This Supreme Court decision clarifies that a person who signs a promissory note as an accommodation party is still liable for the debt, even if they didn’t directly benefit from the loan. The court emphasized that by signing the note, the accommodation party acknowledges the debt and agrees to repay it. This means individuals need to understand the risks before lending their name to a financial agreement, as they can be held responsible if the borrower defaults.

When Lending a Name Means Bearing the Debt: Examining Accommodation Agreements

In this case, Henry Dela Rama Co (Co) was sued by Admiral United Savings Bank (ADMIRAL) for failing to pay a loan of P500,000.00 evidenced by a promissory note he co-signed with Leocadio O. Isip (Isip). Co argued he was merely an accommodation party for Metropolitan Rentals & Sales, Inc. (METRO RENT), claiming he didn’t receive any loan proceeds. The Regional Trial Court (RTC) initially dismissed the case, but the Court of Appeals (CA) reversed, finding Co liable. The Supreme Court (SC) affirmed the CA’s decision, with modifications regarding the imposed penalties and fees. The core legal issue revolved around the liability of an accommodation party on a promissory note.

The Supreme Court emphasized that Co’s signature on the promissory note bound him to the terms of the agreement. The Court cited previous rulings establishing that a promissory note is a solemn acknowledgment of a debt. An individual signing the instrument agrees to honor it according to the agreed-upon conditions. Despite Co’s claim of being merely an accommodation party, the SC explained that even an accommodation party is liable to a holder for value on the instrument. This liability exists regardless of whether the accommodation party received any of the loan proceeds. It is a recognition that in lending his name, Co essentially guaranteed the debt.

The court referred to the case of Sierra v. Court of Appeals, stressing the commitment inherent in signing a promissory note. Co’s attempt to evade responsibility based on a prior agreement with METRO RENT did not hold weight. The court emphasized that ADMIRAL, as the lender, was not a party to the agreement between Co and METRO RENT. Therefore, the terms of that private arrangement could not bind the bank.

Co also argued that the loan was extinguished by payment, presenting a Release of Real Estate Mortgage as evidence. The court found that the release did not conclusively prove loan payment. It noted that the properties mentioned in the release were not directly linked to the promissory note securing the loan, undermining the claim. Moreover, the certificates of title (TCTs) for the properties remained with the bank, indicating the underlying debt might not have been settled. Therefore, the Court held that Co failed to prove the payment and cannot, based on the evidence he presented, evade responsibility.

Regarding the financial penalties, the Supreme Court upheld the 18% per annum interest rate but reduced the service charge and liquidated damages. Drawing from L.M. Handicraft Manufacturing Corporation v. Court of Appeals, the service charge was lowered to a maximum of 2% per annum. A service charge over the maximum will have to be reduced. Furthermore, acknowledging the potential for excessive penalties, the court also reduced the liquidated damages to P150,000.00, and attorney’s fees to 10% of the principal loan, or P50,000.00, based on the legal provisions:

ART. 1229.      The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

and

ART. 2227.      Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.

This decision reinforces the responsibility that comes with co-signing a promissory note and highlights the necessity of clear evidence when claiming loan payment. Additionally, it is within the bounds of judicial prudence and in consideration of equity to temper penalties if the same are deemed unconscionable and iniquitous.

FAQs

What is an accommodation party?	An accommodation party is someone who signs a promissory note to lend their name to another party, enabling them to obtain credit, without necessarily receiving direct benefits from the loan. They essentially act as a guarantor for the loan.
Is an accommodation party liable for the debt?	Yes, an accommodation party is liable to a holder for value on the promissory note, even if they didn’t receive any of the loan proceeds. They are bound by their signature and the terms of the note.
What happens if the borrower doesn’t pay?	If the primary borrower fails to pay the loan, the lender can pursue the accommodation party for the full amount of the debt, including interest and other applicable charges.
Can an accommodation party avoid liability by claiming they didn’t benefit?	No, the accommodation party’s liability is not contingent on receiving a direct benefit from the loan. The act of signing the note creates the obligation to pay.
What kind of evidence is needed to prove loan payment?	Ideally, receipts of payment should be presented as primary evidence of payment. A release of mortgage, while suggestive, is not conclusive proof of loan payment and may require supporting documentation to establish its connection to the specific promissory note.
Can penalties for non-payment be reduced?	Yes, courts have the power to reduce penalties like liquidated damages and attorney’s fees if they are deemed excessive or unconscionable. This power is usually exercised if the principal obligation has been partially complied with.
Does the cancellation of a mortgage automatically extinguish the loan?	No, a real estate mortgage is an accessory contract to the loan. The debt can still exist, even after the release or cancellation of the mortgage.
Who has the burden of proving payment?	The party claiming payment, typically the defendant in a collection case, has the burden of proving that payment was actually made. This requires presenting credible evidence, such as receipts or bank statements.

This case serves as a reminder of the legal consequences of acting as an accommodation party. It underscores the importance of fully understanding the terms of a promissory note before signing and being prepared to fulfill the obligations associated with the agreement.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Henry Dela Rama Co v. Admiral United Savings Bank, G.R. No. 154740, April 16, 2008