were unavailing against a holder in due course.

• Piercing the Corporate Veil: The three-part test from Concept Builders, Inc. vs. NLRC was applied: (1) complete domination of finances, policy, and business practice such that the corporate entity had no separate mind, will, or existence of its own; (2) such control was used to commit fraud or wrong; and (3) the control and breach proximately caused the injury. All three were satisfied. VMSC was a family-owned corporation of which Avelino was president. Avelino committed fraud by selling to the spouses a vehicle already sold to Esmeraldo. Avelino never refuted the prior sale; he merely insisted he was not personally a party. Avelino, knowing the vehicle was already sold, abused his relationship with the spouses, proceeded with the sale, and collected the down payment. His actions were the proximate cause of the spouses' loss. The non-inclusion of VMSC as a party in the third-party complaint did not preclude recovery from Avelino or bar application of the piercing doctrine. Citing Arcilla vs. Court of Appeals, the Court held that even when the corporation was not impleaded, its president could be held personally liable when the corporation was merely his business conduit and alter ego.

• Holder in Due Course Doctrine — Under Section 52 of the NIL, a holder in due course is one who takes the instrument (a) complete and regular on its face, (b) before overdue and without notice of dishonor, (c) in good faith and for value, and (d) without notice of any infirmity in the instrument or defect in the title of the person negotiating it. The law presumes every holder to be a holder in due course (Section 59). A holder in due course holds the instrument free from any defect of title of prior parties and from personal defenses available among prior parties (Section 57), and may enforce payment for the full amount. In this case, BA Finance met all four requisites, and the spouses' defenses of non-delivery and nullity of sale were personal defenses unavailable against a holder in due course.

• Piercing the Veil of Corporate Fiction — A corporation has a personality separate and distinct from its stockholders, but when the separate personality is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the veil may be pierced. The three-part test requires: (1) complete domination of finances, policy, and business practice over the transaction attacked, such that the corporation had no separate mind, will, or existence; (2) use of such control to commit fraud or wrong; and (3) proximate causation of the injury by such control and breach. The doctrine may be applied even when the corporation itself is not impleaded as a party, provided the corporation is shown to be the alter ego or business conduit of the individual held liable.

• "A holder in due course, however, holds the instrument free from any defect of title of prior parties and from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof." — States the controlling rule under Section 57 of the NIL, explaining why the spouses' personal defenses of fraud and nullity of sale could not be raised against BA Finance.

• "When the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced." — Canonical formulation of the piercing doctrine as quoted from Concept Builders, Inc. vs. NLRC, applied here to hold Avelino personally liable for fraud committed through VMSC.

• "The fact that VMSC was not included as defendant in petitioners' third party complaint does not preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil doctrine." — Directly addresses and rejects the CA's rationale for dismissing the third-party complaint, establishing that non-impleader of the corporation does not prevent piercing when the individual's alter-ego relationship is established.

• Salas vs. Court of Appeals, G.R. No. 76788, January 22, 1990, 181 SCRA 296 — Cited for the proposition that a holder of a negotiable instrument may enforce payment for the full amount and that the maker cannot set up the defense of nullity of the contract of sale. Also cited by the CA for the rule that VMSC, as an indispensable party, must be impleaded for a binding judgment — a proposition the Supreme Court effectively limited in its ruling on piercing.

• Concept Builders, Inc. vs. NLRC, G.R. No. 108734, May 29, 1996, 257 SCRA 149 — Controlling authority for the three-part test on piercing the veil of corporate fiction: control, use of control to commit fraud, and proximate causation of injury. All three elements were found present in this case.

• Arcilla vs. Court of Appeals, G.R. No. 89804, October 23, 1992, 215 SCRA 120 — Followed for the principle that a corporate president may be held personally liable when the corporation is merely his alter ego and business conduit, even if the corporation was not impleaded as a party in the proceedings below.

• Section 1, Negotiable Instruments Law — Defines the requisites of a negotiable instrument: (a) in writing and signed by the maker or drawer; (b) unconditional promise or order to pay a sum certain in money; (c) payable on demand or at a fixed or determinable future time; (d) payable to order or to bearer; (e) drawee named with reasonable certainty. The promissory note was found to satisfy all these requisites.

• Section 52, Negotiable Instruments Law — Defines what constitutes a holder in due course: a holder who takes the instrument (a) complete and regular on its face; (b) before overdue and without notice of dishonor; (c) in good faith and for value; (d) without notice of any infirmity or defect in title. BA Finance was found to meet all four conditions.

• Section 57, Negotiable Instruments Law — Provides that a holder in due course holds the instrument free from any defect of title of prior parties and from defenses available to prior parties among themselves, and may enforce payment for the full amount. Applied to bar the spouses' personal defenses against BA Finance.

• Section 59, Negotiable Instruments Law — Presumes that every holder of a negotiable instrument is a holder in due course. Applied to establish the presumption in favor of BA Finance.

• Section 24, Negotiable Instruments Law — Provides that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. Applied to negate the spouses' defense of failure of consideration against BA Finance.

• Article 1318, Civil Code — Provides that there is no contract unless there is (1) consent of the contracting parties, (2) object certain which is the subject matter of the contract, and (3) cause of the obligation established. Petitioners invoked this provision to argue vitiated consent and absence of object, but the Court held such personal defenses were unavailing against a holder in due course.

Leonardo A. Quisumbing (Chairperson), Consuelo Ynares-Santiago, Conchita Carpio Morales, and Dante O. Tinga concurred. No separate concurring opinions were noted.