Obligations and Contracts

April 25, 2002

GREAT ASIAN SALES CENTER CORPORATION (PETITIONER) VS. COURT OF APPEALS AND BANCASIA (RESPONDENT) Facts: On two occasions in March 1981 and February 1982, Great Asian Sales Center Corporation, through a Board Resolution, authorized its Treasurer and General Manager Arsenio Lim, Jr to secure a loan from Bancasia for an amount not exceeding 1 million and a discounting line for 2 million. Prior to the contract with Bancasia, Tan Chong Lin, President of Great Asian signed a surety agreement in favor of Bancasia to guarantee, solidarily the debts of Great Asian. Great Asian, through Mr. Lim, signed four Deeds of Assignment of Receivables, assigning 15 postdated checks, all endorsed by Mr. Lim, and the said assigned checks were issued by various clients of Great Asian as payments for appliances and other merchandise. The postdated checks were received by Bancasia for a discounted rate of 24%, however, all 15 checks were dishonored by the drawee banks. The total amount of the dishonored checks is P1,042,005 After the checks were dishonored, Bancasia referred the matter to its lawyer who thereafter sent notification to Tan Chong Lin and demanded payment from him. Subsequently, another letter was personally delivered to Mr. Tan demanding payment for all 15 dishonored checks but neither Mr. Tan nor Great Asian made payment. On May 1982, Great Asian filed with the CFI of Manila a petition for insolvency and in the attached Schedule and Inventory of Liabilities and Creditors, Bancasia was listed as one of the creditors in the amount of P1,243,632. The petition for voluntary insolvency, however, was later withdrawn. On June 1982, Bancasia filed a complaint for collection against Great Asian and Tan Chong Lin. Tan Chong Lin denied responsibility claiming that the warranties in the Deed of Assignment enlarge or increase his risks under the Surety Agreements and has materially altered his obligations, and therefore he is released from any liability. Great Asian claimed that Arsenio Lim had no authorization to execute the Deed of Assignment and that Bancasia should have gone after the drawers of the checks and not Great Asian because the assignment of the checks is not a loan accommodation but a sale of checks. In both CFI and CA, the courts decided for Bancasia Issue: WON Arsenio Lim was had the proper authorization to execute the Deed of Assignment WON Tan Chong Lin was solidarily liable WON Great Asian was under the Deed of Assignment in breach of contract Held: First: Arsenio Lim had the authorization as stipulated in the two Board Resolutions by the Board of Directors of Great Asian Second

Bernz Velo Tumaru

Obligations and Contracts Tan Chong Lin was solidarily liable with Great Asian, the stipulations of the Surety Agreements he signed specifically providing for his guaranteeing any other obligations of every kind which the Principal may now or hereafter owe the creditor

Third Under the Civil Code, Great Asian was in Breach of Contract. Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in case the drawers fail to pay the checks maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks, including penalty and attorneys fees. The failure of the drawers to pay the checks is a suspensive condition, the happening of which gives rise to Bancasias right to demand payment from Great Asian. This conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in the Deed of Assignments. The Deeds of Assignment uniformly stipulate that: If for any reason the receivables or any part cannot be paid by the obligor/s, the Assignor unconditionally and irrevocably agress to pay the same, assuming the liability to pay, by way of penalty three percent (3%) of the total amount unpaid, for the period of delay until the same is fully paid. By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated checks on with recourse basis against itself. Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were negotiable instruments with the endorsement of Arsenio. The explicit with recourse stiupulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law. Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation but a sale of checks. With the sale, the ownership of the checks passed to Bancasia, which must now, according the Great Asian, sue the drawers and endorser of the check who are parties primarily liable on the checks. Great Asian forgets that under the Deed of Assignment, Great Asian expressly undertook to pay the full value of the checks in case of dishonor. In summary, Great Asians four contracts assigning its fifteen postdated checks to Bancasia expressly stipulate the suspensive condition that in the event the drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Other important facts Discounting Line means a credit facility with a financing company or bank which allows a business entity to sell, on a continuing basis, its accounts receivables at a discount. The term discount means the sale of receivables at less than its face value. The purpose of a discounting line is to enable a business entity to generate instant cash out its receivables which are still to mature at future dates. The financing company or bank which buys the receivables makes profit out of the difference between the face value of the receivable and the discounted price. Discounting Line vs. Loan Accommodation If the accounts receivable, like postdated checks, are sold for a consideration less than their face value, the transaction is one of discounting, and is subject to the provisions of the Financing Company Act. The assignee is immediately subrogated as creditor of the accounts receivable. However, if the accounts receivable are merely used as collateral for the loan, the transaction is only simple loan, and the lender is not subrogated as creditor until there is default and the collateral is closed.

Bernz Velo Tumaru