TOPIC Sec.

29, Negotiable Instruments Law

DOCTRINE
An accommodation party is a person who has signed the instrument as maker, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person and is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew (the
signatory) to be an accommodation party. He has the right, after paying the holder, to obtain reimbursement
from the party accommodated, since the relation between them has in effect become one of principal and
surety, the accommodation party being the surety.

RECIT-READY DIGEST
On July 17, 1982, petitioner Agro Conglomerates, Inc. sold two parcels of farmland to Wonderland Food
Industries, Inc. They executed a MOA which provides that the P5M purchase price shall be paid as follows:
P1million shall be paid in cash upon the signing of the agreement, P2 million worth of common shares of
stock of Wonderland Food Industries, Inc., and the remaining P2 million shall be paid in four equal
installments. On July 19, 1982, AGRO as vendor, WONDERLAND as vendee, and the herein respondent
Regent Savings and Loan Bank executed as Addendum to the previous MOA to the effect that the vendee
authorized the vendor to obtain a loan from REGENT for the total amount of the initial payments and that
the vendee undertook to assume the settlement of the said loan. Mario Soriano signed several promissory
notes and received the proceeds in behalf of AGRO. However, the sale of the said farmland did not
materialize which resulted to a rescission of contract of sale between AGRO and WONDERLAND.
Subsequently, AGRO and Soriano failed to meet their obligations as they fell due. Thus, after several
opportunities given to Soriano to settle their accounts, the bank filed 3 separate complaints for Collection
of Sums of Money before the RTC of Manila against the petitioners. RTC ruled in favor of the Bank. CA
affirmed. This Court ruled that there was no novation by "substitution" of debtor because there was
no prior obligation which was substituted by a new contract. It will be noted that the promissory notes,
which bound the petitioners to pay, were executed after the addendum. The addendum modified the contract
of sale, not the stipulations in the promissory notes which pertain to the surety contract. At this instance,
Wonderland apparently assured the payment of future debts to be incurred by the petitioners. Consequently,
only a contract of surety arose.

FACTS
 Agro Conglomerates (AGRO), as vendor, sold 2 parcels of land to Wonderland Food Industries,
Inc. (WONDERLAND)
 In their Memorandum of Agreement (MOA), the parties covenanted that the purchase price of P5M
would be settled by Wonderland under the following terms and conditions:
(1) P1M shall be paid in cash upon the signing of the agreement;
(2) P2M worth of common shares of stock of Wonderland; and
(3) The balance of P2M shall be paid in 4 equal installments, the first installment falling due 180
days after the signing of the agreement and every 6 months thereafter, with an interest rate of
18% per annum, to be advanced by Wonderland upon the signing of the agreement.
 On July 19, 1982, the vendor and vendee, and respondent Regent Savings & Loan Bank (REGENT)
executed an Addendum to the previous MOA. The new arrangement pertained to the revision of
settlement of the initial payments of P1M and prepaid interest of P360,000 (18% of P2M). This
addendum was not notarized.
 Consequently, petitioner Mario Soriano signed as maker several promissory notes, payable to
Regent. Thereafter, the bank released the proceeds of the loan to petitioners.

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 o However, petitioners failed to meet their obligations as they fell due.
 During that time, the bank was experiencing financial turmoil and was under the supervision of the
Central Bank.
 Central Bank examiner and liquidator Cordula de Jesus endorsed the subject promissory notes to
the bank’s counsel for collection. The bank gave petitioners opportunity to settle their account by
extending payment due dates.
o Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor
submit his formal written request.
 Regent filed 3 separate complaints before the RTC of Manila for collection of sum of money.
 In their answer, petitioners interpose the defense of novation and insisted there was a valid
substitution of debtor.
o They alleged that the addendum specificaclly states that although the promissory notes
were in their names, Wonderland shall be responsible for the payment thereof.
 The RTC held that petitioners are liable. The CA affirmed.

ISSUE/S and HELD

RATIO
1. On the issue of novation:
 Revealed by the facts on record, the conflict among the parties started from a contract of sale of a
farmland between Agro and Wonderland. No such sale materialized.
 A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause
or consideration for the obligation or promise by the other. The vendee is obliged to pay the price,
while the vendor must deliver actual possession of the land.
o In this case, the original plan was that the initial payments would be paid in cash.
o Subsequently, the parties executed an addendum providing, instead, that the petitioners
would secure a loan in the name of Agro for the total amount of the initial payments, while
the settlement of said loan would be assumed by Wonderland.
o Thereafter, Soriano signed several promissory notes and received the proceeds in behalf of
Agro.
 By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed
the promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners
became liable as accommodation party.
 An accommodation party is a person who has signed the instrument as maker, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person and
is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking
the instrument knew (the signatory) to be an accommodation party.
o He has the right, after paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them has in effect become one of principal and
surety, the accommodation party being the surety.
 We do not give credence to petitioners' assertion that, as provided by the addendum, their obligation
to pay the promissory notes was novated by "substitution" of a new debtor, Wonderland. Contrary
to petitioners' contention, the attendant facts herein do not make a case of novation.
 In this case, the first requisite (there must be a previous valid obligation) is lacking.
o There was no novation by "substitution" of debtor because there was no prior obligation
which was substituted by a new contract. It will be noted that the promissory notes, which
bound the petitioners to pay, were executed after the addendum.

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 o The addendum modified the contract of sale, not the stipulations in the promissory notes
which pertain to the surety contract.
o At this instance, Wonderland apparently assured the payment of future debts to be incurred
by the petitioners. Consequently, only a contract of surety arose. It was wrong for
petitioners to presume a novation had taken place.
 As it turned out, the contract of surety between Wonderland and the petitioners was extinguished
by the rescission of the contract of sale of the farmland. With the rescission, there was confusion
or merger in the persons of the principal obligor and the surety, namely the petitioners herein. The
addendum which was dependent thereon likewise lost.
 The contract of sale between Wonderland and petitioners did not materialize. But it was admitted
that petitioners received the proceeds of the promissory notes obtained from the bank.
o Sec. 22 of the Civil Code provides that: “Every person who through an act of performance
by another, or any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to him.”
o Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of
the bank.
o Neither could petitioners excuse themselves and hold Wonderland still liable to pay the
loan upon the rescission of their sales contract.
o If petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages.
o The non-inclusion of a necessary part does not prevent the court from proceeding in the
action, and the judgment rendered therein shall be without prejudice to the rights of such
necessary party.
o But the CA did not err in holding that petitioners are duty-bound under the law to pay the
claims of the bank from whom they had obtained the loan proceeds.

DISPOSTIVE PORTION
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of Appeals
dated October 17, 1994 is AFFIRMED. Costs against petitioners.