G.R. No.

72764 July 13, 1989

STATE INVESTMENT HOUSE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, ANITA PEÑA CHUA and HARRIS
CHUA, respondents.

Macalino, Salonga & Associates for petitioner.

Edgardo F. Sundiam for respondents.

FERNAN, C.J.:

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 036512 Dec. 22, 1980 98,387.00

Co.

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 Peña 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 Peña 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   rendered judgment against herein private
1

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   (now Court of Appeals) reversed the lower court's judgment in the
3

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."

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.

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 ... 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
7

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.

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

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.

Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Feliciano, J., is on leave.

G.R. No. 170912 : April 19, 2010

ROBERT DINO, Petitioner, v. MARIA LUISA JUDAL-LOOT, joined by her husband

VICENTE LOOT, Respondents.

DECISION

CARPIO, J.:

The Case
This is a petition for review 1  of the 16 August 2005 Decision2  and 30 November 2005
cЃa cЃa

Resolution3  of the Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed
cЃa

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, attorney's 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 syndicate's offer, petitioner issued three
cЃa

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 cЃa

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 suit6  against petitioner and Lobitana before the trial
cЃa

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
attorney's 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 cräläwvirtualibräry

Only petitioner filed an appeal. Lobitana did not appeal the trial court's judgment.

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court's finding that respondents are holders in due
course of Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals pointed out
that petitioner's 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 petitioner's stop payment order.

The Court of Appeals modified the trial court's decision by deleting the award of interest,
moral damages, attorney's 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 court's 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, attorney's 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 petitioner's motion for
reconsideration.

In denying the petitioner's 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 PETITIONER'S 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 petitioner's
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
cЃa

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.
cЃa

Office of the President,12  the Court held:

cЃa

[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
cЃa

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 cЃa

Based on the foregoing, respondents had the duty to ascertain the indorser's, in this case
Lobitana's, 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 Lobitana's 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
cЃa

are not deemed holders in due course of the subject check. 16 cräläwvirtualibräry

State Investment House v. Intermediate Appellate Court 17  squarely applies to this case.
cЃa

There, New Sikatuna Wood Industries, Inc. sold at a discount to State Investment House
three post-dated crossed checks, issued by Anita Peña 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 cЃa

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
cЃa

consideration,20  which petitioner sufficiently established in this case. Petitioner issued

cЃa

the subject check supposedly for a loan in favor of Consing's 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,
cЃa

Lobitana did not appeal the trial court's decision, finding her solidarily liable to pay, among
others, the face value of the subject check. Therefore, the trial court's 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.

ANTONIO T. CARPIO
Associate Justice

G.R. No. 132403               September 28, 2007

HI-CEMENT CORPORATION, Petitioner,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI
BANK) Respondent.

x-----------------------x

G.R. No. 132419

E.T. HENRY & CO. and SPOUSES ENRIQUE TAN and LILIA
TAN, Petitioners,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI
BANK), Respondent.
 DECISION

CORONA, J.:

At bar are consolidated petitions assailing the decision of the Court of Appeals
(CA) dated January 21, 1998 in CA-G.R. CV No. 31600 entitled Insular Bank
of Asia and America [now Philippine Commercial International Bank/(PCIB)]
v. E.T. Henry & Co., et al.1

The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of
E.T. Henry & Co., Inc. (E.T. Henry), a company engaged in the business of processing
and distributing bunker fuel. 2 Among E.T. Henry's customers were petitioner Hi-Cement
Corporation (Hi-Cement),3 Riverside Mills Corporation (Riverside) and Kanebo Cosmetics
Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated
checks to E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now
Equitable PCI-Bank) granted E.T. Henry a credit facility known as "Purchase of Short
Term Receivables." Through this arrangement, E.T. Henry was able to encash, with pre-
deducted interest, the postdated checks of its clients. In other words, E.T. Henry and
respondent were into "re-discounting" of checks.

For every transaction, respondent required E.T. Henry to execute a promissory note and
a deed of assignment bearing the conformity of the client to the re-discounting. 4

From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of
assignment) with respondent. However, in February 1981, 20 checks 5 of Hi-Cement
(which were crossed and which bore the restriction "deposit to payee’s account only")
were dishonored. So were the checks of Riverside and Kanebo. 6

Respondent filed a complaint for sum of money 7 in the then Court of First Instance of
Rizal8 against E.T. Henry, the spouses Tan, Hi-Cement (including its general
manager9 and its treasurer 10 as signatories of the postdated crossed checks), Riverside
and Kanebo.11

In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered
actual damages equivalent to their value, exclusive of accrued and accruing interests,
charges and penalties such as attorney’s fees and expenses of litigation, as follows:

1. Riverside Mills Corporation ₱ 115,312.50

2. Kanebo Cosmetics Philippines, Inc. 5,811,750.00

3. Hi-Cement Corporation 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan
obligations (amounting to ₱1,661,266.51 and ₱4,900,805, respectively) as deficiencies
resulting from the foreclosure of the real estate mortgage on E.T. Henry's property in
Sucat, Parañaque.12

Hi-Cement filed its answer alleging, among others, that: (1) its general manager and
treasurer were not authorized to issue the postdated crossed checks in E.T. Henry's
favor; (2) the deed of assignment purportedly executed by Hi-Cement assigning them to
respondent only bore the conformity of its treasurer and (3) respondent was not a holder
in due course as it should not have discounted them for being "crossed checks." 13

In their answer (with counterclaim against respondent and cross-claims against Hi-
Cement, Riverside and Kanebo), 14 E.T. Henry and the spouses Tan claimed that: (1) the
drawers of the postdated checks failed to honor them due to the adverse economic
conditions prevailing at the time respondent presented them for payment; (2) the extra-
judicial sale of the mortgaged Sucat property was void due to gross inadequacy of the bid
price15 and (3) their loans were subjected to a usurious interest rate of 21% p.a.

For their part, Riverside and Kanebo sought the dismissal of the case against them,
arguing that they were not privy to the re-discounting arrangement between respondent
and E.T. Henry.

On June 30, 1989, the trial court rendered a decision which read:

WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of

evidence, this Court hereby renders judgment in favor of [respondent] and against [E.T.
Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], to wit:

1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and
severally, to pay [respondent] damages represented by the face value of the postdated
checks as follows:

(a) Riverside Mills Corporation ₱ 115,312.50

(b) Kanebo Cosmetics Philippines, Inc. 5,811,750.00

(c) Hi-Cement Corporation 10,000,000.00

plus interests, services, charges and penalties until fully paid;

2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of
₱4,900,805.00 plus accrued interests, charges, penalties until fully paid;

3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of ₱1,661,266.51
plus interests, charges, and penalties until fully paid;

4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay
[respondent] [a]ttorney’s fees and expenses of litigation in the amount of ₱200,000.00
and pay the cost of this suit.16

SO ORDERED.17

Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these
petitions.

In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed
checks because (1) it did not authorize their issuance; (2) respondent was not a holder in
due course and (3) there was no basis for the lower court’s holding that it was solidarily
liable for the face value of Riverside’s and Kanebo’s checks. 18

In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially
contend that the lower courts erred in: (1) applying the doctrine of piercing the veil of the
corporate entity to make the spouses Tan solidarily liable with E.T. Henry; (2) not ruling
on their cross-claims and counterclaims, and (3) not declaring the foreclosure of E.T.
Henry's Sucat property as void.19

(A) G.R. 132403

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review
of errors of law.20 The factual findings of the trial court, specially when affirmed by the
appellate court, are generally binding on us unless there was a misapprehension of facts
or when the inference drawn from the facts was manifestly mistaken. 21 This case falls
within the exception.

Authority of Hi-Cement’s General Manager and Treasurer to Issue the Postdated

Crossed Checks

Both the trial court and the CA concluded that Hi-Cement authorized its general manager
and treasurer to issue the subject postdated crossed checks. They both held that Hi-
Cement was already estopped from denying such authority since it never objected to the
signatories' issuance of all previous checks to E.T. Henry which the latter, in turn, was
able to re-discount with respondent.

We agree with the lower courts that both the general manager and treasurer of Hi-
Cement were authorized to issue the subjects checks. However, notwithstanding such
fact, respondent could not be considered a holder in due course.

Respondent Bank Not a Holder In Due Course

The Negotiable Instruments Law (NIL), specifically Section 191, 22 provides:

"Holder" means the payee or indorsee of a bill or a note, or the person who is in
possession of it, or the bearer thereof.

On the other hand, Section 5223 states:

A holder in due course is a holder who has taken the instrument under the following
conditions: (a) it is complete and regular on its face; (b) he became the holder of it before
it was overdue, and without notice that it has previously been dishonored, if such was the
fact; (c) he took it in good faith and for value and (d) 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.

Absent any of the elements set forth in Section 52, the holder is not a holder in due
course. In the case at bar, the last two requirements were not met.

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,24 we held that the holder of
crossed checks was not a holder in due course. There, the drawer (BCCF) issued
postdated crossed checks in favor of one of its suppliers (George King) who promised to
deliver bales of tobacco leaf but failed. George King, however, sold the checks on
discount to State Investment House, Inc. (SIHI) and upon the latter’s presentment to the
drawee bank, BCCF ordered a "stop payment." Thereafter, SIHI filed a collection case
against it. In ruling that SIHI was not a holder in due course, we explained:

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 [and]; (c) the act of crossing the checks 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.

Likewise, in Atrium Management Corporation v. CA,25 where E.T. Henry, Hi-Cement and

its treasurer26 again engaged in a legal scuffle over four postdated crossed checks, we
held that Atrium (with which the checks were re-discounted) was not a holder in due
course. In that case, E.T. Henry was the payee of four Hi-Cement postdated checks
which it endorsed to Atrium. When the latter presented the crossed checks to the drawee
bank, Hi-Cement stopped payment.27 We held that Atrium was not a holder in due course:

In the instant case, the checks were crossed and specifically indorsed for deposit to
payee’s account only. From the beginning, Atrium was aware of the fact that the checks
were all for deposit only to payee’s account, meaning E.T. Henry. Clearly, then, Atrium
could not be considered a holder in due course.

In the case at bar, respondent's claim that it acted in good faith when it accepted and
discounted Hi-Cement’s postdated crossed checks from E.T. Henry (as payee therein)
fails to convince us. Good faith becomes inconsequential amidst proof of respondent's
grossly negligent conduct in dealing with the subject checks.

Respondent was all too aware that subject checks were crossed and bore restrictions
that they were for deposit to payee's account only; hence, they could not be further
negotiated to it. The records likewise reveal that respondent completely disregarded a
telling sign of irregularity in the re-discounting of the checks when the general manager
did not acquiesce to it as only the treasurer's signature appeared on the deed of
assignment. As a banking institution, it behooved respondent to act with extraordinary
diligence in every transaction.28 Its business is impressed with public interest, thus, it was
not expected to be careless and negligent, specially so where the checks it dealt with
were crossed. In Bataan Cigar and Cigarette Factory, Inc.,29 we ruled:

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…and as such[,] the consensus
of authority is to the effect that the holder of the check is not a holder in due course.
(emphasis supplied)

The next query is whether Hi-Cement can still be made liable for the checks. We answer
in the negative.

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court, 30 SIHI re-
discounted crossed checks and was declared not a holder in due course. As a result,
when it presented the checks for deposit, we deemed that its presentment to the drawee
bank was not proper, hence, the liability did not attach to the drawer of the checks. We
ruled that:

The three subject checks in the case at bar had been crossed…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. 31
Our resolution in the foregoing case was reiterated in Atrium Management Corporation v.
CA,32 where we affirmed the CA ruling that the drawer of the postdated crossed checks
was not liable to the holder who was deemed not a holder in due course.

We note, however, that in the two aforementioned cases, we made it clear that the NIL
does not absolutely bar a holder who is not a holder in due course from recovering on the
checks. In both, we ruled that it may recover from the party who indorsed/encashed the
checks "if the latter has no valid excuse for refusing payment." Here, there was no doubt
that it was E.T. Henry that re-discounted Hi-Cement's checks and received their value
from respondent. Since E.T. Henry had no justification to refuse payment, it should pay
respondent.

Solidary Liability of Hi-Cement for The Face Value of Riverside's and Kanebo's
Checks

Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the
face value of their checks. Hi-Cement had nothing to do with the checks of these two
corporations. However, although the language of the trial court decision's dispositive
portion seemed confusing, a reading of the decision in its entirety reveals that
the fallo was for each corporation to be liable solidarily with E.T. Henry and/or the
spouses Tan for the respective values of their checks.

Furthermore, solidary liability cannot be presumed but must be established by law or

contract. Neither is present here. Articles 1207 and 1208 of the Civil Code provide:

Art. 1207. The concurrence of two or more debtors in one and the same obligation does
not imply that each one of the former has a right to demand, or that each one of the latter
is bound to render, entire compliance with the presentation. There is solidary liability
only when the obligation expressly so states, or when the obligation requires
solidarity. (emphasis supplied)

Art. 1208. If from the law, or the nature of the wording of the obligations to which the
preceding article refers to the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one another, subject to the Rules
governing the multiplicity of suits.

At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable
for the checks.

(B) G.R. No. 132419

Doctrine of Piercing the

Veil of Corporate Entity

In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in
applying the "piercing the veil of corporate entity" doctrine to their case. They claim that
both the trial and appellate courts failed to cite the reasons why the doctrine was relevant
to them.

We agree with petitioners E.T. Henry and the spouses Tan in this respect.

If any general rule can be laid down, it is that the corporation will be looked upon as a
legal entity until sufficient reasons to the contrary appear. 33 It is only when the fiction or
notion of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud
or defend crime that the law will shred the corporate legal veil and regard it as a mere
association of persons.34 This is referred to as the doctrine of piercing the veil of
corporate entity.

After a careful study of the records, we hold that E.T. Henry's corporate veil should not
have been pierced at all.

First, the trial court failed to provide a clear ground why the doctrine was used. It merely
stated that it agreed with respondent’s arguments but did not explain why the doctrine
was relevant to petitioner E.T. Henry's and the spouses Tan’s case. On the other hand,
the CA held:

…It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as
well as its authorized signatories. The business of the corporation was conducted solely
for the benefit of the spouses Tan who colluded with [Hi-Cement] in defrauding
[respondent]. As the lower court cited…[I]t is a settled law in this and other jurisdictions
that when the corporation is a mere alter ego of a person, same being true when the
corporation is controlled, and its affairs are so conducted to make it merely an
instrumentality, agency or conduit of another.35

Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T.
Henry and the spouses Tan defrauded respondent. It did not also state what act
constituted the fraud. Fraud is an allegation of fact that demands clear and convincing
evidence.36 It is never presumed.37

Second, the mere ownership by a single stockholder or by another corporation of all or

nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. 38 For this ground to stand in this case,
there must be proof that the spouses Tan: (1) had control or complete domination of E.T.
Henry’s finances and that the latter had no separate existence with respect to the act
complained of; (2) used such control to commit fraud or wrong and (3) the control was
the proximate cause of the loss or injury complained of by respondent. 39 The records of
this case do not show that these elements were present.

Inadequacy of the Bid Price to Annul Foreclosure Proceeding

With respect to the allegation that foreclosure was void due to the inadequacy of the bid
price, we agree with the CA that the "mere inadequacy of the price obtained at the
[s]heriff’s sale, unless shocking to the conscience, (was) not sufficient to set aside the
sale if there (was) no showing that, in the event of a regular sale, a better price (could) be
obtained."40
1âwphi1

Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that
it was carried out without strict observance of the procedure, we will continue to assume
its regularity and strike down any attempt to vitiate it. In this case, E.T. Henry and the
spouses Tan made no mention of any anomaly to support the nullification of the
foreclosure sale but merely alleged a disparity in the bid price and the property’s fair
market value.

Counterclaims and Cross-claims

Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of
the lower court to pass upon their counterclaim against respondent or cross-claims
against Hi-Cement, Riverside and Kanebo. They ask us now to hold these parties liable
on the basis of said claims. We decline to do so.
First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and
Kanebo as parties in the case at bar. Under Rule 3 of the Rules of Court, every action,
including a counterclaim (or a cross-claim), must be prosecuted or defended in the name
of the real party in interest. 41 The term "defendant" may refer to the original defending
party, the defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party
defendant.42 Hence, for this technical lapse, we are constrained not to pass on E.T.
Henry's and the spouses Tan's cross-claims.

Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on
the basis of an alleged void foreclosure proceeding on E.T. Henry's Sucat property due
to an inadequate bid price. It is no longer necessary to delve into this matter in view of
our finding that the mere inadequacy of the bid price on the property did not automatically
render the foreclosure sale irregular or void.

Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts’ ruling
on E.T. Henry’s and the spouses Tan’s solidary liability with Riverside and Kanebo vis-a-
vis their checks.43 To be consistent, however, with our dictum on the separate personality
of E.T. Henry and the spouses Tan, the solidarity liability arising from the checks of
Riverside and Kanebo shall only be enforced against E.T. Henry.

WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is

hereby AFFIRMED with MODIFICATION. Accordingly, petitioner Hi-Cement Corporation
is discharged from any liability. Only petitioner E.T. Henry & Co. is ORDERED to pay
respondent Insular Bank of Asia and America (later Philippine Commercial International
Bank and now Equitable PCI-Bank) the following:

1. ₱10,000,000 representing the value of Hi-Cement's checks it received from

respondent plus accrued interests, charges and penalties until fully paid, and

2. the loans for ₱1,661,266.51 and ₱4,900,805 plus accrued interests, charges and
penalties until fully paid.

Let the records of this case be remanded to the trial court for the proper computation of
E.T. Henry's, Riverside's and Kanebo's liabilities for the checks, attorney's fees and costs
of litigation.

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.

Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to

another merely as security, and the right of a real estate mortgagee after
extrajudicial foreclosure to recover the balance of the obligation, are the
issues in this Petition for Review of the Decision of respondent Court of
Appeals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security

for pieces of jewelry to be sold on commission, two (2) post-dated Equitable
Banking Corporation checks in the amount of Fifty Thousand Pesos
(P50,000.00) each, one dated 30 August 1979 and the other, 30 September
1979. Thereafter, the payee negotiated the checks to petitioner State
Investment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee
before maturity of the checks. The checks, however, could no longer be
retrieved as they had already been negotiated. Consequently, before their
maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency
of funds. On 20 December 1979, STATE allegedly notified MOULIC of the
dishonor of the checks and requested that it be paid in cash instead, although
MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus
attorney's fees and expenses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the

checks because the jewelry was never sold and the checks were negotiated
without her knowledge and consent. She also instituted a Third-Party
Complaint against Corazon Victoriano, who later assumed full responsibility
for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-
Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's
fees.

STATE elevated the order of dismissal to the Court of Appeals, but the
appellate court affirmed the trial court on the ground that the Notice of
Dishonor to MOULIC was made beyond the period prescribed by the
Negotiable Instruments Law and that even if STATE did serve such notice on
MOULIC within the reglementary period it would be of no consequence as the
checks should never have been presented for payment. The sale of the
jewelry was never effected; the checks, therefore, ceased to serve their
purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were

negotiable. After all, at the pre-trial, the parties agreed to limit the issue to
whether or not STATE was a holder of the checks in due course. 1

In this regard, Sec. 52 of the Negotiable Instruments Law provides —

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 was 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.

Culled from the foregoing, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course.  Consequently, the burden of proving
2

that STATE is not a holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete
and regular: (b) petitioner bought these checks from the payee, Corazon Victoriano,
before their due dates;  (c) petitioner took these checks in good faith and for value, albeit
3

at a discounted price; and, (d) petitioner was never informed nor made aware that these
checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments
free from any defect of title of prior parties, and from defenses available to prior parties
among themselves; STATE may, therefore, enforce full payment of the checks. 4

MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as security is not a ground for the
discharge of the instrument as against a holder in due course. For the only grounds are
those outlined in Sec. 119 of the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By

payment in due course by or on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument is made or accepted for his
accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other
act which will discharge a simple contract for the payment of money; (e) When the
principal debtor becomes the holder of the instrument at or after maturity in his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under
paragraph (c) is that cancellation effected by destroying the instrument either by tearing it
up,  burning it,  or writing the word "cancelled" on the instrument. The act of destroying
5 6

the instrument must also be made by the holder of the instrument intentionally. Since
MOULIC failed to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of
money under paragraph (d) are determined by other existing legislations since Sec. 119
does not specify what these acts are, e.g., Art. 1231 of the Civil Code  which enumerates
7

the modes of extinguishing obligations. Again, none of the modes outlined therein is
applicable in the instant case as Sec. 119 contemplates of a situation where the holder of
the instrument is the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was
returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the
mere expediency of withdrawing her funds from the drawee bank. She is thus liable as
she has no legal basis to excuse herself from liability on her checks to a holder in due
course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no
moment. The need for such notice is not absolute; there are exceptions under Sec. 114
of the Negotiable Instruments Law:

Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required
to be given to the drawer in the following cases: (a) Where the drawer and the drawee
are the same person; (b) When the drawee is a fictitious person or a person not having
capacity to contract; (c) When the drawer is the person to whom the instrument is
presented for payment: (d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded
payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks
when she returned the jewelry. She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After withdrawing her funds, she could not
have expected her checks to be honored. In other words, she was responsible for the
dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which
is simply bringing to the knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument, upon proper proceedings
taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it.8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating,
not hindering or hampering transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case.9

The drawing and negotiation of a check have certain effects aside from the transfer of
title or the incurring of liability in regard to the instrument by the transferor. The holder
who takes the negotiated paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit are available for the
payment of the instrument in the bank upon which it is drawn.  Consequently, the
10

withdrawal of the money from the drawee bank to avoid liability on the checks cannot
prejudice the rights of holders in due course. In the instant case, such withdrawal renders
the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds
with the drawee bank to meet her obligation on the checks,  so that Notice of Dishonor
11

would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute
unjust enrichment on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the
obligation of Corazon Victoriano and her husband at the time their property mortgaged to
STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public
auction was only P1 million.  Thus, the value of the property foreclosed was not even
12

enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the
debtor.  The step thus taken by the mortgagee-bank in resorting to an extra-judicial
13

foreclosure was merely to find a proceeding for the sale of the property and its action
cannot be taken to mean a waiver of its right to demand payment for the whole
debt.  For, while Act 3135, as amended, does not discuss the mortgagee's right to
14

recover such deficiency, it does not contain any provision either, expressly or impliedly,
prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right
of a creditor to sue for any deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For instance, with respect to pledges,
Art. 2115 of the Civil Code  does not allow the creditor to recover the deficiency from the
15

sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on
installment basis, in the event of foreclosure, the vendor "shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary will be void".16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it
cannot be concluded that the creditor loses his right recognized by the Rules of Court to
take action for the recovery of any unpaid balance on the principal obligation simply
because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a
Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of
recovering the unpaid balance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder
in due course, STATE, without prejudice to any action for recompense she may pursue
against the VICTORIANOs as Third-Party Defendants who had already been declared as
in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED

and a new one entered declaring private respondent NORA B. MOULIC liable to
petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos.
30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's
fees, and the costs of suit, without prejudice to any action for recompense she may
pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

Cruz and Griño-Aquino, JJ., concur.

Padilla, J., took no part.

G.R. No. L-33549 January 31, 1978

BANCO ATLANTICO, petitioner,
vs.
AUDITOR GENERAL, respondent.

Juan G. Collas, Jr., and Luis Ma. Guerrero for petitioner.

Solicitor General Estelito P. Mendoza Assistant Solicitor General Rosalio A. de

Leon and Solicitor Eulogio Raquel-Santos for respondent.
FERNANDEZ, J:

This is an appeal from the decision of the Auditor General contained in a letter
dated April 22, 1971 addressed to the counsel of the petitioner, Banco
Atlantico, stating that, ... for want of legal basis, this Office cannot snow in
audit the payment of the said claim of Banco Atlantico against the Philippine
Embassy in Madrid, Spain."  1

The record discloses that the petitioner is a commercial Bank doing business in Madrid,
Spain; that on October 31, i968, Virginia Boncan, then the Finance Officer of the
Philippine Embassy in Madrid, Spain, negotiated with Banco Atlantico a Philippine
Embassy check signed by Luis M. Gonzales, its ambassador and by said Virginia
Boncan as Finance Officer, dated October 31, 1968 in the sum of US$10,109.10 payable
to Azucena Pace and drawn against the Philippine National Bank branch in New
York, U.S.A.; that the check was endorsed by Azucena Pace and Virginia Boncan; that
the petitioner, without clearing the check with the drawn bank in New York, U.S.A., paid
the full amount of US$10,109.10 to Virginia Boncan;

that on November 2, 1968, Virginia Boncan negotiated by endorsement with the

petitioner another embassy check signed by Luis M. Gonzales as ambassador and by
her as finance officer in the sum of US$35,000.75 dated November 2, 1968 payable to
Virginia Boncan and drawn against the Philippine National Bank branch in New York,
U.S.A.; that the petitioner paid the full amount of the check to Virginia Boncan
without clearing said check with the drawn bank,

that on November 5, 1968, Virginia Boncan negotiated by endorsement with petitioner

another embassy check signed by Ambassador Luis M. Gonzales and by Finance Officer
Virginia Boncan in the sum of US$90,000.00 dated November 5, 1968 payable to Virginia
Boncan and drawn against the Philippine National Bank in New York, U.S.A.; that the
petitioner paid the full amount of the aforementioned check of US$90,000.00 to Virginia
Boncan without clearing said check with the drawn bank; that

upon presentment for acceptance and payment of the aforementioned checks by

Banco Atlantico through its collecting bank in New York, U.S.A. to the drawn bank, the
Philippine National Bank branch in U.S.A., said drawee bank dishonored the
checks by non-acceptance allegedly on the ground that the drawer had ordered
payments to be stopped; that upon receipt of the notice of the dishonor, the collecting
bank of the petitioner in New York, U.S.A. sent individual notices of protest with
respect to the checks in question to the Philippine Embassy in Madrid, Spain and
to Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy
in Madrid, Spain refused to pay the petitioner the amounts of the aforementioned
checks. 2

The petitioner, Banco Atlantico, filed the corresponding money claim with the Auditor
General.

In denying the claim of the petitioner for the amounts of the three checks in
question, the respondent Auditor General concurred in the following views expressed by
Ambassador Luis M. Gonzales in his second endorsement dated November 13, 1970:

1) Counsel for Claimant alleges that the "Embassy of the Republic of the Philippines
maintained a checking account with Claimant who honored and cashed checks drawn by
the Embassy against its depository bank, the Philippine National Bank branch in New
York, U.S.A." This claim is erroneous. The Embassy never maintained any checking
account with Banco Atlantico at any time in the past. Only the individual staff
members of the Embassy, including Miss Virginia Boncan, in their personal and private
capacities, maintained accounts with said bank.

2) Counsel for claimant alleges that the three checks for the amount of US$10,109.10,
US$35,075.00 and US$90,000.00 were honored and full amount of the aforementioned
checks paid to Miss Boncan in the ordinary course of its banking transactions. While the
aforementioned checks of the Embassy may have appeared valid, payment to Miss
Boncan in her capacity as endorser and payee of the checks without clearing them
first with the drawee bank is definitely not in accordance with normal or ordinary
banking practice, especially so in this case where the drawee bank was a foreign bank,
and the amounts involved were quite large. The normal procedure would have been for
the Banco Atlantico to clear the three cheeks concerned with the drawee bank before
paying Miss Boncan.

From our investigation we have gathered enough proof that Miss Boncan had very
special relations with the employees and chiefs of the claimant bank's foreign
department. This personal relationship that existed between Miss Boncan and said
employees and officers was one thing and ordinary banking transactions were something
else. Because of this special relationship, the bank took a risk and sacrificed normal
banking procedures by cashing the aforementioned checks without prior clearance
from the drawee bank.

3) Counsel for claimant says that Banco Atlantico has every right to recover from the
Embassy as drawer of the checks because it is a holder in due course. Basis for the
claim is Section 61 of the Negotiable Instruments Law, to wit:

SEC. 61. Liability of drawer — The drawer by drawing the instrument admits the
existence of the payee and his then capacity to endorse and engages that on the due
presentment the instrument will be accepted or paid, or both, according to its tenor and
that if it be dishonored, and the n proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder, or to any subsequent indorser who may be compelled to
pay it. But the drawer may insert in the instrument an express stipulation negativing or
limiting his own liability to the holder.

It is erroneous for claimant bank's Counsel to single out this particular provision because
the interpretation thereof would be out of context. All the other related provisions of
said law must be interpreted together, and it would then be doubtful if Banco Atlantico
could qualify as a holder in due course.

4) As regards the checks for US$10,109.10 and US$35,075.00 Miss. Boncan had altered
them by fraudulently increasing the amounts for which said cheeks were issued, and
claimant bank failed to protect itself by cashing them without first clearing them
with the drawer bank. When claimant bank gave Miss Boncan special treatment as a
privileged client in disregard of the elementary principles of prudence that should attend
banking transactions, they should stand to suffer the loss that was due to their own
negligence.

Further proof of the special relationship between claimant bank and Miss Boncan was the
leniency of the bank towards her when it accepted for deposit to Miss Boncan's dollar
account an Embassy check for US$75.00 payable to Mr. Antonio P. Villamor without his
indorsement. Such leniency on the part of the bank could even lead to the suspicion that
there was collusion between the bank and Miss Boncan A photocopy of this check is
enclose for ease of reference.

In the particular case of the check for US$90,000.00 we can demonstrate that claimant
bank likewise has no ewe at all. Section 61 of the Negotiable instruments Law can
only be availed of by holders in due course and Banco Atlantico cannot be
considered as one under the definition of Section 52 of the N.I.L., to wit:

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 on 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 infirmity in the instrument
or defect in the title of the person negotiating it.

All four conditions enumerated under this section must concur before a holder can be
considered as a holder in due course. The absence or failure to comply with any of the
conditions set forth under this section will make one's title to the instrument defective.

The check for US$90,000.00 was a demand note. When Miss Boncan the payee of this
check, negotiated the same by depositing it in her account, at the game time informing
the bank in writing (copy of her letter is enclosed for ease of reference) that it be not
presented for collection until a later date, Banco Atlantico through its agent teller
or cashier should have been put on guard that there was something wrong with
the check. The fact that the amount involved was quite big and it was the payee herself
who made the request that the same not be presented for collection until a fixed date in
the future was proof of a glaring infirmity or defect in the instrument. It loudly
proclaims, "Take me at your risk." The interest of the payee was the immediate
punishment of the check of which she was the beneficiary and not the deferment of the
presentment for collection of the same to the drawee bank. This being the case, Banco
Atlantico was not a holder in due course as defined by Section 52 of the N.I.L., because
it was obvious that it had knowledge of the infirmity or defect of the cheek. The fact
that the check was honored by claimant bank was proof not only of their gross
negligence but a further manifestation of the special treatment they were according Miss
Boncan.  3

According to the petitioner, the issues at bar are the follow:

1. Was there a forgery committed on the three (3) checks as contemplated by See. 23 of
the Negotiable Instruments Law (NIL) as to bar petitioner from enforcing collection from
the drawer-Philippine Embassy in Madrid, Spain? And, if there was such a forgery, is the
drawer precluded from setting up forgery or want of authority of Miss Boncan? and,

2. Do the payments of the aforecited checks without clearing them first with the drawee
bank constitute an actual notice of a defective title in the endorser thereof and/or an
assumption of risk by the petitioner as to defeat collection thereon? 4

The record shows that the chock dated October 31, 1968 and payable to Azucena Pace
was intended to be issued for the sum of US$109.10 for the payment of said payee's
salary as consular clerk in the Philippine Embassy in Madrid for the second half of
October, 1968 as shown in the Embassy's General Payroll.   It also appears that the
5

check dated November 2, 1968 was to be issued for the amount of US$75.00 in
reimbursement of Virginia Boncan's living quarters allowance for November 1968 as
shown in Cash Voucher No. MA-132/69.   There is also a showing that on November 8,
6
1968, Virginia Boncan cashed with the petitioner a check for US$90,000.00 dated
November 5, 1968 drawn on the Philippine National Bank branch at New York City, and
although said check was payable on demand, Virginia Boncan asked that the same be
not presented for collection until a later date.  7

The petitioner paid the amounts of the three (3) checks in question to Virginia
Boncan without previously clearing the said checks with the drawee bank,
Philippine National Bank, New York. This is contrary to normal or ordinary banking
practice specially so where the drawee bank is a foreign bank and the amounts involved
were large. The drawer of the aforementioned checks was not even a client of the
petitioner. There is a showing that Virginia Boncan enjoyed special treatment from the
employees and chiefs of the petitioner's foreign department. It was probably because of
this special relation. ship that the petitioner, in of the elementary principle that should
attend banking transactions, cashed the three (3) checks in question without prior
clearances from the drawee bank.

In view of the foregoing, the Philippine Embassy in Madrid, as drawer of the three (3)
checks in question, cannot be held liable. It is apparent that the said three (3) checks
were fraudulently altered by Virginia Boncan as to their amounts and, therefore, wholly
inoperative.   No right of payment thereof against any party thereto could have been
8

acquired by the petitioner.

WHEREFORE, the decision of the Auditor General denying the claim of the petitioner for
payment of the three (3) checks, Annex "C", Annex "D", and Annex "E" of the petition, is
hereby affirmed, without pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar and Guerrero, JJ., concur.

Muñoz Palma J., concurs in the result.

EN BANC

G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:

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 defendant 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.

Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., concurs in the result.

[G.R. No. 138074. August 15, 2003.]

CELY YANG, Petitioner, v. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL

BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI
and FERNANDO DAVID, Respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the decision 1 of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV
No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC) of
Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 5479 2 and 5492. 3 The trial court
dismissed the complaint against herein respondents Far East Bank & Trust Company (FEBTC),
Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB) and
ruled in favor of respondent Fernando David as to the proceeds of the two cashier’s checks, including
the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of
P100,000.00 and attorney’s fees also in the amount of P100,000.00.chanrob1es virtua1 1aw 1ibrary

The facts of this case are not disputed, to wit:

On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani
entered into an agreement whereby the latter (Prem) was to give Yang a PCIB manager’s check in the
amount of P4.2 million in exchange for two (2) of Yang’s manager’s checks, each in the amount of
P2.087 million, both payable to the order of private respondent Fernando David. Yang and
Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to be
divided equally between them.

Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in
the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which
Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang
Seng Bank Ltd. of Hong Kong.

Accordingly, on December 22, 1987, Yang procured the following:chanrob1es virtual 1aw library

a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22,
1987, payable to the order of Fernando David;

b) FEBTC Cashier’s Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987,
likewise payable to the order of Fernando David; and

c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of
US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.

At about one o’clock in the afternoon of the same day, Yang gave the aforementioned cashier’s
checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by
Liong’s messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala
Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s checks and dollar draft
to Chandiramani who, in turn, would deliver to Ranigo a PCIB manager’s check in the sum of P4.2
million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.

Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashier’s checks
and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the
dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed
Yang, and the loss was then reported to the police.

It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was
able to get hold of said instruments, without delivering the exchange consideration consisting of
the PCIB manager’s check and the Hang Seng Bank dollar draft.

At three o’clock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet
in Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078, dated
December 22, 1987, in the sum of P2.087 million; and (b) Equitable Cashier’s Check No. CCPS 14-
009467, dated December 22, 1987, also in the amount of P2.087 million. In exchange, Chandiramani
got US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife,
Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No. 124 with the
United Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also
deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank,
New York for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.

Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed
to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC
subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the holder
of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00.

On December 28, 1987, herein petitioner Yang lodged a Complaint 4 for injunction and damages
against Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the
Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The Complaint
was subsequently amended to include a prayer for Equitable to return to Yang the amount of P2.087
million, with interest thereon until fully paid. 5

On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of
preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay City,
docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that
defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No.
4771, with interest at 18% annually until fully paid. 6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary
injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case
No. 5492 also.

Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions were
denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.

As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated.
The trial court then conducted pre-trial and trial of the two cases, but the proceedings had to be
suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the
money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was also
agreed by the parties to limit the issues at the trial to the following:chanrob1es virtual 1aw library

1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking
Corporation (EBC) Cashier’s Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated December
22, 1987, and Far East Bank and Trust Company (FEBTC) Cashier’s Check No. 287078 in the sum of
P2,087,000.00 dated December 22, 1987, together with the earnings derived therefrom pendente
lite?

2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment
of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop
payment order of Cely Yang? 7

On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to
wit:chanrob1es virtual 1aw library

WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff
Cely Yang and declaring the former entitled to the proceeds of the two (2) cashier’s checks, together
with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant
Fernando David moral damages in the amount of P100,000.00; attorney’s fees in the amount of
P100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company (FEBTC),
Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is
dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file against
defendant Prem Chandiramani for reimbursement of the amounts received by him from defendant
Fernando David.

SO ORDERED. 8

In finding for David, the trial court ratiocinated:chanrob1es virtual 1aw library

The evidence shows that defendant David was a holder in due course for the reason that the cashier’s
checks were complete on their face when they were negotiated to him. They were not yet overdue
when he became the holder thereof and he had no notice that said checks were previously
dishonored; he took the cashier’s checks in good faith and for value. He parted some $200,000.00
for the two (2) cashier’s checks which were given to defendant Chandiramani; he had also no notice
of any infirmity in the cashier’s checks or defect in the title of the drawer. As a matter of fact, he
asked the manager of the China Banking Corporation to inquire as to the genuineness of the cashier’s
checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13–14). Another proof that defendant
David is a holder in due course is the fact that the stop payment order on [the] FEBTC cashier’s check
was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24–25). The apparent
reason for lifting the stop payment order was because of the fact that FEBTC realized that the checks
were not actually lost but indeed reached the payee defendant David. 9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its
Order of September 20, 1995.

In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals,
docketed as CA-G.R. CV No. 52398.

CA
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:chanrob1es virtual
1aw library

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby
orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand
Pesos (P25,000.00).

SO ORDERED. 10

In affirming the trial court’s judgment with respect to herein respondent David, the appellate court
found that:chanrob1es virtual 1aw library

In this case, defendant-appellee had taken the necessary precautions to verify, through his bank,
China Banking Corporation, the genuineness of whether (sic) the cashier’s checks he received from
Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendant-
appellee had no notice of what had transpired earlier between the plaintiff-appellant and
Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he
had (sic) a transaction. Further on, David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to David, was acting as Yang’s agent.

David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in
the instrument(s) and defect of title of the holder. To mandate that each holder inquire about every
aspect on how the instrument came about will unduly impede commercial transactions, Although
negotiable instruments do not constitute legal tender, they often take the place of money as a means
of payment.

The mere fact that David and Chandiramani knew one another for a long time is not sufficient to
establish that they connived with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory. 11

The appellate court awarded P25,000.00 in attorney’s fees to PCIB as it found the action filed by Yang
against said bank to be "clearly unfounded and baseless." Since PCIB was compelled to litigate to
protect itself, then it was entitled under Article 2208 12 of the Civil Code to attorney’s fees and
litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:chanrob1es
virtual 1aw library

a WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;

b WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO

DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;

c WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION

OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

d WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES
AND ATTORNEY’S FEES. 13
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil
Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited
to reviewing questions of law, questions of fact are not entertained absent a showing that the factual
findings complained of are totally devoid of support in the record or are glaringly erroneous. 14 Given
the facts in the instant case, despite petitioner’s formulation, we find that the following are the
pertinent issues to be resolved:chanrob1es virtual 1aw library

a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder
in due course; and

b) Whether the appellate court committed a reversible error in awarding damages and attorney’s
fees to David and PCIB.

On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in
due course of the checks in question. While it is true that he was named the payee thereof, David
failed to inquire from Chandiramani about how the latter acquired possession of said checks. Given
his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the title of
Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were
crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v.
Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks
were issued for a definite purpose and accordingly, made inquiries to determine if he received the
checks pursuant to that purpose. His failure to do so negates the finding in the proceedings below
that he was a holder in due course.

Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any
consideration of value in exchange for the aforementioned checks.

Private respondent Fernando David counters that the evidence on record shows that when he
received the checks, he verified their genuineness with his bank, and only after said verification did he
deposit them. David stresses that he had no notice of previous dishonor or any infirmity that would
have aroused his suspicions, the instruments being complete and regular upon their face. David
stresses that the checks in question were cashier’s checks. From the very nature of cashier’s checks, it
is highly unlikely that he would have suspected that something was amiss. David also stresses
negotiable instruments are presumed to have been issued for valuable consideration, and he who
alleges otherwise must controvert the presumption with sufficient evidence. The petitioner failed to
discharge this burden, according to David. He points out that the checks were delivered to him as the
payee, and he took them as holder and payee thereof. Clearly, he concludes, he should be deemed to
be their holder in due course.

We shall now resolve the first issue.

Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this
presumption arises only in favor of a person who is a holder as defined in Section 191 of the
Negotiable Instruments Law, 15 meaning a "payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof."cralaw virtua1aw library

In the present case, it is not disputed that David was the payee of the checks in question. The weight
of authority sustains the view that a payee may be a holder in due course. 16 Hence, the presumption
that he is a prima facie holder in due course applies in his favor. However, said presumption may be
rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 52 17 of the Negotiable Instruments Law. All the
requisites provided for in Section 52 must concur in David’s case, otherwise he cannot be deemed a
holder in due course.

We find that the petitioner’s challenge to David’s status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David tendered any valuable consideration for the
disputed checks; and (2) David’s failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in David’s intentional ignorance tantamount to bad faith. In
sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing
David from being considered a holder in due course. Unfortunately for the petitioner, her arguments
on this score are less than meritorious and far from persuasive.

First, with respect to consideration, Section 24 18 of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a consideration 19 or for value.
20 Thus, the law itself creates a presumption in David’s favor that he gave valuable consideration for
the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got hold
of the checks absent said consideration. In other words, the petitioner must present convincing
evidence to overthrow the presumption. Our scrutiny of the records, however, shows that the
petitioner failed to discharge her burden of proof. The petitioner’s averment that David did not give
valuable consideration when he took possession of the checks is unsupported, devoid of any concrete
proof to sustain it. Note that both the trial court and the appellate court found that David did not
receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said
instruments. Factual findings of the Court of Appeals are conclusive on the parties and not reviewable
by this Court; they carry great weight when the factual findings of the trial court are affirmed by the
appellate court. 21

Second, petitioner fails to point any circumstance which should have put David on inquiry as to the
why and wherefore of the possession of the checks by Chandiramani. David was not privy to the
transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate
dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David
took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing
wrong with said checks. At that time, David was not aware of any "stop payment" order. Under
these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of
the latter’s title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him
guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was
something amiss about Chandiramani’s acquisition or possession of the checks. David did not close
his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani
upon the petitioner, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith. 22

Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below,
petitioner now claims that David should have been put on alert as the instruments in question were
crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at
least have inquired as to whether he was acquiring said checks for the purpose for which they were
issued, according to petitioner’s submission.

Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are
not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a
discount by the payee, while in the instant case, the payee did not negotiate further the checks in
question but promptly deposited them in his bank account.

The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce 23 makes reference to such instruments. Nonetheless, this Court has taken judicial
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 not converted into cash. 24 The effects of crossing a check, thus,
relates to the mode of payment, meaning that the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by
the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross
checks and paying cash for them, despite the warning of the crossing, the subsequent holder could
not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan Cigar
reiterates that in De Ocampo & Co. v. Gatchalian.25cralaw:red
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here,
there is no dispute that the crossed checks were delivered and duly deposited by David, the payee
named therein, in his bank account. In other words, the purpose behind the crossing of the checks
was satisfied by the payee.

Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are
not entitled to damages, attorney’s fees, and costs of suit as both acted in bad faith towards her, as
shown by her version of the facts which gave rise to the instant case.

Respondent David counters that he was maliciously and unceremoniously dragged into this suit for
reasons which have nothing to do with him at all, but which arose from petitioner’s failure to receive
her share of the profit promised her by Chandiramani. Moreover, in filing this suit which has lasted
for over a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to
which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his
rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing
as a person of good repute in the business community of Pampanga. David thus contends that it is but
proper that moral damages, attorney’s fees, and costs of suit be awarded him.

For its part, respondent PCIB stresses that it was established by both the trial court and the appellate
court that it was needlessly dragged into this case. Hence, no error was committed by the appellate
court in declaring PCIB entitled to attorney’s fees as it was compelled to litigate to protect itself.

We have thoroughly perused the records of this case and find no reason to disagree with the finding
of the trial court, as affirmed by the appellate court, that:chanrob1es virtual 1aw library

[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the plaintiff
and defendant Chandiramani. 26

A careful reading of the findings of facts made by both the trial court and appellate court clearly
shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong
tree. It is apparent from the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner
incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse
should have been against him and not against David. By needlessly dragging David into this case all
because he and Chandiramani knew each other, the petitioner not only unduly delayed David from
obtaining the value of the checks, but also caused him anxiety and injured his business reputation
while waiting for its outcome. Recall that under Article 2217 27 of the Civil Code, moral damages
include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation,
and similar injury. Hence, we find the award of moral damages to be in order.

The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and
baseless grounds. Both were thus compelled to litigate to protect their interests, which makes an
award of attorney’s fees justified under Article 2208 (2) 28 of the Civil Code. Hence, we rule that the
award of attorney’s fees to David and PCIB was proper.

WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.chanrob1es
virtua1 1aw 1ibrary

SO ORDERED.

Bellosillo, Austria-Martinez and Tinga, JJ., concur.

Callejo, Sr., J., is on leave.

ASIA BANKING CORPORATION, Plaintiff-Appellant, v. TEN SEN GUAN Y SOBRINOS and YU BIAO
SONTUA, Defendants-Appellees.

J. A. Wolfson for Appellant.

Crossfield & O’Brien for Appellees.

DECISION

STATEMENT

Plaintiff alleges that it is a foreign corporation duly licensed to do a banking business in the City of
Manila. That the defendant is a duly registered partnership with its principal office in the City of
Manila and is indebted to it in the sum of $10,475.51, with interest and exchange, for and on
account of a New York draft for that amount drawn by "Snow’s Ltd." on Ten Sen Guan payable
ninety days after sight. That the draft was duly endorsed, and that the plaintiff is the owner and
holder of it in due course of business. That demand therefor has been made and payment refused.
Wherefore, plaintiff prays for judgment against the defendants for the amount of the draft, with
interest thereon at the rate of 8 per cent annum from May 12, 1920, to the date of payment, plus
exchange at the rate of 14 per centum with costs. The complaint was filed August 4, 1921.

For answer, the defendants deny all of the material allegations of the complaint, except such as are
hereinafter admitted, and, as a further and separate defense, specifically deny that are indebted to
the plaintiff in the amount alleged or in any other sum, or that the plaintiff is the holder of the draft in
due course of business or for value. It is then alleged that on February 25, 1910, the defendants
ordered from "Snow’s, LTD." ten cases of mercerized batiste of the value $10,266.98 to be shipped
from New York freight prepaid to Manila where they were to be delivered to the defendants. That the
merchandise in question arrived in Manila about June 28,1920, at which time a draft for the amount
alleged drawn by "Snow’s, Ltd." against the defendants was presented to them through the plaintiff
as agent of Snow’s, Ltd." for acceptance. That the delivery of the bill of landing and other documents
relating to the merchandise was refused by the plaintiff until the draft was accepted by the
defendants, and that delivery was contingent upon the acceptance of the draft. That the defendants,
being assured by plaintiff, and believing that the merchandise described in the bill of lading was the
"batiste" ordered, accepted the draft and received delivery of the bill of lading and made entry of the
goods at the Customs House in Manila, and paid charges thereon amounting to P628.07; that when
the cases supposed to contain the "batiste" were opened they were found to contain "burlap" of little
value, which was not in any sense or manner the "batiste" ordered and guaranteed to be contained in
the cases. That immediately the defendants declined to receive the goods and left them in the
possession of the Customs authorities, and at once notified the plaintiff and returned to it the bill of
lading, and demanded that their acceptance of the draft be cancelled. That plaintiff accepted the
return of the bill of lading and documents, and agreed to cancel defendants’ acceptance of the draft,
for the reason that it was without consideration. Wherefore, defendants pray for judgment, with
costs.

The lower court found for the defendants for whom judgment was entered, and the plaintiff appeals,
claiming that the court erred in failing to make any findings of fact, in dismissing the complaint, and in
failing to render judgment for the plaintiff, and in the admission of parol evidence tending to vary the
terms of the written acceptance of the bill of exchange, that the plaintiff had cancelled defendants’
acceptance, that defendants were released, and in the admission of certain exhibits, and the denial of
plaintiff’s motion for a new trial.

JOHNS, J. :
The draft in question was endorsed by "Snow’s, Ltd." and, with the invoice, bill of lading and other
shipping documents, delivered to the plaintiff at its place of business in New York City from where and
by which it was sent to its Manila branch and presented to the defendants for acceptance. At first the
defendants refused to accept the draft, because the merchandise had not arrived and it had no
opportunity to inspect it. It is then claimed, and, in legal effect, the trial court found, that upon the
representation of the local bank that the draft was drawn for the ten cases of mercerized batiste in
question and that they would arrive, as ordered, June 28, 1920, the defendants accepted the draft,
and the plaintiff now claims that they are legally bound upon the acceptance, and that parol
testimony is not admissible to vary or contradict the force and effect of their legal liability as it
appears upon the face of the draft. It is undisputed that the defendants placed the order with
"Snow’s, Ltd." for ten cases of mercerized batiste, and that draft was drawn for the corresponding
value of ten cases of mercerized batiste, including incidental expenses. That when the cases
evidenced by the draft arrived and were examined, they were found to contain "burlap" only which
had but little, if any, commercial value, which the plaintiff was at once notified, and that the
defendants refused to received the goods. Plaintiff alleges that it is the holder of the draft for value
and in due course of business. The testimony upon that point is not clear or convincing, and is entitled
to but little weight. If it be a fact, as the plaintiff claims, that it was in good faith the purchaser of the
draft, it would have been a very easy matter to establish that fact by competent evidence, showing
the nature of the transaction in its New York office, when and how it acquired the draft and when and
to whom it paid the money and how much it paid the money and how much it paid and by whom it
was actually paid. In other words, to give an authentic account of the whole transactions. There is no
such evidence in the record. Upon that point the plaintiff was content to call a local employee of the
bank who testified as to the alleged meaning of certain entries made in the bank records. Standing
alone that is not sufficient or competent to show that standing alone that is not sufficient or
competent to show that the bank in New York was the purchaser and holder for value. If it be a fact,
as the evidence tends to show, that the plaintiff is not a bona fide holder of the draft, and that it was
held for collection only, it follows that the defendants would have a right to make any defense to the
draft which would have a right to make against "Snow’s Ltd."cralaw virtua1aw library

The trial court found and the evidenced sustains the finding that the acceptance of the draft by the
defendants was conditional, and that oral evidence was admissible to explain the terms and
conditions of the acceptance. That would specially be true where the plaintiff held the draft for
collection. It also found, in legal effect, that the plaintiff released and discharged the defendants from
any liability upon the draft, and the evidence sustains that finding. It will be noted that the original
draft was dated May 12, 1920, payable ninety days after sight, and that it was accepted by the
defendants on June 28, 1920, and that the complaint was filed on August 4, 1921, more than fourteen
months after it was accepted and almost one year after it became due.

We are not impressed with plaintiff’s case on the merits. The record indicates that in truth and in fact
the plaintiff held the draft for collection; that relying upon the statements and representations of the
plaintiff, the defendants conditionally accepted the draft; that immediately upon discovery of the
fraud the defendants promptly notified the bank. Its then officials recognized the fraud and the
conditional acceptance of the draft, and accepted the return of the papers and the "burlap," and
agreed to release the defendants from all liability. There is no merit in plaintiffs claim that it is an
innocent holder for value.

The judgment is affirmed, with costs. So ordered.

Araullo, C.J., Malcolm, Avanceña, Villamor, Ostrand, and Romualdez, JJ., concur.

RCBC SAVINGS BANK, Petitioner, v. NOEL M. ODRADA, Respondent.

DECISION
CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari1 assailing the 26 March 2014 Decision2 and the
18 June 2015 Resolution3 of the Court of Appeals in CA-G.R. CV No. 94890.

The Facts

In April 2002, respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero (Montero)
to Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand Pesos (P1,510,000). Of the total
consideration, Six Hundred Ten Thousand Pesos (P610,000) was initially paid by Lim and the balance
of Nine Hundred Thousand Pesos (P900,000) was financed by petitioner RCBC Savings Bank (RCBC)
through a car loan obtained by Lim.4 As a requisite for the approval of the loan, RCBC required Lim to
submit the original copies of the Certificate of Registration (CR) and Official Receipt (OR) in his name.
Unable to produce the Montero's OR and CR, Lim requested RCBC to execute a letter addressed to
Odrada informing the latter that his application for a car loan had been approved.

On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to Odrada upon
submission of the OR and CR. Following the letter and initial down payment, Odrada executed a Deed
of Absolute Sale on 9 April 2002 in favor of Lim and the latter took possession of the
Montero.5chanrobleslaw

When RCBC received the documents, RCBC issued two manager's checks dated 12 April 2002 payable
to Odrada for Nine Hundred Thousand Pesos (P900,000) and Thirteen Thousand Five Hundred Pesos
(P13,500).6 After the issuance of the manager's checks and their turnover to Odrada but prior to the
checks' presentation, Lim notified Odrada in a letter dated 15 April 2002 that there was an issue
regarding the roadworthiness of the Montero. The letter states:

chanRoblesvirtualLawlibrary
April 15, 2002

Mr. Noel M. Odrada

C/o Kotse Pilipinas
Fronting Ultra, Pasig City

Thru: Shan Mendez;.

Dear Mr. Odrada,

Please be inform[ed] that I am going to cancel or exchange the (1) one unit Montero that you sold to
me thru Mr. Shan Mendez because it did not match your representations the way Mr. Shan Mendez
explained to me like:ChanRoblesVirtualawlibrary
1. You told me that the said vehicle has not experience [d] collision. However, it is hidden, when you
open its engine cover there is a trace of a head-on collision. The condenser is smashed,; the fender
support is not align[ed], both bumper supports] connecting [the] chassis were crippled and welded,
the hood support was repaired, etc.

2. The 4-wheel drive shift is not functioning. When Mr. Mendez was asked about it, he said it would
not function until you can reach the speed of 30 miles.

3. During Mr. Mendez['s] representation, he said the odometer has still an original mileage data but
found tampered.

4. You represented the vehicle as model 1998 however; it is indicated in the front left A-pillar
inscribed at the identification plate [as] model 1997.
Therefore, please show your sincerity by personally inspecting the said vehicle at RCBC, Pacific Bldg.
Pearl Drive, Ortigas Center, Pasig City. Let us meet at the said bank at 10:00 A.M., April 17, 2002.

Meanwhile, kindly hold or do not encash the manager's check[s] issued to you by RCBC until you have
clarified and satisfied my complaints.

Sincerely yours,

Teodoro L. Lim

Cc: Dario E. Santiago, RCBC loan

Legal7
Odrada did not go to the slated meeting and instead deposited the manager's checks with
International Exchange Bank (Ibank) on 16 April 2002 and redeposited them on 19 April 2002 but the
checks were dishonored both times apparently upon Lim's instruction to RCBC.8 Consequently,
Odrada filed a collection suit9 against Lim and RCBC in the Regional Trial Court of
Makati.10chanrobleslaw

In his Answer,11 Lim alleged that the cancellation of the loan was at his instance, upon discovery of
the misrepresentations by Odrada about the Montero's roadworthiness. Lim claimed that the
cancellation was not done ex parte but through a letter12 dated 15 April 2002.13 He further alleged
that the letter was delivered to Odrada prior to the presentation of the manager's checks to
RCBC.14chanrobleslaw

On the other hand, RCBC contended that the manager's checks were dishonored because Lim had
cancelled the loan. RCBC claimed that the cancellation of the loan was prior to the presentation of the
manager's checks. Moreover, RCBC alleged that despite notice of the defective condition of the
Montero, which constituted a failure of consideration, Odrada still proceeded with presenting the
manager's checks.

It was later disclosed during trial that RCBC also sent a formal notice of cancellation of the loan on 18
April 2002 to both Odrada and Lim.15chanrobleslaw

The Regional Trial Court's Ruling

In its Decision16 dated 1 October 2009, the trial court ruled in favor of Odrada. The trial court held
that Odrada was the proper party to ask for rescission.17 The lower court reasoned that the right of
rescission is implied in reciprocal obligations where one party fails to perform what is incumbent upon
him when the other is willing and ready to comply. The trial court ruled that it was not proper for Lim
to exercise the right of rescission since Odrada had already complied with the contract of sale by
delivering the Montero while Lim remained delinquent in payment.18 Since Lim was not ready,
willing, and able to comply with the contract of sale, he was not the proper party entitled to rescind
the contract.

The trial court ruled that the defective condition of the Montero was not a supervening event that
would justify the dishonor of the manager's checks. The trial court reasoned that a manager's check is
equivalent to cash and is really the bank's own check. It may be treated as a promissory note with the
bank as maker. Hence, the check becomes the primary obligation of the bank which issued it and
constitutes a written promise to pay on demand.19 Being the party primarily liable, the trial court
ruled that RCBC was liable to Odrada for the value of the manager's checks.

Finally, the trial court found that Odrada suffered sleepless nights, humiliation, and was constrained
to hire the services of a lawyer meriting the award of damages.20chanrobleslaw

The dispositive portion of the Decision reads:

chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered:ChanRoblesVirtualawlibrary
(a) Directing defendant RCBC to pay plaintiff the amount of Php 913,500.00 representing the cash
equivalent of the two (2) manager's checks, plus 12% interest from the date of filing of the case until
fully paid;

(b) Directing defendants to solidarity pay moral damages in the amount of Php 500,000.00 and
exemplary damages in the amount of Php 500,000.00;

(c) Directing defendants to solidarity pay attorney's fees in the amount of Php 300,000.00.
Finally, granting the cross-claim of defendant RCBC, Teodoro L. Lim is hereby directed to indemnify
RCBC Savings Bank for the amount adjudged for it to pay plaintiff.

SO ORDERED.21

RCBC and Lim appealed from the trial court's decision.

The Court of Appeals' Ruling

In its assailed 26 March 2014 Decision, the Court of Appeals dismissed the appeal and affirmed the
trial court's 1 October 2009 Decision.

The Court of Appeals ruled that the two manager's checks, which were complete and regular, reached
the hands of Lim who deposited the same in his bank account with Ibank. RCBC knew that the amount
reflected on the manager's checks represented Lim's payment for the remaining balance of the
Montero's purchase price. The appellate court held that when RCBC issued the manager's checks in
favor of Odrada, RCBC admitted the existence of the payee and his then capacity to endorse, and
undertook that on due presentment the checks which were negotiable instruments would be
accepted or paid, or both according to its tenor.22 The appellate court held that the effective delivery
of the checks to Odrada made RCBC liable for the checks.23chanrobleslaw

On RCBC's defense of want of consideration, the Court of Appeals affirmed the finding of the trial
court that Odrada was a holder in due course. The appellate court ruled that the defense of want of
consideration is not available against a holder in due course.24chanrobleslaw

Lastly, the Court of Appeals found that the award of moral and exemplary damages and attorney's
fees was excessive. Hence, modification was proper.

The dispositive portion of the Decision reads:

chanRoblesvirtualLawlibrary
WHEREFORE, the impugned Decision of the court a quo in Civil Case No. 02-453 is hereby AFFIRMED
with MODIFICATION insofar as the reduction of awards for moral, exemplary damages and attorney's
fees to P50,000.00, P20,000.00, and P20,000.00 respectively.

SO ORDERED.25cralawred

RCBC and Lim filed a motion for reconsideration26 on 28 April 2014. In its 18 June 2015 Resolution,
the Court of Appeals denied the motion for lack of merit.27chanrobleslaw

RCBC alone28 filed this petition before the Court. Thus, the decision of the Court of Appeals became
final and executory as to Lim.

The Issues

RCBC presented the following, issues in this petition:

chanRoblesvirtualLawlibrary
A. The court a quo gravely erred in finding that as between Odrada as seller and Lim as buyer of the
vehicle, only the former has the right to rescind the contract of sale finding failure to perform an
obligation under the contract of sale on the part of the latter only despite the contested
roadworthiness of the vehicle, subject matter of the sale.
1. Whether or not the court a quo erred in holding that Lim cannot cancel the auto loan despite the
failure in consideration due to the contested roadworthiness of the vehicle delivered by Odrada to
him.29
B. The court a quo gravely erred when it found that Odrada is a holder in due course of the manager's
checks in question despite being informed of the cancellation of the auto loan by the borrower, Lim.
1. Whether or not Lim can validly countermand the manager's checks in the hands of a holder who
does not hold the same in due course.30

Odrada failed to file a comment31 within the period prescribed by this Court.32chanrobleslaw

The Ruling of this Court

We grant the petition.

Under the law on sales, a contract of sale is perfected the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price which is the consideration. From
that moment, the parties may reciprocally demand performance.33 Performance may be done
through delivery, actual or constructive. Through delivery, ownership is transferred to the vendee.34
However, the obligations between the parties do not cease upon delivery of the subject matter. The
vendor and vendee remain concurrently bound by specific obligations. The vendor, in particular, is
responsible for an implied warranty against hidden defects.

Article 1547 of the Civil Code states: "In a contract of sale, unless a contrary intention appears, there
is an implied warranty that the thing shall be free from any hidden faults or defects."35 Article 1566
of the Civil Code provides that "the vendor is responsible to the vendee for any hidden faults or
defects in the thing sold, even though he was not aware thereof."36 As a consequence, the law fixes
the liability of the vendor for hidden defects whether known or unknown to him at the time of the
sale.

The law defines a hidden defect as one which would render the thing sold unfit for the use for which
it is intended, or would 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.37chanrobleslaw

In this case, Odrada and Lim entered into a contract of sale of the Montero. Following the initial
downpayment and execution of the deed of sale, the Montero was delivered by Odrada to Lim and
the latter took possession of the Montero. Notably, under the law, Odrada's warranties against
hidden defects continued even after the Montero's delivery. Consequently, a misrepresentation as to
the Montero's roadworthiness constitutes a breach of warranty against hidden defects.

In Supercars Management & Development Corporation v. Flores,38 we held that a breach of warranty
against hidden defects occurred when the vehicle, after it was delivered to respondent,
malfunctioned despite repairs by petitioner.39 In the present case, when Lim acquired possession, he
discovered that the Montero was not roadworthy. The engine was misaligned, the automatic
transmission was malfunctioning, and the brake rotor disks needed refacing.40 However, during the
proceedings in the trial court, Lim's testimony was stricken off the record because he failed to appear
during cross-examination.41 In effect, Lim was not able to present clear preponderant evidence of the
Montero's defective condition.

RCBC May Refuse to Pay Manager's Checks

We address the legal question of whether or not the drawee bank of a manager's check has the
option of refusing payment by interposing a personal defense of the purchaser of the manager's
check who delivered the check to a third party.
In resolving this legal question, this Court will examine the nature of a manager's check and its
relation to personal defenses under the Negotiable Instruments Law.42chanrobleslaw

Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the bank itself
and accepted in advance by the bank by the act of its issuance.43 It is really the bank's own check and
may be treated as a promissory note with the bank as its maker.44 Consequently, upon its purchase,
the check becomes the primary obligation of the bank and constitutes its written promise to pay the
holder upon demand.45 It is similar to a cashier's check46 both as to effect and use in that the bank
represents that the check is drawn against sufficient funds.47chanrobleslaw

As a general rule, the drawee bank is not liable until it accepts.48 Prior to a bill's acceptance, no
contractual relation exists between the holder49 and the drawee. Acceptance, therefore, creates a
privity of contract between the holder and the drawee so much so that the latter, once it accepts,
becomes the party primarily liable on the instrument.50 Accordingly, acceptance is the act which
triggers the operation of the liabilities of the drawee (acceptor) under Section 6251of the Negotiable
Instruments Law. Thus, once he accepts, the drawee admits the following: (a) existence of the drawer;
(b) genuineness of the drawer's signature; (c) capacity and authority of the drawer to draw the
instrument; and (d) existence of the payee and his then capacity to endorse.

As can be gleaned in a long line of cases decided by this Court, a manager's check is accepted by the
bank upon its issuance. As compared to an ordinary bill of exchange where acceptance occurs after
the bill is presented to the drawee, the distinct feature of a manager's check is that it is accepted in
advance. Notably, the mere issuance of a manager's check creates a privity of contract between the
holder and the drawee bank, the latter primarily binding itself to pay according to the tenor of its
acceptance.

The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a holder in
due course irrespective of any available personal defenses. However, while this Court has consistently
held that a manager's check is automatically accepted, a holder other than a holder in due course is
still subject to defenses. In International Corporate Bank v. Spouses Gueco,52 which involves a
delivered manager's check, the Court still considered whether the check had become stale:

chanRoblesvirtualLawlibrary
It has been held that, if the check had become stale, it becomes imperative that the circumstances
that caused its non-presentment be determined. In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the bank.53

In International Corporate Bank, this Court considered whether the holder presented the manager's
check within a reasonable time after its issuance - a circumstance required for holding the instrument
in due course.54chanrobleslaw

Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation,55 the Court
observed that the mere issuance of a manager's check does not ipso facto work as an automatic
transfer of funds to the account of the payee.56 In order for the holder to acquire title to the
instrument, there still must have been effective delivery. Accordingly, the Court, taking exception to
the manager's check automatic transfer of funds to the payee, declared that: "the doctrine that the
deposit represented by a manager's check automatically passes to the payee is inapplicable, because
the instrument - although accepted in advance remains undelivered."57 This Court ruled that the
holder did not acquire the instrument in due course since title had not passed for lack of
delivery.58chanrobleslaw

We now address the main legal question: if the holder of a manager's check is not a holder in due
course, can the drawee bank interpose a personal defense of the purchaser?
Our rulings in Mesina v. Intermediate Appellate Court59 and United Coconut Planters Bank v.
Intermediate Appellate Court60 shed light on the matter.

In Mesina, Jose Go purchased a manager's check from Associated Bank. As he left the bank, Go
inadvertently left the check on top of the desk of the bank manager. The bank manager entrusted the
check for safekeeping to another bank official who at the time was attending to a customer named
Alexander Lim.61 After the bank official answered the telephone and returned from the men's room,
the manager's check could no longer be found. After learning that his manager's check was missing,
Go immediately returned to the bank to give a stop payment order on the check. A third party named
Marcelo Mesina deposited the manager's check with Prudential Bank but the drawee bank sent back
the manager's check to the collecting bank with the words "payment stopped." When asked how he
obtained the manager's check, Mesina claimed it was paid to him by Lim in a "certain
transaction."62chanrobleslaw

While this Court acknowledged the general causes and effects of a manager's check, it noted that
other factors were needed to be considered, namely the manner by which Mesina acquired the
instrument. This Court declared:

chanRoblesvirtualLawlibrary
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and
effects of a cashier's check such as (1) it cannot be countermanded in the hands of a holder in due
course and (2) a cashier's check is a bill of exchange drawn by the bank against itself - are general
principles which cannot be aptly applied to the case at bar, without considering other things.
Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or
value as shown by the established facts of the case. Admittedly, petitioner became the holder of the
cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why it
was passed to him. He had therefore notice of the defect of his title over the check from the start.63

Ultimately, the notice of defect affected Mesina's claim as a holder of the manager's check. This Court
ruled that the issuing bank could validly refuse payment because Mesina was not a holder in due
course. Unequivocally, the Court declared: "the holder of a cashier's check who is not a holder in due
course cannot enforce such check against the issuing bank which dishonors the
same."64chanrobleslaw

In the same manner, in United Coconut Planters Bank (UCPB),65 this Court ruled that the drawee
bank was legally justified in refusing to pay the holder of a manager's check who did not hold the
check in due course. In UCPB, Altiura Investors, Inc. purchased a manager's check from UCPB, which
then issued a manager's check in the amount of Four Hundred Ninety Four Thousand Pesos
(P494,000) to Makati Bel-Air Developers, Inc. The manager's check represented the payment of
Altiura Investors, Inc. for a condominium unit it purchased from Makati Bel-Air Developers, Inc.
Subsequently, Altiura Investors, Inc. instructed UCPB to hold payment due to material
misrepresentations by Makati Bel-Air Developers, Inc. regarding the condominium unit.66 Pending
negotiations; and while the stop payment order was in effect, Makati Bel-Air Developers, Inc. insisted
that UCPB pay the value of the manager's check. UCPB refused to pay and filed an interpleader to
allow Altiura Investors, Inc. and Makati Bel-Air Developers, Inc. to litigate their respective claims.
Makati Bel-Air Developers, Inc. also filed a counterclaim against UCPB in the amount of Five Million
Pesos (P5,000,000) based on UCPB's violation of its warranty on its manager's check.67chanrobleslaw

In upholding UCPB's refusal to pay the value of the manager's check, this Court reasoned that Makati
Bel-Air Developers, Inc.'s title to the instrument became defective when there arose a partial failure
of consideration.68 We held that UCPB could validly invoke a personal defense of the purchaser
against Makati Bel-Air Developers, Inc. because the latter was not a holder in due course of the
manager's check:

chanRoblesvirtualLawlibrary
There are other considerations supporting the conclusion reached by this Court that respondent
appellate court had committed reversible error. Makati Bel-Air was a party to the contract of sale of
an office condominium unit to Altiura, for the payment of which the manager's check was issued.
Accordingly, Makati Bel-Air was fully aware, at the time it had received the manager's check, that
there was, or had arisen, at least partial failure of consideration since it was unable to comply with its
obligation to deliver office space amounting to 165 square meters to Altiura. Makati Bel-Air was also
aware that petitioner Bank had been informed by Altiura of the claimed defect in Makati Bel-Air's title
to the manager's check or its right to the proceeds thereof. Vis-a-vis both Altiura and petitioner Bank,
Makati Bel-Air was not a holder in due course of the manager's check.69

The foregoing rulings clearly establish that the drawee bank of a manager's check may interpose
personal defenses of the purchaser of the manager's check if the holder is not a holder in due course.
In short, the purchaser of a manager's check may validly countermand payment to a holder who is not
a holder in due course. Accordingly, the drawee bank may refuse to pay the manager's check by
interposing a personal defense of the purchaser. Hence, the resolution of the present case requires a
determination of the status of Odrada as holder of the manager's checks.

In this case, the Court of Appeals gravely erred when it considered Odrada as a holder in due course.
Section 52 of the Negotiable Instruments Law defines a holder in due course as one who has taken
the instrument under the following conditions:

chanRoblesvirtualLawlibrary
(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. (Emphasis supplied)

To be a holder in due course, the law requires that a party must have acquired the instrument in good
faith and for value.

Good faith means that the person taking the instrument has acted with due honesty with regard to
the rights of the parties liable on the instrument and that at the time he,took the instrument, the
holder has no knowledge of any defect or infirmity of the instrument.70 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 would amount to bad faith.71chanrobleslaw

Value, on the other hand, is defined as any consideration sufficient to support a simple
contract.72chanrobleslaw

In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a day after
Lim had informed him that there was a serious problem with the Montero. Instead of addressing the
issue, Odrada decided to deposit the manager's checks. Odrada's actions do not amount to good
faith. Clearly, Odrada failed to make an inquiry even when the circumstances strongly indicated that
there arose, at the very least, a partial failure of consideration due to the hidden defects of the
Montero. Odrada's action in depositing the manager's checks despite knowledge of the Montero's
defects amounted to bad faith. Moreover, when Odrada redeposited the manager's checks on 19
April 2002, he was already formally notified by RCBC the previous day of the cancellation of Lim's auto
loan transaction. Following UCPB,73 RCBC may refuse payment by interposing a personal defense of
Lim - that the title of Odrada had become defective when there arose a partial failure or lack of
consideration.74chanrobleslaw

RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified RCBC
of the defective condition of the Montero before Odrada presented the manager's checks.75 Lim
informed RCBC of the hidden defects of the Montero including a misaligned engine, smashed
condenser, crippled bumper support, and defective transmission. RCBC also received a formal notice
of cancellation of the auto loan from Lim and this prompted RCBC to cancel the manager's checks
since the auto loan was the consideration for issuing the manager's checks. RCBC acted in good faith
in stopping the payment of the manager's checks.

Section 58 of the Negotiable Instruments Law provides: "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, x x x." Since Odrada was not a holder in due course, the instrument becomes subject to
personal defenses under the Negotiable Instruments Law. Hence, RCBC may legally act on a
countermand by Lim, the purchaser of the manager's checks.

Lastly, since Lim's testimony involving the Montero's hidden defects was stricken off the record by the
trial court, Lim failed to prove the existence of the hidden defects and thus Lim remains liable to
Odrada for the purchase price of the Montero. Lim's failure to file an appeal from the decision of the
Court of Appeals made the decision of the appellate court final and executory as to Lim. RCBC cannot
be made liable because it acted in good faith in carrying out the stop payment order of Lim who
presented to RCBC the complaint letter to Odrada when Lim issued the stop payment order.

WHEREFORE, we GRANT the petition. We REVERSE and SET ASIDE the 26 March 2014 Decision and
the 18 June 2015 Resolution of the Court of Appeals in CA-G.R. CV No. 94890 only insofar as RCBC
Savings Bank is concerned.

SO ORDERED.chanRoblesvirtualLawlibrary