Gaudencio, a store owner, obtained a P1-­‐million loan from Bathala Financing Corporation (BFC). As security, Gaudencio executed a "Deed of Assignment of Receivables," assigning 15 checks received from various customers who bought merchandise from his store. The checks were duly indorsed by Gaudencio’s customers.


The Deed of Assignment contains the following stipulation:

"If, for any reason, the receivables or any part thereof cannot be paid by the obligors, the ASSIGNOR unconditionally and irrevocably agrees 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."


When the checks became due, BFC deposited them for collection, but the drawee banks dishonored all the checks for one of the following reasons: "account closed," "payment stopped," "account under garnishment," or "insufficiency of funds." BFC wrote Gaudencio notifying him of the dishonored checks, and demanding payment of the loan. Because Gaudencio did not pay, BFC filed a collection suit.


In his defense, Gaudencio contended that [a] BFC did not give timely notice of dishonor (of the checks); and [b] considering that the checks were duly indorsed, BFC should proceed against the drawers and the indorsers of the checks.


Are Gaudencio’s defenses tenable? Explain.


Notice of dishonor is not necessary because what took place is not a negotiation but a mere assignment of funds whereby Gaudencio obligates himself to pay in the event that the assigned receivables cannot be paid by the obligors. Gaudencio therefore cannot refuse to pay since he agrees to be secondarily liable in case the principal obligors were not able to pay. Since what took place is not negotiation but a mere assignment of funds, BFC as the assignee should proceed against the assignor and not to other indorsers or drawers which are not privy to the contract of assignment. Furthermore, Gaudencio unconditionally binds himself to pay in the event that the assigned receivables cannot be paid hence he cannot escape responsibility therefrom. No, Gaudencio’s defenses are untenable. The cause of action of BFC was really on the contract of loan, with the checks merely serving as collateral to secure the payment of the loan. By virtue of the Deed of Assignment which he signed, Gaudencio undertook to pay for the receivables if for any reason they can not be paid by the obligors (Velasquez v Solidbank Corporation [2008]) (2009 Bar Question)