Dishonored Checks in Property Sales: What the Supreme Court Ruling Means

The Supreme Court recently settled an important question for property transactions: can a seller still collect the purchase price evidenced by dishonored checks when a separate case for rescission of the sale is pending? In Padrigon v. Palmero (G.R. No. 218778, September 23, 2020), the Court ruled that a dishonored check is solid evidence of an unpaid obligation, and that filing a rescission case does not automatically abandon a claim for the unpaid balance.

The Facts of the Case

Rodolfo Padrigon wanted to buy Benjamin Palmero's property in Camarines Norte—a parcel of land with an ice plant. The parties agreed on a price of P2,000,000.00, to be paid through eight developed lots plus P500,000.00 in cash. Later, they revised the deal: Padrigon would instead convey two bigger parcels of land plus P1,000,000.00 in cash.

Padrigon issued three postdated checks totaling P1,000,000.00. When Palmero deposited them, all were dishonored for "account closed." Padrigon replaced one check for P200,000.00 but refused to replace the other two, totaling P800,000.00. Palmero sued for collection of sum of money.

The Issue Before the Court

The central issue was whether Palmero's later filing of a separate complaint for rescission of the deed of absolute sale over the land meant he had abandoned his claim for the P800,000.00. Padrigon argued that if the sale was rescinded, there was no longer any purchase price to collect, and allowing collection would unjustly enrich Palmero.

The Ruling: No Abandonment, Checks Prove the Debt

The Supreme Court denied Padrigon's petition. The Court made two key points.

First, no court had yet ruled on the rescission complaint. Padrigon's claim that "there is no more purchase price to collect" was premature. The rescission case was still pending, so the collection case remained a live controversy.

Second, the rescission complaint did not amount to abandonment of the collection case. Reading the rescission complaint carefully, the Court found that Palmero treated the sale of the land as separate from the sale of the building, ice plant, and machinery. The rescission case concerned only the land; the collection case concerned the unpaid P800,000.00 for the building and machinery. These were two distinct transactions.

Checks as Evidence of Indebtedness

The Court cited Pacheco v. Court of Appeals for the rule that a check constitutes evidence of indebtedness and can be used in lieu of a promissory note. Here, the two dishonored Prudential Bank checks—one for P200,000.00 and one for P600,000.00—were sufficient to prove the obligation.

Interest Rates Modified

The Court modified the interest award. Since the case involved forbearance of money, the P800,000.00 award should earn:

• 12% per annum from the date of demand (January 6, 2005) to June 30, 2013, following the old rule;
• 6% per annum from July 1, 2013 (when the Nacar v. Gallery Frames rate took effect) until the judgment becomes final and executory; and
• 6% per annum on the total monetary awards from finality until fully paid.

Practical Takeaways

• A dishonored check is powerful evidence. It can prove an unpaid obligation even without a separate promissory note.
• Filing a rescission case does not automatically abandon a collection claim. Courts look at whether the claims cover the same transaction. If the rescission covers only part of the deal, the collection case for the rest can proceed.
• Keep transactions separate and documented. The Court's analysis turned on the parties treating the land sale and the building/machinery sale as distinct. Clear documentation of what each payment covers protects both sides.
• Know the interest rules. For forbearance of money, interest is 12% per annum before July 1, 2013, and 6% per annum after that date, plus 6% from finality of judgment until payment.
• Act promptly on dishonored checks. While the seller here succeeded, delays and multiple extensions complicated the case. Timely legal action avoids arguments about stale checks and laches.

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