Dear Atty. Gab,

Musta Atty?

I hope this email finds you well. I’m writing to you because I’m in a very stressful situation and don’t know where to turn. A few years ago, I helped a small trading business, where I was a part-owner and manager, get a loan of P1.5 million from a private lender named Mr. Santos. The loan was officially taken out in the company’s name, and I signed the main loan agreement on behalf of the company as its manager.

However, Mr. Santos insisted that for ‘security’ and to make sure the loan was repaid, I had to issue a series of post-dated personal checks from my own bank account covering the monthly payments and the principal amount. He assured me these were just symbolic and would only be used if the company completely failed, and that he would prioritize collecting from the company first. I trusted him and issued the checks.

Unfortunately, the business hit a rough patch and hasn’t been able to keep up with the payments. Now, instead of going after the business assets or its other partners, Mr. Santos is directly trying to deposit my personal checks. Many have bounced, and he’s threatening to file cases against me personally, both criminal for the bounced checks and civil for the full loan amount.

Atty., I thought I was just helping secure the company’s debt, like a guarantor perhaps. Doesn’t he have to exhaust all means to collect from the business first before he can come after me? The loan wasn’t even for my personal benefit. I’m so confused and worried about losing my personal savings. Please, Atty., can you give me some guidance on my situation?

Thank you for your time and help.

Sincerely,

Juan Dela Cruz

Dear Juan Dela Cruz,

Musta Atty!

Thank you for reaching out and explaining your situation. It sounds like a very challenging time, and it’s understandable why you are confused and worried. Your case involves a common point of confusion regarding business debts, personal guarantees, and the implications of issuing personal checks.

In situations like yours, the distinction between merely guaranteeing a debt and becoming personally liable on a negotiable instrument, like a check, is crucial. While you may have intended to simply act as a guarantor for the company’s loan, the act of issuing your own personal checks can have significant legal consequences that differ from a typical guarantee.

Checks as Instruments of Primary Liability

Under Philippine law, particularly concerning negotiable instruments, your liability when you issue a check differs significantly from that of a simple guarantor of a loan agreement. A guaranty, as defined by law, is when a person binds themselves to a creditor to fulfill the obligation of the principal debtor in case the latter fails to do so. The law explicitly states that a guaranty is not presumed; it must be express.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (Article 2047, Civil Code)

For a guarantee agreement to be enforceable, especially a special promise to answer for the debt of another, it must comply with the Statute of Frauds, meaning it needs to be in writing.

Those that do not comply with the Statute of Frauds as set forth in this number… A special promise to answer for the debt, default, or miscarriage of another… (Article 1403(2)(b), Civil Code)

If you were merely a guarantor, you would generally have the benefit of excussion. This means the creditor would first need to exhaust all the property of the principal debtor (the company in your case) and resort to all legal remedies against the debtor before they could compel you to pay.

The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (Article 2058, Civil Code)

However, when you issue a personal check, you are signing a negotiable instrument. A check is a type of bill of exchange drawn on a bank payable on demand. The law governing negotiable instruments treats individuals who sign these instruments in a particular capacity differently.

An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. (Section 29, Negotiable Instruments Law)

By issuing your personal checks for the company’s loan, you likely became what is known as an accommodation party on those checks. Even though you did not personally receive the value of the loan, you signed the instruments (the checks) to lend your name and credit to the company, allowing it to obtain the loan or security Mr. Santos required. The law clearly states that an accommodation party is liable on the instrument to a holder for value, regardless of whether the holder knew you were merely accommodating another.

The relationship between an accommodation party and the party they accommodate (the company, in this instance) is likened to that of a surety to a principal debtor. A surety is bound equally and absolutely with the principal debtor, meaning their liability is immediate and direct, not subsidiary like a typical guarantor with the benefit of excussion. When a negotiable instrument like a check is involved, the provisions of the Negotiable Instruments Law take precedence.

Therefore, the mere fact that you issued your own checks to Mr. Santos makes you personally liable to him on those checks. He does not necessarily need to first pursue and exhaust the assets of the company before demanding payment from you based on the dishonored checks. Your liability arises directly from your signature on the checks themselves, independent of the underlying loan agreement’s dynamics between the company and the lender, and it bypasses the typical benefit of excussion available to a pure guarantor.

Practical Advice for Your Situation

• Review the Promissory Note and any other loan documents: Check exactly how you signed the main loan agreement (as company manager vs. personally) and if there is any separate written guarantee agreement.
• Examine the checks you issued: Confirm they were drawn on your personal account and signed by you individually.
• Gather evidence of communications with Mr. Santos: Any written communication where he stated the checks were mere security or that he would go after the company first could be relevant, although verbal assurances about not depositing the checks or pursuing the company first may be difficult to prove and may not override your liability on the checks themselves as accommodation party.
• Understand the nature of the claim: Mr. Santos can pursue you civilly for the amount of the dishonored checks and potentially criminally under the Bouncing Checks Law (BP 22). Your acquittal in a BP 22 case (perhaps for lack of proven notice of dishonor) does not extinguish your civil liability on the check or the underlying debt.
• Consult with a lawyer immediately: Bring all relevant documents (loan agreement, checks, demand letters, communications) to a lawyer specializing in civil and commercial law. They can assess the specifics of your documents and circumstances.
• Explore potential defenses: While your liability on the checks as an accommodation party is strong, a lawyer can help determine if there are any valid defenses based on the specific facts, such as issues with demand or presentment, or any agreements that might modify the standard rules.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.