ISIDRO S. SANTOS, PLAINTIFF AND APPELLANT, VS. ARTURO P. REYES AND AURELIO P. REYES, DEFENDANTS AND APPELLEES.

This is an appeal taken by the plaintiff
Isidro S. Santos from the judgment of the Court of First Instance of
Rizal absolving the defendants Arturo P. Reyes and Aurelio P. Reyes
from the complaint filed by the plaintiff and dismissing said complaint
with costs to the latter.

The appellant assigns in his brief six alleged errors as committed by the court a quo in its judgment in question, to wit:

“1. In holding that plaintiff-appellant was aware, at the time he
acquired the promissory notes in question, Exhibits B and C (negotiable
papers), that they had been issued by the makers thereof without any
valuable consideration, in spite of the fact that there is absolutely
no allegation nor evidence of any sort to that effect.

“2. In finding that plaintiff-appellant did not, before paying for said
notes, see the makers thereof or make inquiry about their solvency, and
that he did not acquire said notes for valuable consideration,
notwithstanding the uncontradicted evidence to the contrary.

“3. In saying that, it is admitted, plaintiff is not a holder in due course, and in holding that plaintiff is not such a holder.

“4. In entertaining defendants’ story, and in finding that said notes
were issued by the defendants in favor of the original payee for no
valuable consideration at all.

“5. In not holding that the defendants are estopped from asserting
against the plaintiff that the notes in question were issued for no
consideration at all.

“6. In not sentencing the defendants to pay the plaintiff the amount
claimed in the complaint, in absolving the defendants from the
complaint with costs against the plaintiff, and in denying plaintiff’s
motion for new trial.”

On October 2, 1933, Isidro S’. Santos filed a complaint against Arturo
P. Reyes and Aurelio P. Reyes, with a petition for preliminary
attachment, for the recovery of the proceeds of two promissory notes,
the one for the sum of P300 executed by Arturo P. Reyes on April 23,
1931, of which there remains a balance of only P140, and the other for
the sum of P1,145 executed jointly and severally by Arturo P. Reyes and
Aurelio P. Reyes on said date of April 23, 1931, the date of maturity
of the former being April 24, 1931, and that of the latter October 23,
1932, plus legal interest on both sums from the date on which the
defendants defaulted, with the costs of the suit.

On November 23, 1933, the defendants, in answer to the complaint,
alleged as special defense that the promissory note for the sum of
Pl,145 is forged, spurious and fictitious, denying under oath the
genuineness and due execution thereof.

On February 27, 1934, said defendants amended their answer by
amplifying their special defense and alleging, furthermore, that the
promissory notes which are the subject matter of the complaint are
without cause or consideration.

The following facts have been proven during the trial, some without dispute, and the others by a preponderance of evidence:

Hermogenes Mendoza and the herein defendants, the brothers Arturo
P. Reyes and Aurelio P. Reyes, are optometrists by profession and Were
partners in the business connected with optometry. On December 24,
1928, Hermogenes Mendoza applied for and obtained from the Bureau of
Lands a loan in the sum of P300 with interest of 9 per cent. per annum.
To secure the payment thereof, he constituted a mortgage on a
residential lot having an area of 698 square meters, with the
improvements thereon consisting in a house of light materials, situated
in the municipality of San Juan del Monte, Province of Rizal, which he
had purchased by installment in 1922 for more than P1,000, having
completed payment thereof in 1927 (Exhibit 4-Arturo P. Reyes). Mendoza
had been paying the interest on the loan, together with the land tax,
until November 4, 1931. The mortgage matured on April 23, 1931, but
Mendoza succeeded in having the period for payment extended to December
5th of said year. Threatened by the Bureau of Lands with foreclosure of
the mortgage, Hermogenes Mendoza approached the defendant Arturo P.
Reyes, who had just then arrived from Zamboanga with P280 realized
from his business, and requested the latter to help him in order to
avoid the foreclosure of said mortgage. On said date, April 23, 1931,
Hermogenes Mendoza executed a notarial instrument (Exhibit A) in favor
of .the herein defendants Arturo P. Reyes and Aurelio P. Reyes, wherein
it was made to appear that he sold and transferred the parcel of land
in question to said defendants for the sum of P1,745 which the vendor
acknowledged to have received’ from the purchasers. It was likewise
made to appear in said document that the land was subject to a mortgage
lien in favor of the Bureau of Lands to secure the payment of a debt in
the sum of P300, which obligation was assumed by the purchasers as a
part of the purchase price. Said deed of sale was not presented to the
Bureau of Lands or to the registry of deeds for registration. The
defendant Arturo P. Reyes, also on said date, April 23, 1931, issued a
promissory note (Exhibit B) in favor of Hermogenes Mendoza, whereby,
for value received, he promised to pay the latter, or order, the sum of
P300 on or before April 24, 1931. Likewise on the same date, April 23,
1931, the herein defendants Arturo P. Reyes and Aurelio P. Reyes,
executed another promissory note (Exhibit C) in favor of said
Hermogenes Mendoza, acknowledging that they were indebted to the latter
and promising to pay jointly and severally in Maypajo, Caloocan, Rizal,
the sum of P1,145 on or before October 23, 1932.

Inasmuch as the period for the payment of the mortgage debt had
expired without having been paid, the mortgagee Director of Lands
instituted civil case No. 5325 in the Court of First Instance of Rizal
against Hermogenes Mendoza alone—in whose name the mortgaged property
continued to be registered in the Bureau of Lands—for the foreclosure
of the mortgage. Judgment was rendered against said Hermogenes Mendoza
on June 13, 1933 (Exhibit 4Arturo P. Reyes).

On September 4, 1933, as Hermogenes Mendoza was in difficulty and
needed money urgently, he executed a document (Exhibit D) whereby in
consideration of the sum of P1,000, he transferred to the herein
plaintiff-appellant Isidro S. Santos all his rights, interest and
participation in said promissory notes Exhibits B and C.

From the year 1931, every time the Bureau o± Lands required Mendoza to
pay his debt of P300, the latter always informed the defendants of said
demands. Said defendants advised him to consult Attorney Onofre
Mendoza of the legal division of the Bureau of Lands in order to make
arrangements for the payment of the debt in question. In making the
defendants sign the documents Exhibits B and C, Hermogenes Mendoza
assured them that his only purpose was to present said documents to one
Vicente Syquia so that the latter might be convinced to buy the land at
a high price, the profit to be divided later among themselves. Arturo
P. Reyes paid P160 (Exhibit F) to Hermogenes Mendoza on account of the
promissory note Exhibit B and, upon request of the latter, he paid the
sum of P9.83 to the Bureau of Lands on May 5, 1931, as evidenced by the
receipt Exhibit 1, to avoid the sale at public auction of the land in
question by said bureau.

It is inferred from the above-stated facts that there was a
combination between Hermogenes Mendoza and the defendants for the
purpose of enabling the former to sell his land at a price higher than
what he had paid therefor, the profit to be divided among themselves.
Were this true, neither the deed of sale Exhibit A, executed by
Hermogenes Mendoza in favor of the brothers Arturo P. Reyes and Aurelio
P. Reyes whereby the former sold to the latter his land mortgaged to
the Bureau of Lands, nor the promissory notes executed by said Reyes
brothers in favor of Hermogenes Mendoza, had valuable consideration and
therefore, they were fictitious. Had the sale been real and true, the
defendants, to secure the right acquired by them by virtue of the deed
of sale Exhibit A executed by Hermogenes Mendoza in their favor, would
have compelled said Hermogenes Mendoza to register the deed of sale in
the registry of deeds and in the Bureau of Lands, or they would have
been interested in having it done, knowing as they did that the land
sold to them was mortgaged to said bureau, which lien they had assumed.
Their lack of diligence in protecting their rights and the fact that it
was the alleged vendor Hermogenes Mendoza who was attending to the
demands of the Bureau of Lands for the payment of interest and
requesting that the foreclosure of the mortgage be not carried out or,
at least, that the period for payment be extended, notwithstanding the
fact that the land appeared to have been sold to the defendants, show
that the above-stated understanding existed between Hermogenes Mendoza
and the defendants. However, instead of selling the land, Hermogenes
Mendoza negotiated and transferred the promissory notes executed by the
defendants for the purpose of inducing those who were interested in the
land to buy it.

The fact that Arturo P. Reyes paid P160 to Hermogenes Mendoza on
account of the promissory note Exhibit B does not of itself show that
said promissory note was executed for a consideration, there being, as
already stated, an understanding between them to make it appear that
the land was worth more so that a higher price could be obtained at the
sale thereof.

As to the question whether or not the plaintiff Isidro S. Santos is a bona fide
holder in due course of the promissory notes under consideration, he
himself admits that when said documents were transferred to him,
payment thereof was already one year overdue, and he was aware of it.
In spite of this, he bought said promissory notes without first
inquiring into the solvency of the makers thereof, the herein
defendants, contenting himself with the idea that they were known to
him. The promissory notes have not been endorsed to him by the holder
Hermogenes Mendoza. Said plaintiff-appellant claims to have asked the
defendants, on one occasion when, according to him, he was in the
latter’s office for the’ purpose of, having his eyeglasses repaired
about the month of July or August, 1933, whether or not said defendants
were indebted to Mendoza, and they answered in the affirmative. The
plaintiff’s testimony on this point has been denied by the defendants
who testified that said plaintiff once dropped in at their store,
merely inquiring about the price of eyeglasses and then left. There is
no doubt that as the plaintiff had purchased the two promissory notes
in question without the necessary endorsement on the part of the holder
after payment thereof had already been one year overdue, and without
having made inquiries about the solvency of their makers, he cannot be
considered a holder in due course in accordance with the provisions of
section 52 of the Negotiable Instruments Law (Act No. 2031), and the
defendants have a perfect right to set up, as they have done so against
him, the defense that said promissory notes lack valuable consideration
and are fictitious, which defense they could have set up had the
original holder Hermogenes Menploza demanded payment of them (8 Corpus
Juris, 473, 477).

Wherefore, finding the appealed judgment to be in accordance with
the evidence and the law, it is affirmed in toto, with costs to the
appellant. So ordered.

Avancena, C. J., Abad Santos, Imperial, Diaz, Laurel, and Concepcion, JJ., concur.