NEGOTIABLE INSTRUMENTS LAW (SEC 51-59)
L-15126 November 30, 1961
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument
may to sue thereon in his own name; and payment to him in due course discharges the
instrument.
Sec. 52. What constitutes a holder in due course. - A holder in due course is a
holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Sec. 53. When person not deemed holder in due course. - Where an instrument
payable on demand is negotiated on an unreasonable length of time after its issue, the
holder is not deemed a holder in due course.
Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of
any infirmity in the instrument or defect in the title of the person negotiating the same
before he has paid the full amount agreed to be paid therefor, he will be deemed a holder
in due course only to the extent of the amount therefore paid by him.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an
illegal consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument amounted to bad faith.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument
free from any defect of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the instrument for the full
amount thereof against all parties liable thereon. robles virtual law library
Sec. 58. When subject to original defense. - In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. But a holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the instrument, has all the
rights of such former holder in respect of all parties prior to the latter.
Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie
to be a holder in due course; but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as holder in due course. But the
last-mentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
G.R. No.
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN,
ET AL., defendants-appellants.
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M.
Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of
P600, with legal interest from September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the
plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the
check and alleges that plaintiff received it in payment of the indebtedness of one
Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales
P158.25, the difference between the face value of the check and Matilde Gonzales'
indebtedness. The defendants admit the execution of the check but they allege in
their answer, as affirmative defense, that it was issued subject to a condition, which
was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps
to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as
follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully
submit the following Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C.
Gatchalian who was then interested in looking for a car for the use of her husband
and the family, was shown and offered a car by Manuel Gonzales who was
accompanied by Emil Fajardo, the latter being personally known to defendant Anita
C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he
was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of
said car and to negotiate for and accomplish said sale, but which facts were not
known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by
Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her
husband would be able to see same; that on this request of defendant Anita C.
Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing
to give the certificate of registration unless there is a showing that the party
interested in the purchase of said car is ready and willing to make such purchase
and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian
to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said
check to be for safekeeping only of Manuel Gonzales and to be returned to
defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the
car and the certificate of registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his
assurance that said check will be only for safekeeping and which will be returned to
said defendant the following day when the car and its certificate of registration will
be brought by Manuel Gonzales to defendants, but which facts were not known to
plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that
Manuel Gonzales executed and issued a receipt for said check, Exh. "1";

Fifth. That on the failure of Manuel Gonzales to appear the day following and on
his failure to bring the car and its certificate of registration and to return the check,
Exh. "B", on the following day as previously agreed upon, defendant Anita C.
Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee
bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who furthermore had no reason
to know check was given to plaintiff;
Sixth. That defendants, both or either of them, did not know personally Manuel
Gonzales or any member of his family at any time prior to September 1953, but
that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or
agreement with the Ocampo Clinic at any time prior to, on or after 9 September
1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of
said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability,
directly or indirectly with the Ocampo Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant
Anita C. Gatchalian under the representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the fees and expenses
arising from the hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of
hospitalization and the release of the wife of Manuel Gonzales from its hospital,
accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees
and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per
receipt, Exhibit "D") representing the balance on the amount of the said check, Exh.
"B";
Eleventh. That the acts of acceptance of the check and application of its proceeds
in the manner specified above were made without previous inquiry by plaintiff from
defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal
of Manila, a complaint for estafa against Manuel Gonzales based on and arising from
the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving
the cash balance of the check, Exh. "B" and that said complaint was subsequently
dropped;
Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits
submitted previously, be considered as parts of this stipulation, without necessity of
formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be
admitted and that the parties hereto be given fifteen days from today within which
to submit simultaneously their memorandum to discuss the issues of law arising
from the facts, reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda. (pp. 21-25,
Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the
judgment already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable
instrument, under the facts and circumstances stated in the stipulation of facts, and
that plaintiff is not a holder in due course. In support of the first contention, it is
argued that defendant Gatchalian had no intention to transfer her property in the
instrument as it was for safekeeping merely and, therefore, there was no delivery
required by law (Section 16, Negotiable Instruments Law); that assuming for the
sake of argument that delivery was not for safekeeping merely, delivery was
conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the
appellant argues that plaintiff-appellee cannot be a holder in due course because
there was no negotiation prior to plaintiff-appellee's acquiring the possession of the
check; that a holder in due course presupposes a prior party from whose hands
negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the
maker and the payee being original parties. It is also claimed that the plaintiff-
appellee is not a holder in due course because it acquired the check with notice of
defect in the title of the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there were circumstances that
brought suspicion about Gonzales' possession and negotiation, which circumstances
should have placed the plaintiff-appellee under the duty, to inquire into the title of
the holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation
of Facts). Plaintiff could have inquired why a person would use the check of another
to pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch
as defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V.
R. de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales.
(Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted
only to P441.75. The check is in the amount of P600.00, which is in excess of the
amount due plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25
(Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay,
plaintiff should have been more cautious and wary in accepting a piece of paper and
disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should have been made by
plaintiff. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that
in accordance with the best authority on the Negotiable Instruments Law, plaintiff-
appellee may be considered as a holder in due course, citing Brannan's Negotiable
Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee
may be a holder in due course and says that to this effect is the greater weight of
authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at
common law, is a question upon which the courts are in serious conflict. There can
be no doubt that a proper interpretation of the act read as a whole leads to the
conclusion that a payee may be a holder in due course under any circumstance in
which he meets the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due
course as "a holder who has taken the instrument under the following conditions: 1.
That it is complete and regular on its face. 2. That he became the holder of it before
it was overdue, and without notice that it had been previously dishonored, if such
was the fact. 3. That he took it in good faith and for value. 4. That at the time it
was negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the
word holder in the first clause of sec. 52 and in the second subsection may be
replaced by the definition in sec. 191 so as to read "a holder in due course is a
payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments
Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether
or not the plaintiff-appellee is a holder in due course. If it is such a holder in due
course, it is immaterial that it was the payee and an immediate party to the
instrument.
The other contention of the plaintiff is that there has been no negotiation of the
instrument, because the drawer did not deliver the instrument to Manuel Gonzales
with the intention of negotiating the same, or for the purpose of giving effect
thereto, for as the stipulation of facts declares the check was to remain in the
possession Manuel Gonzales, and was not to be negotiated, but was to serve merely
as evidence of good faith of defendants in their desire to purchase the car being
sold to them. Admitting that such was the intention of the drawer of the check when
she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee
if Manuel Gonzales delivered the check or negotiated it. As the check was payable to
the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the
delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other
words, Manuel Gonzales was the agent of the drawer Anita Gatchalian insofar as the
possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-
appellee, negotiation took place through no fault of the plaintiff-appellee, unless it
can be shown that the plaintiff-appellee should be considered as having notice of
the defect in the possession of the holder Manuel Gonzales. Our resolution of this
issue leads us to a consideration of the last question presented by the appellants,
i.e., whether the plaintiff-appellee may be considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we
agree with the defendants-appellants that the circumstances indicated by them in
their briefs, such as the fact that appellants had no obligation or liability to the
Ocampo Clinic; that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check
could only be deposited but may not be converted into cash all these
circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to
pay Matilde's account. It was payee's duty to ascertain from the holder Manuel
Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was
guilty of gross neglect in not finding out the nature of the title and possession of
Manuel Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith. To such effect is the consensus of
authority.
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant's assignor, it being sufficient to show that the defendant had notice that
there was something wrong about his assignor's acquisition of title, although he did
not have notice of the particular wrong that was committed. Paika v. Perry, 225
Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the particulars
or even the nature of the fraud, since all that is required is knowledge of such facts
that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton
(Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac.
391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years
old, less than five feet tall, immature in appearance and bearing on his face the
stamp a degenerate, to the defendants' clerk for sale. The boy stated that they
belonged to his mother. The defendants paid the boy for the bonds without any
further inquiry. Held, the plaintiff could recover the value of the bonds. The term
'bad faith' does not necessarily involve furtive motives, but means bad faith in a
commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It
was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The
circumstances thrust the duty upon the defendants to make further inquiries and
they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111
Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y.
Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-
appellee should not be allowed to recover the value of the check. Let us now
examine the express provisions of the Negotiable Instruments Law pertinent to the
matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in
due course is one who takes the instrument "in good faith and for value;" Section
59, "that every holder is deemed prima facie to be a holder in due course;" and
Section 52 (d), that in order that one may be a holder in due course it is necessary
that "at the time the instrument was negotiated to him "he had no notice of any . . .
defect in the title of the person negotiating it;" and lastly Section 59, that every
holder is deemed prima facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder
in due course does not apply because there was a defect in the title of the holder
(Manuel Gonzales), because the instrument is not payable to him or to bearer. On
the other hand, the stipulation of facts indicated by the appellants in their brief, like
the fact that the drawer had no account with the payee; that the holder did not
show or tell the payee why he had the check in his possession and why he was
using it for the payment of his own personal account show that holder's title was
defective or suspicious, to say the least. As holder's title was defective or
suspicious, it cannot be stated that the payee acquired the check without knowledge
of said defect in holder's title, and for this reason the presumption that it is a holder
in due course or that it acquired the instrument in good faith does not exist. And
having presented no evidence that it acquired the check in good faith, it (payee)
cannot be considered as a holder in due course. In other words, under the
circumstances of the case, instead of the presumption that payee was a holder in
good faith, the fact is that it acquired possession of the instrument under
circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in actual good
faith.
The rule applicable to the case at bar is that described in the case of Howard
National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme
Court of Vermont made the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in
this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215,
where the rule was distinctly laid down by the court of King's Bench that the
purchaser of negotiable paper must exercise reasonable prudence and caution, and
that, if the circumstances were such as ought to have excited the suspicion of a
prudent and careful man, and he made no inquiry, he did not stand in the legal
position of a bona fide holder. The rule was adopted by the courts of this country
generally and seem to have become a fixed rule in the law of negotiable paper.
Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court
abandoned its former position and adopted the rule that nothing short of actual bad
faith or fraud in the purchaser would deprive him of the character of a bona fide
purchaser and let in defenses existing between prior parties, that no circumstances
of suspicion merely, or want of proper caution in the purchaser, would have this
effect, and that even gross negligence would have no effect, except as evidence
tending to establish bad faith or fraud. Some of the American courts adhered to the
earlier rule, while others followed the change inaugurated in Goodman v. Harvey.
The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full
consideration of the question, a rule was adopted in harmony with that announced
in Gill v. Cubitt, which has been adhered to in subsequent cases, including those
cited above. Stated briefly, one line of cases including our own had adopted the test
of the reasonably prudent man and the other that of actual good faith. It would
seem that it was the intent of the Negotiable Instruments Act to harmonize this
disagreement by adopting the latter test. That such is the view generally accepted
by the courts appears from a recent review of the cases concerning what constitutes
notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general
purpose of the act to make uniform the Negotiable Instruments Law of those states
which should enact it, we are constrained to hold (contrary to the rule adopted in
our former decisions) that negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of themselves
prevent a recovery, but are to be considered merely as evidence bearing on the
question of bad faith. See G. L. 3113, 3172, where such a course is required in
construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is
called upon to prove himself a holder in due course to be entitled to recover, he is
required to establish the conditions entitling him to standing as such, including good
faith in taking the instrument. It devolves upon him to disclose the facts and
circumstances attending the transfer, from which good or bad faith in the
transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which
should have put it to inquiry, why the holder had the check and used it to pay his
own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it
actually acquired said check in good faith. The stipulation of facts contains no
statement of such good faith, hence we are forced to the conclusion that plaintiff
payee has not proved that it acquired the check in good faith and may not be
deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is
hereby, reversed, and the defendants are absolved from the complaint. With costs
against plaintiff-appellee.
Green v. Lopez, 1917
A negotiable note was issued by defendant to a payee which the latter later on
indorsed to the present holders, the plaintiffs.
The defendant refused to pay the note alleging that plaintiffs were not bona fide
holders of the note by indorsement, because they had knowledge of the existence of
certain equitable defenses which the makers were entitled to set up as against the
payee of the noted, before they acquired it by indorsement from the payee.
The plaintiff on the other hand claims that he sent an employee to call upon the
makers of the note to inquire whether it was a good note which would be paid at
maturity, and that upon his return this employee stated that he had been informed
by the makers of the note that it was a good note duly executed by them and that it
would be paid when due.
Issue: Whether the defendant could refuse payment on the note.
Ruling:
No. The court ruled that the allegations of the defendant were either wholly false or
he failed to make himself understood resulting to the fact that no knowledge of the
existence of equitable defenses was made known to the plaintiff, the purchaser of
the note. There was nothing on the face of the note to put the purchasers on notice
of the existence of such equitable defenses. It was entirely regular in form and
came into their possession in the usual course of business. Under these
circumstances the burden of proof was manifestly upon the maker of the note to
establish the fact of knowledge of the equitable defenses before they could be
permitted to rely upon such defenses as against the purchasers. Equitable defenses
of this nature can in no event defeat the right of the holders of a negotiable note by
indorsement and for valuable consideration, until and unless knowledge of the
existence of such equitable defenses is brought home to them, or until it appears
that the holders had such knowledge of the existence of defects in the instrument
as to charge them with bad faith in acquiring it under all the attendant
circumstances.
G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC.,
respondents.
For our review is the decision of the Court of Appeals in the case entitled "State
Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.,"1 affirming the
decision of the Regional Trial Court2 in a complaint filed by the State Investment
House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks
issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI).
The foregoing decisions unanimously ruled in favor of SIHI, the private respondent
in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar &
Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred
to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In
consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated
sometime in March 1979 in the total amount of P820,000.00.3
Relying on the supplier's representation that he would complete delivery within
three months from December 5, 1978, petitioner agreed to purchase additional
2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance
with their earlier agreement. Again petitioner issued post dated crossed checks in
the total amount of P1,100,000.00, payable sometime in September 1979.4
During these times, George King was simultaneously dealing with private
respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 5518265
bearing an amount of P164,000.00, post dated March 31, 1979, drawn by
petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978,
he again sold to respondent checks TCBT Nos. 608967 & 608968,6 both in the
amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn
by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed
despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment
order on all checks payable to George King, including check TCBT 551826.
Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 &
608968 on September 14 & 28, 1979, respectively, due to George King's failure to
deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case,
naming only BCCFI as party defendant. The trial court pronounced SIHI as having a
valid claim being a holder in due course. It further said that the non-inclusion of
King Tim Pua George as party defendant is immaterial in this case, since he, as
payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks,
is a holder in due course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course,
thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under
the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima facie a
holder in due course. However, when it is shown that the title of any person who
has negotiated the instrument was defective, the burden is on the holder to prove
that he or some person under whom he claims, acquired the title as holder in due
course.
The facts in this present case are on all fours to the case of State Investment
House, Inc. (the very respondent in this case) v. Intermediate Appellate Court 7
wherein we made a discourse on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank
payable on demand. 8 There are a variety of checks, the more popular of which are
the memorandum check, cashier's check, traveler's check and crossed check.
Crossed check is one where two parallel lines are drawn across its face or across a
corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is
written between the parallel lines drawn. It is crossed generally when only the
words "and company" are written or nothing is written at all between the parallel
lines. It may be issued so that the presentment can be made only by a bank.
Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks,"
although Article 541 9 of the Code of Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected by its being
crossed, whether specially or generally. It may legally be negotiated from one
person to another as long as the one who encashes the check with the drawee bank
is another bank, or if it is specially crossed, by the bank mentioned between the
parallel lines. 10 This is specially true in England where the Negotiable Instrument
Law originated.
In the Philippine business setting, however, we used to be beset with bouncing
checks, forging of checks, and so forth that banks have become quite guarded in
encashing checks, particularly those which name a specific payee. Unless one is a
valued client, a bank will not even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced
that crossing of a check should have the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only
once to one who has an account with a bank; (c) and the act of crossing the
check serves as warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New
Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post dated
crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood
Industries, Inc. Ruling that SIHI was not a holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued payable
to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had
intended the same for deposit only by the rightful person, i.e. the payee named
therein. Apparently, it was not the payee who presented the same for payment and
therefore, there was no proper presentment, and the liability did not attach to the
drawer. Thus, in the absence of due presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner (SIHI) against the
drawer of the subject checks, private respondent wife (Anita), considering that
petitioner is not the proper party authorized to make presentment of the checks in
question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) on due date would make the back up deposit
for said checks but which condition apparently was not made, thus resulting in the
non-consummation of the loan intended to be granted by private respondents to
New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner
who is not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon
him devolves the duty to ascertain the indorser's title to the check or the nature of
his possession. Failing in this respect, the holder is declared guilty of gross
negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, 13 and as such the consensus of authority is to the
effect that the holder of the check is not a holder in due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is
to George King. Because, really, the checks were issued with the intention that
George King would supply BCCFI with the bales of tobacco leaf. There being failure
of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be
obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the
checks. The only disadvantage of a holder who is not a holder in due course is that
the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in
this case, George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant
petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by
the Court of Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.
[G.R. No. L-15380. September 30, 1960.]
CHAN WAN, Plaintiff-Appellant, v. TAN KIM and CHEN SO, Defendants-
Appellees.
1. NEGOTIABLE INSTRUMENTS; CROSSED CHECKS; ABSENCE OF DUE
PRESENTMENT; LIABILITY OF DRAWER. The drawer in drawing the check
engaged that on due presentment, the check would be paid, and that if it be
dishonored, he will pay the amount thereof to the holder. Wherefore, in the absence
of due presentment, the drawer did not become liable.
2. ID.; ID.; CHECK CROSSED SPECIALLY IN FAVOR OF A CERTAIN BANK; HOW
COLLECTED; LIABILITY OF DRAWEE OR WRONG PAYMENT. Where a check is
crossed specially in favor of a certain bank, the check is generally deposited with
the bank mentioned in the crossing, so that the latter may take charge of the
collection. If it is not presented by said bank for payment, the drawee is liable to
the true owner, in case of payment to persons not entitled thereto.
3. ID.; ID.; HOLDER WHO IS NOT HOLDER IN DUE COURT CAN STILL RECOVER ON
THE CHECK. The Negotiable Instruments law does not provide that a holder who
is not a holder in due course, may not in any case, recover on the instrument. The
only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable.
This suit to collect eleven checks totalling P4,290.00 is here for decision because it
involves no issue of fact.
Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the
other defendant is her husband) upon the Equitable Banking Corporation, were all
presented for payment by Chan Wan to the drawee bank, but they "were all
dishonored and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer."cralaw virtua1aw library
At the hearing of the case, in the Manila court of first instance, the plaintiff did not
take the witness stand. His attorney, however, testified only to identify the checks
which are Exhibits A to K plus the letters of demand upon defendants.
On the other hand, Tan Kim declared without contradiction that the checks had
been issued to two persons named Pinong and Muy for some shoes the former had
promised to make and "were intended as mere receipts."
In view of such circumstances, the court declined to order payment for two principal
reasons: (a) plaintiff failed to prove he was a holder in due course, and (b) the
checks being crossed checks should not have been presented to the drawee for
"payment," but should have been deposited instead with the bank mentioned in the
crossing.
It may be stated in this connection, that defendants asserted a counterclaim, the
court dismissed it for failure of proof, and from such dismissal they did not appeal.
The only issue is, therefore, the plaintiffs right to collect on the eleven commercial
documents.
The Negotiable Instruments Law regulating the issuance of negotiable checks, the
rights and the liabilities arising therefrom, does not mention "crossed checks." Art.
541 of the Code of Commerce refers to such instruments. 1 The bills of Exchange
Act of England of 1882, contains several provisions about them, some of which are
quoted in the margin. 2 In Philippine National Bank v. Zulueta, 101 Phil., 1071; 55
Off. Gaz., 222, we applied some provisions of said Bills of Exchange Act because the
Negotiable Instruments Law, originating from England and codified in the United
States, permits resort thereto in matters not covered by it and local legislation. 3
Eight of the checks here in question bear across their face two parallel transverse
lines between which these words are written: non- negotiable - China Banking
Corporation. These checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for payment by China
Banking, and not by Chan Wan. 4 Inasmuch as Chan Wan did present them for
payment himself - the Manila court said - there was no proper presentment, and the
liability did not attach to the drawer.
We agree to the legal premises and conclusion. It must be remembered, at this
point, that the drawer in drawing the check engaged that "on due presentment, the
check would be paid, and that if it be dishonored . . . he will pay the amount thereof
to the holder." 5 Wherefore, in the absence of due presentment, the drawer did not
become liable.
Nevertheless we find, on the backs of the checks, endorsements which apparently
show they had been deposited with the China Banking Corporation and were, by the
latter, presented to the drawee bank for collection. For instance, on the back of the
check Exhibit A (same as in Exh. B), this endorsement
"For deposit to the account of White House Shoe Supply with the China Banking
Corporation."
and then this:
"Cleared through the clearing office Central Bank of the Philippines. All prior
endorsements and/or lack of endorsements guaranteed. China Banking
Corporation."cralaw virtua1aw library
And on the back of Exh. G:jgc:chanrobles.com.ph
"For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. Peoples
Shoe Company."
followed by the endorsement of China Banking Corporation as in Exhibits A and B.
All the crossed checks have the "clearance" endorsement of China Banking
Corporation.
These circumstances would seem to show deposit of the checks with China Banking
Corporation and subsequent presentation by the latter through the clearing office;
but as drawee had no funds, they were unpaid and returned, some of them stamped
"account closed." How they reached his hands, plaintiff did not indicate. Most
probably, as the trial court surmised, - this is not a finding of fact he got them
after they had been thus returned, because he presented them in court with such
"account closed" stamps, without bothering to explain. Naturally and rightly, the
lower court held him not to be a holder in due course under the circumstances,
since he knew, upon taking them up, that the checks had already been dishonored.
Yet it does not follow as a legal proposition, that simply because he was not a
holder in due course, Chan Wan could not recover on the checks. The Negotiable
Instruments Law does not provide that a holder 7 who is not a holder in due course,
may not in any case, recover on the instrument. If B purchases an overdue
negotiable promissory note signed by A, he is not a holder in due course; but he
may recover from A, 8 if the latter has no valid excuse for refusing payment. The
only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. 9
Now what defenses did the defendant Tan Kim prove? The lower courts decision
does not mention any, evidently His Honor had in mind the defense pleaded in
defendants answer, but thought it unnecessary to specify, because the crossing"
and presentation incidents sufficed to bar recovery, in his opinion.
Tan Kim admitted on cross-examination either that the checks had been issued as
evidence of debts to Pinong and Muy, and/or that they had been issued in payment
of shoes which Pinong had promised to make for her.
Seeming to imply that Pinong had failed to make the shoes, she asserted Pinong
had "promised to pay the checks for me." Yet she did not complete the idea,
perhaps because she was just answering cross-questions, her main testimony
having referred merely to their counter-claim.
Needless to say, if it were true that the checks had been issued in payment for
shoes that were never made and delivered, Tan Kim would have a good defense as
against a holder who is not a holder in due course. 10
Considering the deficiency of important details on which a fair adjudication of the
parties rights depends, we think the record should be and is hereby returned, in the
interest of justice, to the court below for additional evidence, and such further
proceedings as are not inconsistent with this opinion. With the understanding that,
as defendants did not appeal, their counterclaim must he and is hereby definitely
dismissed. So ordered.
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO
T. VERGARA, petitioners, vs. IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on
questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No.
68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose,
it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific
Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-assignor to inspect the job
site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were fit
for the job, and gave the corresponding warranty of ninety (90) days performance
of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president
and vice- president, respectively, agreed to purchase on installment said two (2)
units of "Used" Allis Crawler Tractors. It also paid the down payment of Two
Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of
tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with
promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1
"), assigned its rights and interest in the chattel mortgage in favor of the
respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor
of the fact that the tractors broke down and requested for the seller-assignor's
usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not
come out to be what they should be after the repairs were undertaken because the
units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. "
7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation
and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against the
petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty
Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One
Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1979, accruing interest thereafter at the rate of twelve (12%) percent per annum,
attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for
expenses of litigation. The petitioners likewise prayed for such other and further
relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and
personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued
interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS
& 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest thereafter at
the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent
to ten percent (10%) of the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
I THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF
AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS
CLAIM OF WARRANTY.

II THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A
HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID
NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the decision
are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears or
is provided in the Deed of Sale of the tractors and even admitting that in a contract
of sale unless a contrary intention appears, there is an implied warranty, the
defense of breach of warranty, if there is any, as in this case, does not lie in favor of
the appellants and against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course. Warranty lies in this case
only between Industrial Products Marketing and Consolidated Plywood Industries,
Inc. The plaintiff-appellant herein upon application by appellant corporation granted
financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants
either to withdraw from the contract and/or demand a proportionate reduction of
the price with damages in either case (Art. 1567, New Civil Code). We now come to
the issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing
corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument
which was discounted or sold to the IFC Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the following. it is in writing and signed by the
maker; it contains an unconditional promise to pay a certain sum of money payable
at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); the
promissory note was negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the
conditions that the note was complete and regular upon its face before the same
was overdue and without notice, that it had been previously dishonored and that
the note is in good faith and for value without notice of any infirmity or defect in the
title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon (Sec. 57,
NIL); the appellants engaged that they would pay the note according to its tenor,
and admit the existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
In view of the essential elements found in the questioned promissory note, We
opine that the same is legally and conclusively enforceable against the defendants-
appellants.
WHEREFORE, finding the decision appealed from according to law and evidence, We
find the appeal without merit and thus affirm the decision in toto. With costs against
the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17, 1985,
a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO
ORDER NOR TO BEARER.
II THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE
ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III. SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND
THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE
AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR
OF THE PROMISSORY NOTE.
V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN
FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY
COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN
AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated
July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant
petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered pro-
formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use for
which it is intended, or should they diminish its fitness for such use to such an
extent that, had the vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be answerable for
patent defects or those which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession, should have known
them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to
the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller
the particular purpose for which the goods are acquired, and it appears that the
buyer relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a
particular purpose may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against
the petitioner. This liability as a general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in which case the
latter's rights are based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract
with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. (Emphasis
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:
In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for adjudgement before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly installments starting
July 15, 1978 and every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-
called 'words of negotiable, must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it
is drawn payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It means
that the bill or note is to be paid to the person designated in the instrument or to
any person to whom he has indorsed and delivered the same. Without the words "or
order" or"to the order of, "the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument but will merely
"step into the shoes" of the person designated in the instrument and will thus be
open to all defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses
apply to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the Deed of Sale
with Chattel Mortgage with the promissory note which is as testified to by the
witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage were assigned;
. . . you want to make a distinction, one is an assignment of mortgage right and the
other one is indorsement of the promissory note. What counsel for defendants
wants is that you stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Marketing, and the respondent whereby the latter would pay the
seller-assignor the entire purchase price and the seller-assignor, in turn, would
assign its rights to the respondent which acquired the right to collect the price from
the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on
the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent.
Therefore, the respondent had actual knowledge of the fact that the seller-
assignor's right to collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not defective. The respondent
knew that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the promissory note is
negotiable, the respondent, which took the same with actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad faith, is
not a holder in due course. As such, the respondent is subject to all defenses which
the petitioners may raise against the seller-assignor. Any other interpretation would
be most inequitous to the unfortunate buyer who is not only saddled with two
useless tractors but must also face a lawsuit from the assignee for the entire
purchase price and all its incidents without being able to raise valid defenses
available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course
is a holder who has taken the instrument under the following conditions:
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in
the instrument of deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an
infirmity in the instrument or defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking the instrument
amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover
the purchase price. Many times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer, with interest. With the
increasing frequency of installment buying in this country, it is most probable that
the tendency of the courts in the United States to protect the buyer against the
finance company will , the finance company will be subject to the defense of failure
of consideration and cannot recover the purchase price from the buyer. As against
the argument that such a rule would seriously affect "a certain mode of transacting
business adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. &
Mrs. General Public-should have some protection somewhere along the line. We
believe the finance company is better able to bear the risk of the dealer's insolvency
than the buyer and in a far better position to protect his interests against
unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument
in favor of a rule which win afford public protection to the general buying public
against unscrupulous dealers in personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34
Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance
company was a moving force in the transaction from its very inception and acted as
a party to it. When a finance company actively participates in a transaction of this
type from its inception, it cannot be regarded as a holder in due course of the note
given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all defenses that the petitioners
have against the seller-assignor, Industrial Products Marketing. For Section 58 of
the Negotiable Instruments Law provides that "in the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate
court dated July 17, 1985, as well as its resolution dated October 17, 1986, are
hereby ANNULLED and SET ASIDE. The complaint against the petitioner before the
trial court is DISMISSED. SO ORDERED.
G.R. No. 72764 July 13, 1989
STATE INVESTMENT HOUSE, petitioner, vs. INTERMEDIATE APPELLATE
COURT, ANITA PEA CHUA and HARRIS CHUA, respondents.
Petitioner State Investment House seeks a review of the decision of respondent
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No. 04523
reversing the decision of the Regional Trial Court of Manila, Branch XXXVII dated
April 30, 1984 and dismissing the complaint for collection filed by petitioner against
private respondents Spouses Anita Pena Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries,
Inc. requested for a loan from private respondent Harris Chua. The latter agreed to
grant the same subject to the condition that the former should wait until December
1980 when he would have the money. In view of this agreement, private
respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New
Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEE BANK
CHECK NO.
DATE
AMOUNT
1. China Banking Corporation
589053
Dec. 22, 1980
P98,750.00
2. International Corporate Bank
04045549
Dec. 22, 1980
102,313.00
3. Metropolitan Bank & Trust Co.
036512
Dec. 22, 1980
98,387.00
The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with
herein petitioner State Investment House, Inc. whereby for and in consideration of
the sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted
with petitioner eleven (11) postdated checks including the aforementioned three (3)
postdated checks issued by herein private respondent-wife Anita Pea Chua to New
Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua were allegedly
deposited by petitioner, these checks were dishonored by reason of "insufficient
funds", "stop payment" and "account closed", respectively. Petitioner claims that
despite demands on private respondent Anita Pea to make good said checks, the
latter failed to pay the same necessitating the former to file an action for collection
against the latter and her husband Harris Chua before the Regional Trial Court of
Manila, Branch XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint against New Sikatuna
Wood Industries, Inc. for reimbursement and indemnification in the event that they
be held liable to petitioner-plaintiff. For failure of third party defendant to answer
the third party complaint despite due service of summons, the latter was declared in
default.
On April 30, 1984, the lower court 1 rendered judgment against herein private
respondents spouses, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the
defendants ordering the defendants to pay jointly and severally to the plaintiff the
following amounts:
1. P 229,450.00 with interest at the rate of 12% per annum from February
24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.
On the third party complaint, third party defendant New Sikatuna Wood Industries,
Inc. is ordered to pay third party plaintiffs Anita Pena Chua and Harris Chua all
amounts said defendants' third- party plaintiffs may pay to the plaintiff on account
of this case. 2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate
Appellate Court 3 (now Court of Appeals) reversed the lower court's judgment in the
now assailed decision, the dispositive portion of which reads:
WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the
appealed judgment, dated April 30, 1984 and a new judgment is hereby rendered
dismissing the complaint, with costs against plaintiff-appellee. 4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due course
as to entitle it to proceed against private respondents for the amount stated in the
dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as
one who takes the instrument "in good faith and for value". On the other hand,
Section 52(d) provides that in order that one may be a holder in due course, it is
necessary that "at the time the instrument was negotiated to him he had no notice
of any x x x defect in the title of the person negotiating it." However, under Section
59 every holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable
checks as well as the lights and liabilities arising therefrom, does not mention
"crossed checks". But this Court has taken cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be
deposited and may not be converted into cash. Consequently, such circumstance
should put the payee on inquiry and upon him devolves the duty to ascertain the
holder's title to the check or the nature of his possession. Failing in this respect, the
payee is declared guilty of gross negligence amounting to legal absence of good
faith and as such the consensus of authority is to the effect that the holder of the
check is not a holder in good faith. 5
Petitioner submits that at the time of the negotiation and endorsement of the
checks in question by New Sikatuna Wood Industries, it had no knowledge of the
transaction and/or arrangement made between the latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate
Court (now Court of Appeals), correctly elucidated that the effects of crossing a
check are: the check may not be encashed but only deposited in the bank; the
check may be negotiated only once to one who has an account with a bank; and the
act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise he is not a holder in due course. Further, the
appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the
check. Furthermore, his failure to inquire from the holder, party defendant New
Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross
despite the warning of the crossing, prevents him from being considered in good
faith and thus he is not a holder in due course. Being not a holder in due course,
plaintiff is subject to personal defenses, such as lack of consideration between
appellants and New Sikatuna Wood Industries. Note that under the facts the checks
were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if
and when deposits were made to back up the checks. Such deposits were not made,
hence no loan was made, hence the three checks are without consideration (Sec.
28, Negotiable Instruments Law).

Likewise New Sikatuna Wood Industries negotiated the three checks in breach of
faith in violation of Article (sic) 55, Negotiable Instruments Law, which is a personal
defense available to the drawer of the check.6
In addition, such instruments are mentioned in Section 541 of the Negotiable
Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words "and
company."
That the subject checks had been issued subject to the condition that private
respondents on due date would make the back up deposit for said checks but which
condition apparently was not made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to New Sikatuna Wood
Industries, Inc., constitutes a good defense against petitioner who is not a holder in
due course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against
petitioner. SO ORDERED.
SPS. PEDRO AND FLORENCIA VIOLAGO,
Petitioners,

The payment made to a person other than the banker or institution shall not
exempt the person on whom it is drawn, if the payment was not correctly made.
- versus -
Under usual practice, crossing a check is done by placing two parallel lines
diagonally on the left top portion of the check. The crossing may be special wherein
between the two parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with the intervention of that
bank or company, or crossing may be general wherein between two parallel BA FINANCE CORPORATION and AVELINO VIOLAGO,
diagonal lines are written the words "and Co." or none at all as in the case at bar, in Respondents.
which case the drawee should not encash the same but merely accept the same for
deposit. G.R. No. 158262

The effect therefore of crossing a check relates to the mode of its presentment for Present:
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person QUISUMBING, J., Chairperson,
authorized to receive payment on his behalf ... As to who the holder or authorized YNARES-SANTIAGO,*
person will be depends on the instructions stated on the face of the check. CARPIO MORALES,
TINGA, and
The three subject checks in the case at bar had been crossed generally and issued VELASCO, JR., JJ.
payable to New Sikatuna Wood Industries, Inc. which could only mean that the
drawer had intended the same for deposit only by the rightful person, i.e., the
payee named therein. Apparently, it was not the payee who presented the same for Promulgated:
payment and therefore, there was no proper presentment, and the liability did not
attach to the drawer. July 21, 2008
x-----------------------------------------------------------------------------------------x
Thus, in the absence of due presentment, the drawer did not become liable. 7
Consequently, no right of recourse is available to petitioner against the drawer of DECISION
the subject checks, private respondent wife, considering that petitioner is not the VELASCO, JR., J.:
proper party authorized to make presentment of the checks in question.

Yet it does not follow as a legal proposition that simply because petitioner was not a
holder in due course as found by the appellate court for having taken the
instruments in question with notice that the same is for deposit only to the account
of payee named in the subject checks, petitioner could not recover on the checks.
The Negotiable Instruments Law does not provide that a holder who is not a holder
in due course may not in any case recover on the instrument for in the case at bar,
petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter has
no valid excuse for refusing payment. The only disadvantage of a holder who is not
in due course is that the negotiable instrument is subject to defenses as if it were
non-negotiable. 8
This is a Petition for Review on Certiorari of the August 20, 2002 Decision[1] and
May 15, 2003 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 48489
entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia
Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third
Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for
the reversal of the appellate courts ruling which held them liable to respondent BA
Finance Corporation (BA Finance) under a promissory note and a chattel mortgage.
Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable
to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation
(VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latters wife,
Florencia. Avelino explained that he needed to sell a vehicle to increase the sales
quota of VMSC, and that the spouses would just have to pay a down payment of
PhP 60,500 while the balance would be financed by respondent BA Finance. The
spouses would pay the monthly installments to BA Finance while Avelino would take
care of the documentation and approval of financing of the car. Under these terms,
the spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.[3]
On August 4, 1983, the spouses and Avelino signed a promissory note under which
they bound themselves to pay jointly and severally to the order of VMSC the
amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the
first installment to be due and payable on September 16, 1983. Avelino prepared a
Disclosure Statement of Loan/Credit Transportation which showed the net purchase
price of the vehicle, down payment, balance, and finance charges. VMSC then
issued a sales invoice in favor of the spouses with a detailed description of the
Toyota Cressida car. In turn, the spouses executed a chattel mortgage over the car
in favor of VMSC as security for the amount of PhP 209,601. VMSC, through
Avelino, endorsed the promissory note to BA Finance without recourse. After
receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its
rights and interests under the promissory note and chattel mortgage in favor of BA
Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC
through Avelino.[4]
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag
Branch, which issued Certificate of Registration No. 0137032 in the name of Pedro
on August 8, 1983. The spouses were unaware that the same car had already been
sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in
Esmeraldos name by the LTO-San Rafael Branch. Despite the spouses demand for
the car and Avelinos repeated assurances, there was no delivery of the vehicle.
Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to
BA Finance. [5]
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116
in Pasay City a complaint for Replevin with Damages against the spouses. The
complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of the vehicle
in favor of BA Finance or, if delivery cannot be effected, for the payment of PhP
199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 until
fully paid. BA Finance also asked for the payment of attorneys fees, liquidated
damages, replevin bond premium, expenses in the seizure of the vehicle, and costs
of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago
spouses, as defendants a quo, were declared in default for failing to file an answer.
Eventually, the RTC rendered on December 3, 1984 a decision in favor of BA
Finance. A writ of execution was thereafter issued on January 11, 1985, followed by
an alias writ of execution.[6]
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then
issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on
April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle
in favor of Generoso Lopez as security for a loan covered by a promissory note in
the amount of PhP 260,664. This promissory note was later endorsed to BA Finance,
Cebu City branch.[7]
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and
Motion to Quash Writ of Execution on the basis of lack of a valid service of summons
on them, among other reasons. The RTC denied the motions; hence, the spouses
filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No.
2002-SP. On May 31, 1991, the CA nullified the RTCs order. This CA decision
became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the
following: they never received the vehicle from VMSC; the vehicle was previously
sold to Esmeraldo; BA Finance was not a holder in due course under Section 59 of
the Negotiable Instruments Law (NIL); and the recourse of BA Finance should be
against VMSC. On February 25, 1995, the Violago spouses, with prior leave of court,
filed a Third Party Complaint against Avelino praying that he be held liable to them
in the event that they be held liable to BA Finance, as well as for damages. VMSC
was not impleaded as third party defendant. In his Motion to Dismiss and Answer,
Avelino contended that he was not a party to the transaction personally, but VMSC.
Avelinos motion was denied and the third party complaint against him was
entertained by the trial court. Subsequently, the spouses belabored to prove that
they affixed their signatures on the promissory note and chattel mortgage in favor
of VMSC in blank.[8]
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against
the Violago spouses. The RTC, however, declared that they are entitled to be
indemnified by Avelino. The dispositive portion of the RTCs decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and
Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation, at its
principal office the BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila
the Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117, and with
Serial No. RX60-804614, covered by the deed of chattel mortgage dated August 4,
1983; or if such delivery cannot be made, to pay, jointly and severally, to the
plaintiff the sum of P198,003.06 together with the penalty [thereon] at three
percent (3%) a month, from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and
severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of
P198,003.06 as attorneys fees, and another amount also equivalent to twenty five
percent (25%) of the said unpaid balance, as liquidated damages. The defendant-
third party-plaintiffs are also required to shoulder the litigation expenses and costs.
As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago
the aforedescribed motor vehicle; or if such delivery is not possible, to pay to the
said spouses the sum of P198,003.06, together with the penalty thereon at three
(3%) a month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party
plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as
attorneys fees, and another sum equivalent also to twenty-five percent (25%) of
the said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party
plaintiffs the sum of P60,500.00 they paid to him as down payment for the car; and
to pay them P15,000.00 as moral damages; P10,000.00 as exemplary damages;
and reimburse them for all the expenses and costs of the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit,
are dismissed.[9]
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the
promissory note is a negotiable instrument; hence, the trial court should have
applied the NIL and not the Civil Code. The spouses also asserted that since VMSC
was not the owner of the vehicle at the time of sale, the sale was null and void for
the failure in the cause or consideration of the promissory note, which in this case
was the sale and delivery of the vehicle. The spouses also alleged that BA Finance
was not a holder in due course of the note since it knew, through its Cebu City
branch, that the car was never delivered to the spouses.[10] On the other hand,
Avelino prayed for the dismissal of the complaint against him because he was not a
party to the transaction, and for an order to the spouses to pay him moral damages
and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and
that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL.
The CA faulted petitioners for failing to implead VMSC, the seller of the vehicle and
creditor in the promissory note, as a party in their Third Party Complaint. Citing
Salas v. Court of Appeals,[11] the appellate court reasoned that since VMSC is an
indispensable party, any judgment will not bind it or be enforced against it. The
absence of VMSC rendered the proceedings in the RTC and the judgment in the
Third Party Complaint null and void, not only as to the absent party but also to the
present parties, namely the Defendants-Appellants (petitioners herein) and the
Third-Party-Defendant-Appellant (Avelino Violago). The CA set aside the trial courts
order holding Avelino liable for damages to the spouses without prejudice to the
action of the spouses against VMSC and Avelino in a separate action.[12]
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is
DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED. The
Decision of the Court a quo is AFFIRMED, with the modification that the Third-Party
Complaint against the Third-Party-Defendant-appellant is DISMISSED, without
prejudice. The counterclaims of the Third-Party Defendant Appellant against the
Defendants-Appellants are DISMISSED, also without prejudice.[13]
The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.
The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE
MAY BE CONSIDERED A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID
DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE
MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND
SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO
The Courts Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby effectively
absolving Avelino from any liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of
the promissory note, we must determine whether the note is a negotiable
instrument and, hence, covered by the NIL. In their appeal to the CA, petitioners
argued that the promissory note is a negotiable instrument and that the provisions
of the NIL, not the Civil Code, should be applied. In the present petition, however,
petitioners claim that Article 1318 of the Civil Code[14] should be applied since their
consent was vitiated by fraud, and, thus, the promissory note does not carry any
legal effect despite its negotiation. Either way, the petitioners arguments deserve no
merit.
The promissory note is clearly negotiable. The appellate court was correct in finding
all the requisites of a negotiable instrument present. The NIL provides:
Section 1. Form of Negotiable Instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of
VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of TWO
HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00),
Philippines Currency, with interest at the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to
be paid on 9-16-83, and the succeeding monthly installments on the 16th day of
each and every succeeding month thereafter until the account is fully paid, provided
that the penalty charge of three (3%) per cent per month or a fraction thereof shall
be added on each unpaid installment from maturity thereof until fully paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
763 Constancia St., Sampaloc, Manila same
(Address) (Address)
(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS)
PAY TO THE ORDER OF BA FINANCE CORPORATION
WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. [15]
The promissory note clearly satisfies the requirements of a negotiable instrument
under the NIL. It is in writing; signed by the Violago spouses; has an unconditional
promise to pay a certain amount, i.e., PhP 209,601, on specific dates in the future
which could be determined from the terms of the note; made payable to the order
of VMSC; and names the drawees with certainty. The indorsement by VMSC to BA
Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due
course. The resolution of this issue will determine whether petitioners defense of
fraud and nullity of the sale could validly be raised against respondent corporation.
Sec. 52 of the NIL provides:
Section 52. What constitutes a holder in due course.A holder in due course is a
holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that
it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a holder thereof in due
course. [16] In this case, the CA is correct in finding that BA Finance meets all the
foregoing requisites:
In the present recourse, on its face, (a) the Promissory Note, Exhibit A, is complete
and regular; (b) the Promissory Note was endorsed by the VMSC in favor of the
Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and for
value; (d) the Appellee was never informed, before and at the time the Promissory
Note was endorsed to the Appellee, that the vehicle sold to the Defendants-
Appellants was not delivered to the latter and that VMSC had already previously
sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle
to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu
Branch), the same occurred only on May 8, 1987, much later than August 4, 1983,
when VMSC assigned its rights over the Chattel Mortgage by the Defendants-
Appellants to the Appellee. Hence, Appellee was a holder in due course.[17]
In the hands of one other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable.[18] A holder in due
course, however, holds the instrument free from any defect of title of prior parties
and from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof.[19] Since BA Finance is a
holder in due course, petitioners cannot raise the defense of non-delivery of the
object and nullity of the sale against the corporation. The NIL considers every
negotiable instrument prima facie to have been issued for a valuable
consideration.[20] In Salas, we held that a party holding an instrument may enforce
payment of the instrument for the full amount thereof. As such, the maker cannot
set up the defense of nullity of the contract of sale.[21] Thus, petitioners are liable
to respondent corporation for the payment of the amount stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray
that the veil of corporate fiction be set aside and Avelino be adjudged directly liable
to BA Finance. Petitioners likewise pray for damages for the fraud committed upon
them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it
may be connected. But, this separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to promote justice. So, when
the notion of separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the
labor laws, this separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. This is true likewise when the corporation is merely
an adjunct, a business conduit or an alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust acts in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.[22]
This case meets the foregoing test. VMSC is a family-owned corporation of which
Avelino was president. Avelino committed fraud in selling the vehicle to petitioners,
a vehicle that was previously sold to Avelinos other cousin, Esmeraldo. Nowhere in
the pleadings did Avelino refute the fact that the vehicle in this case was already
previously sold to Esmeraldo; he merely insisted that he cannot be held liable
because he was not a party to the transaction. The fact that Avelino and Pedro are
cousins, and that Avelino claimed to have a need to increase the sales quota, was
likely among the factors which motivated the spouses to buy the car. Avelino,
knowing fully well that the vehicle was already sold, and with abuse of his
relationship with the spouses, still proceeded with the sale and collected the down
payment from petitioners. The trial court found that the vehicle was not delivered to
the spouses. Avelino clearly defrauded petitioners. His actions were the proximate
cause of petitioners loss. He cannot now hide behind the separate corporate
personality of VMSC to escape from liability for the amount adjudged by the trial
court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners third party
complaint does not preclude recovery by petitioners from Avelino; neither would
such non-inclusion constitute a bar to the application of the piercing-of-the-
corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an
appellate proceeding involving petitioner Arcillas bid to avoid the adverse CA
decision on the argument that he is not personally liable for the amount adjudged
since the same constitutes a corporate liability which nevertheless cannot even be
enforced against the corporation which has not been impleaded as a party below. In
that case, the Court found as well-taken the CAs act of disregarding the separate
juridical personality of the corporation and holding its president, Arcilla, liable for
the obligations incurred in the name of the corporation although it was not a party
to the collection suit before the trial court. An excerpt from Arcilla:
x x x In short, even if We are to assume arguendo that the obligation was incurred
in the name of the corporation, the petitioner [Arcilla] would still be personally liable
therefor because for all legal intents and purposes, he and the corporation are one
and the same. Csar Marine Resources, Inc. is nothing more than his business
conduit and alter ego. The fiction of separate juridical personality conferred upon
such corporation by law should be disregarded. Significantly, petitioner does not
seriously challenge the [CAs] application of the doctrine which permits the piercing
of the corporate veil and the disregarding of the fiction of a separate juridical
personality; this is because he knows only too well that from the beginning, he
merely used the corporation for his personal purposes.[23]
WHEREFORE, the CAs August 20, 2002 Decision and May 15, 2003 Resolution in
CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice
the third party complaint of petitioners-spouses Pedro and Florencia Violago against
respondent Avelino Violago. The March 5, 1994 Decision of the RTC is REINSTATED
and AFFIRMED. Costs against Avelino Violago. SO ORDERED.
ROBERT DINO, G.R. No. 170912
Petitioner,- versus - BRION, DEL CASTILLO, ABAD, and MARIA LUISA
JUDAL-LOOT, PEREZ, JJ. joined by her husband VICENTE LOOT,
Respondents. April 19, 2010
The Case
This is a petition for review[1] of the 16 August 2005 Decision[2] and 30 November
2005 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 57994. The Court of
Appeals affirmed the decision of the Regional Trial Court, 7th Judicial Region,
Branch 56, Mandaue City (trial court), with the deletion of the award of interest,
moral damages, attorneys fees and litigation expenses. The trial court ruled that
respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of
Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as
drawer, together with co-defendant Fe Lobitana as indorser, to solidarily pay
respondents the face value of the check, among others.
The Facts
Sometime in December 1992, a syndicate, one of whose members posed as an
owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached
petitioner and induced him to lend the group P3,000,000.00 to be secured by a real
estate mortgage on the properties. A member of the group, particularly a woman
pretending to be a certain Vivencia Ompok Consing, even offered to execute a Deed
of Absolute Sale covering the properties, instead of the usual mortgage contract.[4]
Enticed and convinced by the syndicates offer, petitioner issued three Metrobank
checks totaling P3,000,000.00, one of which is Check No. C-MA-142119406-CA
postdated 13 February 1993 in the amount of P1,000,000.00 payable to Vivencia
Ompok Consing and/or Fe Lobitana.[5]
Upon scrutinizing the documents involving the properties, petitioner discovered that
the documents covered rights over government properties. Realizing he had been
deceived, petitioner advised Metrobank to stop payment of his checks. However,
only the payment of Check No. C-MA- 142119406-CA was ordered stopped. The
other two checks were already encashed by the payees.
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to
respondents in exchange for cash in the sum of P948,000.00, which respondents
borrowed from Metrobank and charged against their credit line. Before respondents
accepted the check, they first inquired from the drawee bank, Metrobank, Cebu-
Mabolo Branch which is also their depositary bank, if the subject check was
sufficiently funded, to which Metrobank answered in the positive. However, when
respondents deposited the check with Metrobank, Cebu-Mabolo Branch, the same
was dishonored by the drawee bank for reason PAYMENT STOPPED.
Respondents filed a collection suit[6] against petitioner and Lobitana before the trial
court. In their Complaint, respondents alleged, among other things, that they are
holders in due course and for value of Metrobank Check No. C-MA-142119406-CA
and that they had no prior information concerning the transaction between
defendants.
In his Answer, petitioner denied respondents allegations that on the face of the
subject check, no condition or limitation was imposed and that respondents are
holders in due course and for value of the check. For her part, Lobitana denied the
allegations in the complaint and basically claimed that the transaction leading to the
issuance of the subject check is a sale of a parcel of land by Vivencia Ompok
Consing to petitioner and that she was made a payee of the check only to facilitate
its discounting.
The trial court ruled in favor of respondents and declared them due course holders
of the subject check, since there was no privity between respondents and
defendants. The dispositive portion of the 14 March 1996 Decision of the trial court
reads:
In summation, this Court rules for the Plaintiff and against the Defendants and
hereby orders:
1.) defendants to pay to Plaintiff, and severally, the amount of
P1,000,000.00 representing the face value of subject Metrobank check;
2.) to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00
for accrued and paid interest;
3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of
P100,000.00;
4.) to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for
attorneys fees; and
5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of
P10,000.00 and costs of the suit.
SO ORDERED.[7]
Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.
The Ruling of the Court of Appeals
The Court of Appeals affirmed the trial courts finding that respondents are holders
in due course of Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals
pointed out that petitioners own admission that respondents were never parties to
the transaction among petitioner, Lobitana, Concordio Toring, Cecilia Villacarlos, and
Consing, proved respondents lack of knowledge of any infirmity in the instrument or
defect in the title of the person negotiating it. Moreover, respondents verified from
Metrobank whether the check was sufficiently funded before they accepted it.
Therefore, respondents must be excluded from the ambit of petitioners stop
payment order.
The Court of Appeals modified the trial courts decision by deleting the award of
interest, moral damages, attorneys fees and litigation expenses. The Court of
Appeals opined that petitioner was only exercising (although incorrectly), what he
perceived to be his right to stop the payment of the check which he rediscounted.
The Court of Appeals ruled that petitioner acted in good faith in ordering the
stoppage of payment of the subject check and thus, he must not be made liable for
those amounts.
In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts
decision with modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the decision of the
lower court, WE hereby DISMISS the appeal and AFFIRM the decision of the court a
quo with modifications that the award of interest, moral damages, attorneys fees
and litigation expenses be deleted.
No pronouncement as to costs.
SO ORDERED.[8]
In its 30 November 2005 Resolution, the Court of Appeals denied petitioners motion
for reconsideration.
In denying the petitioners motion for reconsideration, the Court of Appeals noted
that petitioner raised the defense that the check is a crossed check for the first time
on appeal (particularly in the motion for reconsideration). The Court of Appeals
rejected such defense considering that to entertain the same would be offensive to
the basic rules of fair play, justice, and due process.
Hence, this petition.
The Issues
Petitioner raises the following issues:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE
HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS
A CROSSED CHECK CONSTITUTES SUFFICIENT WARNING TO THE RESPONDENTS
TO EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE
INDORSER.
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS RELIED UPON
HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY DEMANDS THAT THE
COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE
COMMISSION OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.[9]
The Ruling of this Court
The petition is meritorious.
Respondents point out that petitioner raised the defense that Metrobank Check No.
C-MA-142119406-CA is a crossed check for the first time in his motion for
reconsideration before the Court of Appeals. Respondents insist that issues not
raised during the trial cannot be raised for the first time on appeal as it would be
offensive to the elementary rules of fair play, justice and due process. Respondents
further assert that a change of theory on appeal is improper.
In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the
Complaint, concerning the allegation that on the face of the subject check, no
condition or limitation was imposed, and (2) Paragraph 8 of the Complaint,
regarding the allegation that respondents were holders in due course and for value
of the subject check. In his Special Affirmative Defenses, petitioner claimed that for
want or lack of the prestation, he could validly stop the payment of his check, and
that by rediscounting petitioners check, respondents took the risk of what might
happen on the check. Essentially, petitioner maintained that respondents are not
holders in due course of the subject check, and as such, respondents could not
recover any liability on the check from petitioner.
Indeed, petitioner did not expressly state in his Answer or raise during the trial that
Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be stressed,
however, that petitioner consistently argues that respondents are not holders in due
course of the subject check, which is one of the possible effects of crossing a check.
The act of crossing a check serves as a warning to the holder that the check has
been issued for a definite purpose so that the holder thereof must inquire if he has
received the check pursuant to that purpose; otherwise, he is not a holder in due
course.[10] Contrary to respondents view, petitioner never changed his theory, that
respondents are not holders in due course of the subject check, as would violate
fundamental rules of justice, fair play, and due process. Besides, the subject check
was presented and admitted as evidence during the trial and respondents did not
and in fact cannot deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain issues or
matters not raised in the lower courts in the interest of substantial justice.[11] In
Casa Filipina Realty v. Office of the President,[12] the Court held:
[T]he trend in modern-day procedure is to accord the courts broad discretionary
power such that the appellate court may consider matters bearing on the issues
submitted for resolution which the parties failed to raise or which the lower court
ignored. Since rules of procedure are mere tools designed to facilitate the
attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice, must
always be avoided. Technicality should not be allowed to stand in the way of
equitably and completely resolving the rights and obligations of the parties.[13]
Having disposed of the procedural issue, the Court shall now proceed to the merits
of the case. The main issue is whether respondents are holders in due course of
Metrobank Check No. C-MA 142119406 CA as to entitle them to collect the face
value of the check from its drawer or petitioner herein.
Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice that it has been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.
In the case of a crossed check, as in this case, the following principles must
additionally be considered: A crossed check (a) may not be encashed but only
deposited in the bank; (b) may be negotiated only once to one who has an account
with a bank; and (c) warns the holder that it has been issued for a definite purpose
so that the holder thereof must inquire if he has received the check pursuant to that
purpose; otherwise, he is not a holder in due course.[14]
Based on the foregoing, respondents had the duty to ascertain the indorsers, in this
case Lobitanas, title to the check or the nature of her possession. This respondents
failed to do. Respondents verification from Metrobank on the funding of the check
does not amount to determination of Lobitanas title to the check. Failing in this
respect, respondents are guilty of gross negligence amounting to legal absence of
good faith,[15] contrary to Section 52(c) of the Negotiable Instruments Law. Hence,
respondents are not deemed holders in due course of the subject check.[16]
State Investment House v. Intermediate Appellate Court[17] squarely applies to this
case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State
Investment House three post-dated crossed checks, issued by Anita Pea Chua
naming as payee New Sikatuna Wood Industries, Inc. The Court found State
Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel lines
diagonally on the left top portion of the check. The crossing may be special wherein
between the two parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with the intervention of that
bank or company, or crossing may be general wherein between two parallel
diagonal lines are written the words and Co. or none at all as in the case at bar, in
which case the drawee should not encash the same but merely accept the same for
deposit.
The effect therefore of crossing a check relates to the mode of its presentment for
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalf x x x As to who the holder or
authorized person will be depends on the instructions stated on the face of the
check.
The three subject checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Industries, Inc. which could only mean that the
drawer had intended the same for deposit only by the rightful person, i.e., the
payee named therein. Apparently, it was not the payee who presented the same for
payment and therefore, there was no proper presentment, and the liability did not
attach to the drawer.
Thus, in the absence of due presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner against the drawer of
the subject checks, private respondent wife, considering that petitioner is not the
proper party authorized to make presentment of the checks in question.
In this case, there is no question that the payees of the check, Lobitana or Consing,
were not the ones who presented the check for payment. Lobitana negotiated and
indorsed the check to respondents in exchange for P948,000.00. It was respondents
who presented the subject check for payment; however, the check was dishonored
for reason PAYMENT STOPPED. In other words, it was not the payee who presented
the check for payment; and thus, there was no proper presentment. As a result,
liability did not attach to the drawer. Accordingly, no right of recourse is available to
respondents against the drawer of the check, petitioner herein, since respondents
are not the proper party authorized to make presentment of the subject check.
However, the fact that respondents are not holders in due course does not
automatically mean that they cannot recover on the check.[18] The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is subject to defenses as
if it were non-negotiable.[19] Among such defenses is the absence or failure of
consideration,[20] which petitioner sufficiently established in this case. Petitioner
issued the subject check supposedly for a loan in favor of Consings group, who
turned out to be a syndicate defrauding gullible individuals. Since there is in fact no
valid loan to speak of, there is no consideration for the issuance of the check.
Consequently, petitioner cannot be obliged to pay the face value of the check.
Respondents can collect from the immediate indorser,[21] in this case Lobitana.
Significantly, Lobitana did not appeal the trial courts decision, finding her solidarily
liable to pay, among others, the face value of the subject check. Therefore, the trial
courts judgment has long become final and executory as to Lobitana.
WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision
and 30 November 2005 Resolution of the Court of Appeals in CA-G.R. CV No.
57994.
SO ORDERED.