Accommodation Party Liability When Signing a Promissory Note With Assumed Responsibility

The Supreme Court has long held that a person who signs a promissory note is bound by its terms, even if that person acted only as an accommodation party and received no benefit from the loan. In Co v. Admiral United Savings Bank (G.R. No. 154740, April 16, 2008), the Court clarified the extent of an accommodation party's liability and the limits on what a bank may recover when a loan defaults.

The case involved a P500,000.00 loan extended by Admiral United Savings Bank to Henry Dela Rama Co, with Leocadio Isip as co-maker. Co signed Promissory Note No. A1-041 dated February 28, 1983, payable on or before February 23, 1984, with 18% interest per annum, a 10% service charge, liquidated damages of 3% per month, and attorney's fees in case of default.

When Co and Isip failed to pay, the bank filed a collection case. Co defended by claiming he was merely an accommodation party for Metropolitan Rentals & Sales, Inc. (METRO RENT), which allegedly received the loan proceeds and promised to pay. He also claimed the loan had been paid through the release of a real estate mortgage over his properties.

The Issue

The central question was whether Co, as an alleged accommodation party who received no part of the loan proceeds, could be held liable on the promissory note. A related issue was whether the cancellation of a real estate mortgage extinguished the loan obligation.

The Ruling: Accommodation Parties Are Liable

The Supreme Court denied Co's petition and affirmed his liability. The Court emphasized that Co never questioned the authenticity or due execution of the promissory note. By signing it, he acknowledged receipt of the loan and undertook to pay it, plus interest, on the due date.

The Court reiterated the rule on accommodation parties: an accommodation party who lends his name to enable another to obtain credit is liable on the instrument to a holder for value, even if he receives no part of the consideration. The Court quoted Sierra v. Court of Appeals (G.R. No. 90270, July 24, 1992): "A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon."

The Court noted that Co was a certified public accountant who fully understood the consequences of signing. He even mortgaged his own properties to secure the loan. His disclaimer did not inspire belief.

Cancellation of Mortgage Does Not Extinguish the Loan

The Court also rejected Co's defense that the loan had been paid because a real estate mortgage was released. No receipt of payment was presented, and the release of mortgage was not conclusive proof of payment. The Court found no showing that the mortgage secured the specific promissory note in question. Even if it did, a real estate mortgage is merely an accessory contract; its cancellation does not automatically extinguish the principal loan obligation.

The Court applied the general rule on burden of proof: a party who pleads payment has the burden of proving it. Co's bare testimony that METRO RENT paid the loan was inadequate and incompetent proof.

Reduction of Penalties

While the Court upheld Co's liability, it reduced the monetary awards. Citing L.M. Handicraft Manufacturing Corporation v. Court of Appeals (G.R. No. 90047, June 18, 1990), the Court reduced the service charge from 10% to 2% per annum, or P10,000.00 per year. It also reduced liquidated damages to P150,000.00 and attorney's fees to 10% of the principal loan, or P50,000.00.

Under Article 1229 and Article 2227 of the Civil Code, courts may equitably reduce penalties that are iniquitous or unconscionable. Since the bank was already protected by interest, service charge, and liquidated damages, the additional awards were deemed excessive.

Practical Takeaways

• Signing a promissory note creates liability. An accommodation party who signs to help another obtain credit is bound to pay the holder for value, even without receiving any benefit.
• The accommodated party's promise to pay does not bind the lender. Agreements between the accommodation party and the accommodated party are not enforceable against the bank unless the bank was aware of and consented to them.
• Cancellation of a mortgage is not proof of payment. A mortgage is accessory to the loan; releasing it does not extinguish the principal debt.
• Payment must be proven with evidence. A party claiming payment must present competent proof, such as receipts, not mere testimony.
• Courts may reduce unconscionable penalties. Even when a contract provides for high liquidated damages and attorney's fees, courts can reduce them if they are iniquitous or unconscionable.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.