G.R. No.

L-15380             September 30, 1960

CHAN WAN, plaintiff-appellant,
vs.
TAN KIM and CHEN SO, defendants-appellees.

Manuel Domingo for appellant.

C.M. de los Reyes for appellees.

BENGZON, J.:

This suit to collect eleven checks totalling P4,290.00 is here for decision
because it involves no issue of fact.

Such checks payable to "cash or bearer" and drawn by defendant Tan Kim
(the other defendant is her husband) upon the Equitable Banking Corporation,
were all presented for payment by Chan Wan to the drawee bank, but
they "were all dishonored and returned to him unpaid due to insufficient funds
and/or causes attributable to the drawer."

At the hearing of the case, in the Manila court of first instance, the plaintiff
did not take the witness stand. His attorney, however, testified only to
identify the checks — which are Exhibits A to K — plus the letters of
demand upon defendants.

On the other hand, Tan Kim declared without contradiction that the
checks had been issued to two persons named Pinong and Muy for
some shoes the former had promised to make and "were intended as
mere receipts".

In view of such circumstances, the court declined to order payment for two
principal reasons: (a) plaintiff failed to prove he was a holder in due
course, and (b) the checks being crossed checks should not have been
deposited instead with the bank mentioned in the crossing.

It may be stated in this connection, that defendants asserted a counterclaim,

the court dismissed it for failure of proof, and from such dismissal they did
not appeal.

The only issue is, therefore, the plaintiff's right to collect on the
eleven commercial documents.

The Negotiable Instruments Law regulating the issuance of negotiable checks,

the rights and the liabilities arising therefrom, does not mention "crossed
checks". Art. 541 of the Code of Commerce refers to such
instruments. 1 The bills of Exchange Act of England of 1882, contains several
provisions about them, some of which are quoted in the margin.  2 In the Philippine
National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz., 222, we applied some
provisions of said Bills of Exchange Act because the Negotiable Law, originating from
England and codified in the United States, permits resort thereto in matters not covered
by it and local legislation.3
Eight of the checks here in question bear across their face two parallel transverse lines
between which these words are written: non-negotiable — China Banking
Corporation. These checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for payment by China
Banking, and not by Chan Wan.4 Inasmuch as Chan Wan did present them for payment
himself — the Manila court said — there was no proper presentment, and the liability did
not attach to the drawer.

We agree to the legal premises and conclusion. It must be remembered, at this point,
that the drawer in drawing the check engaged that "on due presentment, the check would
be paid, and that if it be dishonored . . . he will pay the amount thereof to the
holder".5 Wherefore, in the absence of due presentment, the drawer did not become
liable.

Nevertheless we find, on the backs of the checks, endorsements which apparently show
they had been deposited with the China Banking Corporation and were, by the latter,
presented to the drawee bank for collection. For instance, on the back of the check
Exhibit A (same as in Exh. B), this endorsement appears:

For deposit to the account of White House Shoe Supply with the China Banking
Corporation.

and then this:

Cleared through the clearing office of Central Bank of the Philippines. All prior
endorsements and/or lack of endorsements guaranteed. China Banking Corporation.

And on the back of Exh. G:

For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's
Shoe Company.

followed by the endorsement of China Banking Corporation as in Exhibits A and B. All the
crossed checks have the "clearance" endorsement of China Banking Corporation.

These circumstances would seem to show deposit of the checks with China Banking
Corporation and subsequent presentation by the latter through the clearing office; but as
drawee had no funds, they were unpaid and returned, some of them stamped
"account closed". How they reached his hands, plaintiff did not indicate. Most
probably, as the trial court surmised, — this is not a finding of fact — he got them after
they had been thus returned, because he presented them in court with such "account
closed" stamps, without bothering to explain. Naturally and rightly, the lower court
held him not to be a holder in due course under the circumstances, since he knew,
upon taking them up, that the checks had already been dishonored.6

Yet it does not follow as a legal proposition, that simply because he was not a holder in
due course Chan Wan could not recover on the checks. The Negotiable Instruments
Law does not provide that a holder7 who is not a holder in due course, may not in
any case, recover on the instrument. If B purchases an overdue negotiable promissory
note signed by A, he is not a holder in due course; but he may recover from A,8 if the
latter has no valid excuse for refusing payment. The only disadvantage of holder who is
not a holder in due course is that the negotiable instrument is subject to defense as if it
were non- negotiable.9
Now what defense did the defendant Tan Kim prove? The lower court's decision does not
mention any; evidently His Honor had in mind the defense pleaded in defendant's
answer, but though it unnecessary to specify, because the "crossing" and presentation
incidents sufficed to bar recovery, in his opinion.
1awphîl.nèt

Tan Kim admitted on cross-examination either that the checks had been issued as
evidence of debts to Pinong and Muy, and/or that they had been issued in payment
of shoes which Pinong had promised to make for her.

Seeming to imply that Pinong had to make the shoes, she asserted Pinong had
"promised to pay the checks for me". Yet she did not complete the idea, perhaps
because she was just answering cross- questions, her main testimony having referred
merely to their counter-claim.

Needless to say, if it were true that the checks had been issued in payment for shoes that
were never made and delivered, Tan Kim would have a good defense as against a
holder who is not a holder in due course. 10 (CONSIDERATION ISSUE)

Considering the deficiency of important details on which a fair adjudication of the parties'
right depends, we think the record should be and is hereby returned, in the interest of
justice, to the court below for additional evidence, and such further proceedings as are
not inconsistent with this opinion. With the understanding that, as defendants did not
appeal, their counterclaim must be and is hereby definitely dismissed. So ordered.

Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Gutierrez David, Paredes and Dizon, JJ., concur.

G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE
PHILIPPINES, INC., respondent.

NARVASA, c.J.:

Stelco Marketing Corporation is engaged in the distribution and sale to the

public of structural steel bars.   On seven (7) different occasions in September and
1

October, 1980, it sold to RYL Construction, Inc. quantities of steels bars of various sizes
and rolls of G.I. wire. These bars and wire were delivered at different places at the
indication of RYL Construction, Inc. The aggregate price for the purchases was
P126,859.61.

Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD"
(cash on delivery), the latter made no payments for the construction materials thus
ordered and delivered despite insistent demands for payment by the former.

On April 4, 1981, RYL gave to Armstrong, Industries — described by STELCO as its

"sister corporation" and "manufacturing arm"   — a check drawn against Metrobank in the
2

amount of P126,129.86, numbered 765380 and dated April 4, 1981. That check was a
company check of another corporation, Steelweld Corporation of the Philippines, signed
by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres.

The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of
RYL. Romeo Lim had asked Limson, for financial assistance, and the latter had agreed to
give Lim a check only by way of accommodation, "only as guaranty but not to pay for
anything."   Why the check was made out in the amount of P126,129.86 is not explained.
3

Anyway, the check was actually issued in said amount of P126, 129.86, and as already
stated, was given by R.Y. Lim to Armstrong Industries,   in payment of an obligation.
4

When the latter deposited the check at its bank, it was dishonored because "drawn
against insufficient funds."   When so deposited, the check bore two(2) endorsements,
5

that of "RYL Construction," followed by that of "Armstrong Industries."  6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of

Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were
charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang
22.   They were acquitted in a decision rendered on June 28, 1984 "on the ground that
7

the check in question was not issued by the drawer "to apply on account for value," it
being merely for accommodation purposes. 8 The judgment however conditioned the acquittal with the
following pronouncement:

This is not however to release Steelweld Corporation from its liability under Sec. 29 of the
Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim.

Eleven months or so later — and some four (4) years after issuance of the check in
question — in May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a
civil complaint   against both RYL and STEELWELD for the recovery of the valued of the
9

steel bars and wire sold to and delivered to RYL (as already narrated) in the amount of
P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total amount
sought to be recovered as and by way of attorney's fees . . . ."   Among the allegations of
10

its complaint was that Metrobank Check No. 765380 above mentioned had been given to
it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim.   A preliminary 11

attachment was issued by the trial court on the basis of the averments of the complaint
but was shortly dissolved upon the filing of a counter-bond by STEELWELD.

RYL could no longer be located and could not be served with

summons.   It never appeared. Only STEELWELD filed an answer, under date of July 16,
12

1985.   In said pleading, it specifically denied the facts alleged in the complaint, the truth,
13

according to Steelweld, being basically that —

1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or
business dealing of any kind" with STELCO, the transactions described in the complaint
having been solely and exclusively between the plaintiff and RYL Construction;

2) the check in question was "only given to a certain R. Lim to be used as collateral for
another obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the
check for another purpose. . . .;

3) nevertheless, the check "is wholly inoperative since . . . Steelweld

. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to
mention also the fact that the said plaintiff failed to comply with the requirements of the
law to hold the said defendant (STEELWELD) liable
. . ."

Trial ensued upon these issues, after which judgment was rendered on June 26,
1986.   The judgment sentenced "the defendant Steelweld Corporation to pay to . . .
14
(Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest from
May 9, 1985, when this case was instituted until fully paid, plus another sum equivalent to
25% of the total amount due as and for attorney's fees . . .   That disposition was justified
15

in the judgment as follows:16

There is no question, then, that as far as any commercial transaction is concerned

between plaintiff and defendant Steelweld no such transaction ever occurred. Ordinarily,
under civil law rules, there having been no transaction between them involving the
purchase of certain merchandise there would be no privity of contract between them, and
plaintiff will have no right to sue the defendant for payment of said merchandise for the
simple reason that the defendant did not order them, such less receive them.

But we have here a case where the defendant Steelweld thru its President Peter Rafael
Limson admitted to have issued a check payable to cash in favor of his friend Romeo Lim
who was the President of RYL Construction by way of accommodation. Under the
Negotiable Instruments Law an accommodation party is liable.

Sec. 29. Liability of an accommodation party. — An accommodation party is one who has

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

From this adverse judgment STEELWELD appealed to the Court of Appeals   and there17

succeeded in reversing the judgment. By Decision promulgated on May 29, 1990,   the 18

Court of Appeals   ordered "the complaint against appellant (STEELWELD) DISMISSED;

19

(and the appellee, STELCO) to pay appellant the sum of P15,000.00 as attorney's fees
and cost of litigation, the suit . . . (being) a baseless one that dragged appellant in court
and caused it to incur attorney's fees and expense of litigation.

STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution
dated November 13, 1990.   The Court stressed that —
20

. . . as far as Steelweld is concerned, there was no commercial transaction between said

appellant and appellee. Moreover, there is no evidence that appellee Stelco Marketing
became a holder for value. Nowhere in the check itself does the name of Stelco
Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's complaint is
for the collection of the unpaid accounts for delivery of steels bars and construction
materials. It having been established that appellee had no commercial transaction with
appellant Stelco, appellee had no cause of action against said appellant.

STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this
Court it seeks to make the following points in connection with its plea for the overthrow of
the Appellate Tribunal's aforesaid decision, viz.:

1) said decision is "not in accord with law and jurisprudence;"

2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"

3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence)
holds the same free from personal or equitable defense;" and

4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as

against a holder in due course."
The points are not well taken.

The crucial question is whether or not STELCO ever became a holder in due course of
Check No. 765380, a bearer instrument, within the contemplation of the Negotiable
Instruments Law. It never did.

STELCO evidently places much reliance on the pronouncement of the Regional Trial
Court in Criminal Case No. 66571,   that the acquittal of the two (2) accused (Limson and
21

Torres) did not operate "to release Steelweld Corporation from its liability under Sec. 29
of the Negotiable Instruments Law for having issued . . . (the check) for the
accommodation of Romeo Lim." The cited provision reads as follows:

Sec. 29. Liability of accommodation party. — An accommodation party is one who has

singed the instrument as maker, drawer, acceptor, or indorser, without receiving valued
therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.

It is noteworthy that the Trial Court's pronouncement containing reference to said Section
29 did not specify to whom STEELWELD, as accommodation party, is supposed to be
liable; and certain it is that neither said pronouncement nor any other part of the
judgment of acquittal declared it liable to STELCO.

"A holder in due course," says the law,   "is a holder who has taken the instrument under
22

the following conditions:

(a) That 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 persons negotiating it.

To be sure, as regards an accommodation party (such as STEELWELD), the fourth

condition, i.e., lack of notice of any infirmity in the instruments or defect in title of the
persons negotiating it, has no application. This is because Section 29 of the law above
quoted preserves the right of recourse of a "holder for value" against the accommodation
party notwithstanding that "such holder, at the time of taking the instrument, knew him to
be only an accommodation
party." 
23

Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's
Check No. 765380 because the record shows it to have been in "actual possession"
thereof; otherwise, it "could not have presented, marked and introduced (said check) in
evidence . . . before the court a quo." "Besides," it adds, the check in question was
presented by STELCO to the drawee bank for payment through Armstrong Industries, the
manufacturing arm of STELCO and its sister company."  24

The trouble is, there is no evidence whatever that STELCO's possession of Check No.
765380 ever dated back to nay time before the instrument's presentment and dishonor.
There is no evidence whatsoever that the check was ever given to it, or indorsed to it in
any manner or form in payment of an obligation or as security for an obligation, or for any
other purpose before it was presented for payment. On the contrary, the factual finding of
the Court of Appeals, which by traditional precept is normally conclusive on this Court, is
that STELCO never became a holder for value and that "(n)owhere in the check itself
does the name of Stelco Marketing appear as payee, indorsee or depositor thereof."  25

What the record shows is that: (1) the STEELWELD company check in question was
given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be
"used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y.
Lim indorsed the check to Armstrong in payment of obligation; (4) Armstrong deposited
the check to its account, after indorsing it; (5) the check was dishonored. The record
does not show any intervention or participation by STELCO in any manner of form
whatsoever in these transactions, or any communication of any sort between
STEELWELD and STELCO, or between either of them and Armstrong Industries, at any
time before the dishonor of the check.

The record does show that after the check had been deposited and dishonored,
STELCO came into possession of it in some way, and was able, several years after the
dishonor of the check, to give it in evidence at the trial of the civil case it had instituted
against the drawers of the check (Limson and Torres) and RYL. But, as already pointed
out, possession of a negotiable instrument after presentment and dishonor, or payment,
is utterly inconsequential; it does not make the possessor a holder for value within the
meaning of the law; it gives rise to no liability on the part of the maker or drawer and
indorsers.

It is clear from the relevant circumstances that STELCO cannot be deemed a holder of
the check for value. It does not meet two of the essential requisites prescribed by the
statute. It did not become "the holder of it before it was overdue, and without notice that it
had been previously dishonored," and it did not take the check "in good faith and for
value." 
26

Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim
negotiated the check accepted the instrument and attempted to encash it in behalf, and
as agent of STELCO. On the contrary, the indications are that Armstrong was really the
intended payee of the check and was the party actually injured by its dishonor; it was
after all its representative (a Mr. Young) who instituted the criminal prosecution of the
drawers, Limson and Torres, albeit unsuccessfully.

The petitioner has failed to show any sufficient cause for modification or reversal of the
challenged judgment of the Court of Appeals which, on the contrary, appears to be
entirely in accord with the facts and the applicable law.

WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-
G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner.

SO ORDERED

Paras, Padilla and Regalado, JJ., concur.

Nocon., J., is on leave.

G.R. No. 93048 March 3, 1994

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE,
INC., respondents.

Teresita Gandiongco Oledan for petitioner.

Acaban & Sabado for private respondent.

NOCON, J.:

For our review is the decision of the Court of Appeals in the case entitled
"State Investment House, Inc. v. Bataan Cigar & Cigarette Factory
Inc.,"  affirming the decision of the Regional Trial Court  in a complaint filed by the State
1 2

Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid
checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as
BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private
respondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette
Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged
one of its suppliers, King Tim Pua George (herein after referred to as George King), to
deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof,
BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in
the total amount of P820,000.00. 3

Relying on the supplier's representation that he would complete delivery within three
months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of
tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier
agreement. Again petitioner issued post dated crossed checks in the total amount of
P1,100,000.00, payable sometime in September 1979. 4

During these times, George King was simultaneously dealing with private respondent
SIHI. On July 19, 1978, he sold at a discount check TCBT 551826  bearing an amount of
5

P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as
payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT
Nos. 608967 & 608968,  both in the amount of P100,000.00, post dated September 15 &
6

30, 1979 respectively, drawn by petitioner in favor of George King.

In as much as George King failed to deliver the bales of tobacco leaf as agreed despite
petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all
checks payable to George King, including check TCBT 551826. Subsequently, stop
payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 &
28, 1979, respectively, due to George King's failure to deliver the tobacco leaves.

Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming
only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim
being a holder in due course. It further said that the non-inclusion of King Tim Pua
George as party defendant is immaterial in this case, since he, as payee, is not an
indispensable party.

The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a
holder in due course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the
following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Section 59 of the NIL further states that every holder is deemed prima facie a holder in
due course. However, when it is shown that the title of any person who has negotiated
the instrument was defective, the burden is on the holder to prove that he or some
person under whom he claims, acquired the title as holder in due course.

The facts in this present case are on all fours to the case of State Investment House, Inc.
(the very respondent in this case) v. Intermediate Appellate Court   wherein we made a
7

discourse on the effects of crossing of checks.

As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable

on demand.   There are a variety of checks, the more popular of which are the
8

memorandum check, cashier's check, traveler's check and crossed check. Crossed
check is one where two parallel lines are drawn across its face or across a corner
thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is

written between the parallel lines drawn. It is crossed generally when only the words "and
company" are written or nothing is written at all between the parallel lines. It may be
issued so that the presentment can be made only by a bank. Veritably the Negotiable
Instruments Law (NIL) does not mention "crossed checks," although Article 541   of the
9

Code of Commerce refers to such instruments.

According to commentators, the negotiability of a check is not affected by its being

crossed, whether specially or generally. It may legally be negotiated from one person to
another as long as the one who encashes the check with the drawee bank is another
bank, or if it is specially crossed, by the bank mentioned between the parallel lines.   This
10

is specially true in England where the Negotiable Instrument Law originated.

In the Philippine business setting, however, we used to be beset with bouncing checks,
forging of checks, and so forth that banks have become quite guarded in encashing
checks, particularly those which name a specific payee. Unless one is a valued client, a
bank will not even accept second indorsements on checks.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that
crossing of a check should have the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only once —
to one who has an account with a bank; (c) and the act of crossing the check serves
as warning to the holder that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that purpose, otherwise, he is not a
holder in due course.  11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna
Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks,
issued by Anita Peña Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling
that SIHI was not a holder in due course, we then said:

The three checks in the case at bar had been crossed generally and issued payable to
New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended
the same for deposit only by the rightful person, i.e. the payee named therein.
Apparently, it was not the payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not attach to the drawer. Thus, in
the absence of due presentment, the drawer did not become liable. Consequently, no
right of recourse is available to petitioner (SIHI) against the drawer of the subject checks,
private respondent wife (Anita), considering that petitioner is not the proper party
authorized to make presentment of the checks in question.

xxx xxx xxx

That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) on due date would make the back up deposit for
said checks but which condition apparently was not made, thus resulting in the non-
consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not
a holder in due course.  12

It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law,   and as such the consensus of authority is to the effect that the holder
13

of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to

George King. Because, really, the checks were issued with the intention that George
King would supply BCCFI with the bales of tobacco leaf. There being failure of
consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be
obliged to pay the checks.

The foregoing does not mean, however, that respondent could not recover from the
checks. The only disadvantage of a holder who is not a holder in due course is that the
instrument is subject to defenses as if it were
non-negotiable.   Hence, respondent can collect from the immediate indorser, in this
14

case, George King.

WHEREFORE, finding that the court a quo erred in the application of law, the instant
petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the
Court of Appeals is hereby REVERSED. Cost against private respondent.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

Padilla, J., took no part.

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 now
3

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 drawer of
7

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
cЃa

syndicate's offer, petitioner issued three Metrobank checks totaling P3,000,000.00, one of

which is Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount
of P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana. 5 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 suit 6  against petitioner and Lobitana before the trial court. In
cЃa

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.14cЃa

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
cЃa

the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course
of the subject check.16cräläwvirtualibräry

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 Instruments Law does not
cЃa

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
cЃa

defenses is the absence or failure of consideration, 20  which petitioner sufficiently

cЃa

established in this case. Petitioner issued 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

WE CONCUR:

ARTURO D. BRION
Associate Justice

MARIANO C. DEL CASTILLO ROBERTO A. ABAD

Associate Justice Associate Justice

JOSE PORTUGAL PEREZ

Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court's
Division.

REYNATO S. PUNO
Chief 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 money7 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."401âwphi1

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.

G.R. No. 76788               January 22, 1990

JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court
of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between
the same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred

to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory
note. This note was subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private respondent) which financed
the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due
to a discrepancy in the engine and chassis numbers of the vehicle delivered to
her and those indicated in the sales invoice, certificate of registration and
deed of chattel mortgage, which fact she discovered when the vehicle figured
in an accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915
for a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered

ordering the defendant to pay the plaintiff the sum of P28,414.40 with
interest thereon at the rate of 14% from October 2, 1980 until the said sum
is fully paid; and the further amount of P1,000.00 as attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant.  1

Both petitioner and private respondent appealed the aforesaid decision to the Court of
Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a
different vehicle to petitioner, the latter prayed for a reversal of the trial court's decision
so that she may be absolved from the obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent
portion of which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as

against the pleader. A party cannot subsequently take a position contradictory of, or
inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by
the parties in the pleadings, or in the course of the trial or other proceedings, do not
require proof and cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs.
Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached to

the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denied them, and sets forth what he claims to be the facts (Sec.
8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's
motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as
admitted by the plaintiff, defendant's account became delinquent only beginning May,
1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining
balance of P54,908.30 at l4% per annum from October 2, 1980 until full payment.

WHEREFORE, considering the foregoing, the appealed decision is hereby modified

ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from
October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With
costs to defendant. 2

Petitioner's motion for reconsideration was denied; hence, the present recourse.

In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged
fraud, bad faith and misrepresentation of Violago Motor Sales Corporation in the conduct
of its business and which fraud, bad faith and misrepresentation supposedly released
petitioner from any liability to private respondent who should instead proceed against
VMS.  3

Petitioner argues that in the light of the provision of the law on sales by
description   which she alleges is applicable here, no contract ever existed between her
4

and VMS and therefore none had been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS
as a party to the case before it can be made to answer for damages because VMS was
earlier sued by her for "breach of contract with damages" before the Regional Trial Court
of Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She cites as
authority the decision therein where the court originally ordered petitioner to pay the
remaining balance of the motor vehicle installments in the amount of P31,644.30
representing the difference between the agreed consideration of P49,000.00 as shown in
the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced
by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically,
said decision is still pending consideration by the First Civil Case Division of the Court of
Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922.  5

Private respondent in its comment, prays for the dismissal of the petition and counters
that the issues raised and the allegations adduced therein are a mere rehash of those
presented and already passed upon in the court below, and that the judgment in the
"breach of contract" suit cannot be invoked as an authority as the same is still pending
determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a negotiable
instrument which will bar completely all the available defenses of the petitioner against
private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which
she never denied under oath is, under the foregoing factual milieu, as inevitable as it is
clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as
petitioner would have it appear, where the assignee merely steps into the shoes of, is
open to all defenses available against and can enforce payment only to the same extent
as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and

Acceptance Corp.,   this Court had the occasion to clearly distinguish between a
6

negotiable and a non-negotiable instrument.

Among others, the instrument in order to be considered negotiable must contain the so-
called "words of negotiability — i.e., must be payable to "order" or "bearer"". Under
Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be a specified person
named in the instrument and the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the same. Without
the words "or order or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of a negotiable instrument, but will merely
"step into the shoes" of the person designated in the instrument and will thus be open to
all defenses available against the latter. Such being the situation in the above-cited case,
it was held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be raised.  7

In the case at bar, however, the situation is different. Indubitably, the basis of private
respondent's claim against petitioner is a promissory note which bears all the earmarks
of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY
EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY
(P58,138.20) Philippine currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said principal sum, to be payable, without
need of notice or demand, in installments of the amounts following and at the dates
hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the
21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983.
P_________ monthly for ______ months due and payable on the ______ day of each
month starting _____198__ thru and inclusive of _____, 198________ provided that
interest at 14% per annum shall be added on each unpaid installment from maturity
hereof until fully paid.

x x x           x x x          x x x

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:
____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager  8

A careful study of the questioned promissory note shows that it is a negotiable

instrument, having complied with the requisites under the law as follows: [a] it is in writing
and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay
the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is
"P1,614.95 monthly for 36 months due and payable on the 21 st day of each month
starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with
certainty. 
9

It was negotiated by indorsement in writing on the instrument itself payable to the Order
of Filinvest Finance and Leasing Corporation   and it is an indorsement of the entire
10

instrument.  11

Under the circumstances, there appears to be no question that Filinvest is a holder in due
course, having taken the instrument under the following conditions: [a] it is complete and
regular upon its face; [b] it became the holder thereof before it was overdue, and without
notice that it had previously been dishonored; [c] it took the same in good faith and for
value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity
in the instrument or defect in the title of VMS Corporation. 12

Accordingly, respondent corporation holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among themselves, and
may enforce payment of the instrument for the full amount thereof.   This being so,
13

petitioner cannot set up against respondent the defense of nullity of the contract of sale
between her and VMS.

Even assuming for the sake of argument that there is an iota of truth in petitioner's
allegation that there was in fact deception made upon her in that the vehicle she
purchased was different from that actually delivered to her, this matter cannot be passed
upon in the case before us, where the VMS was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the
"breach of contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this
unfortunate incident. Indeed, there is nothing We can do as far as the Violago Motor
Sales Corporation is concerned since it is not a party in this case. To even discuss the
issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction
in question would amount, to denial of due process, hence, improper and
unconstitutional. She should have impleaded Violago Motor Sales.
14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs
against petitioner.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and

RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court in
AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific

Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors
and other heavy equipment business, offered to sell to petitioner-corporation
two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an
HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be

exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the
"Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said inspection, the seller-
assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors
which were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and availability of
parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill
and judgment, petitioner-corporation through petitioners Wee and Vergara,
president and vice- president, respectively, agreed to purchase on installment
said two (2) units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel
mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of assignment
(E exh. " 1 "), assigned its rights and interest in the chattel mortgage in favor
of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of

"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of the
machines.

Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5,"

the seller-assignor sent to the job site its mechanics to conduct the necessary
repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May 28,
1980, p. 78).

Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner

Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to be
given to the respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to bear one-half (1/2)
of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did nothing
with regard to the request, until the complaint in this case was filed by the
respondent against the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate
of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and

personal capacities the principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per
annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent

to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and

assigned therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-
APPELLANTS CLAIM OF WARRANTY.

II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS
A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER
SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent portions
of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are
of the considered opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there
is an implied warranty, the defense of breach of warranty, if there is any, as
in this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the same
in due course. Warranty lies in this case only between Industrial Products
Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant
herein upon application by appellant corporation granted financing for the
purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to

appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case (Art. 1567,
New Civil Code). We now come to the issue as to whether the plaintiff-
appellee is a holder in due course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing

corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable

instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in
writing and signed by the maker; it contains an unconditional promise to pay
a certain sum of money payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly endorsed to
the latter (Sec. 30, NIL); it was taken in the conditions that the note was
complete and regular upon its face before the same was overdue and without
notice, that it had been previously dishonored and that the note is in good
faith and for value without notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon (Sec.
57, NIL); the appellants engaged that they would pay the note according to
its tenor, and admit the existence of the payee IPM and its capacity to
endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory note,
We opine that the same is legally and conclusively enforceable against the
defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and

evidence, We find the appeal without merit and thus affirm the decision in
toto. With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on October
21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE
TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A

MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND

THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE

LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-

ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR

IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN
ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the
court of origin.

On the other hand, the respondent corporation in its comment to the petition
filed on February 20, 1986, contended that the petition was filed out of time;
that the promissory note is a negotiable instrument and respondent a holder
in due course; that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant

petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a warranty
not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its fitness for such use to
such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to

the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller

the particular purpose for which the goods are acquired, and it appears that
the buyer relies on the sellers skill or judge judgment (whether he be the
grower or manufacturer or not), there is an implied warranty that the goods
shall be reasonably fit for such purpose;
xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a

particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold.
(Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee is
a holder in due course of the promissory note in question, assuming the note
is negotiable, in which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses may not
prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke

down, the petitioner-corporation notified the seller-assignor's sister company,
AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However,
due to the seller-assignor's delay and its failure to comply with its warranty,
the tractors became totally unserviceable and useless for the purpose for
which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its

contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of
the obligation with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. (Emphasis
supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with

the seller-assignor, necessarily can no longer sue the seller-assignor except
by way of counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles  (35 SCRA
102) we held:

In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But  the law definitely does not require
that the contracting party who believes itself injured must first file suit and
wait for adjudgement before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit
and watch its damages accumulate during the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is
not a negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in
24 monthly installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law

requires that a promissory note "must be payable to order or bearer, " it
cannot be denied that the promissory note in question is not a negotiable
instrument.

The instrument in order to be considered negotiablility-i.e. must contain the

so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These
words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater risk
under a negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order

where it is drawn payable to the order of a specified person or to him or his
order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is
payable only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not enjoy the advantages
of being a holder of a negotiable instrument but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due course
but remains a mere assignee of the note in question. Thus, the petitioner may
raise against the respondent all defenses available to it as against the seller-
assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere
assignee of the promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to
by the witness was indorsed? (Counsel for Plaintiff nodding his head.) Then
we have no further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm
that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between

two persons; what is assigned are rights, the rights of the mortgagee were
assigned to the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were

assigned; . . . you want to make a distinction, one is an assignment of
mortgage right and the other one is indorsement of the promissory note.
What counsel for defendants wants is that you stipulate that it is contained in
one single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13,

1980).
Secondly, even conceding for purposes of discussion that the promissory note
in question is a negotiable instrument, the respondent cannot be a holder in
due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the
right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction
shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein
petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is
the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of
the fact that the seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors -sold
were not defective. The respondent knew that when the tractors turned out to
be defective, it would be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners. Even assuming for
the sake of argument that the promissory note is negotiable, the respondent,
which took the same with actual knowledge of the foregoing facts so that its
action in taking the instrument amounted to bad faith, is not a holder in due
course. As such, the respondent is subject to all defenses which the
petitioners may raise against the seller-assignor. Any other interpretation
would be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee for
the entire purchase price and all its incidents without being able to raise valid
defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory
note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that:

negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due

course is a holder who has taken the instrument under the following
conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity
in the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of

an infirmity in the instrument or defect in the title of the person negotiating
the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his
action in taking the instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is

not a holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous
arrangement with the seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of installment buying in
this country, it is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will , the finance
company will be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the argument that such
a rule would seriously affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies. We
think the buyer-Mr. & Mrs. General Public-should have some protection
somewhere along the line. We believe the finance company is better able to
bear the risk of the dealer's insolvency than the buyer and in a far better
position to protect his interests against unscrupulous and insolvent
dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent

argument in favor of a rule which win afford public protection to the general
buying public against unscrupulous dealers in personal property. . . . (Mutual
Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine

Works  (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated
in the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this case are
subject to all defenses that the petitioners have against the seller-assignor,
Industrial Products Marketing. For Section 58 of the Negotiable Instruments
Law provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we
find that both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a ruling does not only
violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against the seller- assignor
in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent

appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.

SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

SECOND DIVISION

[G.R. NO. 158262 : July 21, 2008]

SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners, v. BA FINANCE

CORPORATION and AVELINO VIOLAGO, Respondents.

DECISION

VELASCO, JR., J.:

This is a Petition for Review on Certiorari of the August 20, 2002 Decision 1 and
May 15, 2003 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No.
48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and
Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino
Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and
Florencia Violago pray for the reversal of the appellate court's ruling which
held them liable to respondent BA Finance Corporation (BA Finance) under a
promissory note and a chattel mortgage. Petitioners likewise pray that
respondent Avelino Violago be adjudged directly liable to BA Finance.

The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor Sales

Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and
the latter's wife, Florencia. Avelino explained that he needed to sell a vehicle
to increase the sales quota of VMSC, and that the spouses would just have to
pay a down payment of PhP 60,500 while the balance would be financed by
respondent BA Finance. The spouses would pay the monthly installments to
BA Finance while Avelino would take care of the documentation and approval
of financing of the car. Under these terms, the spouses then agreed to
purchase a Toyota Cressida Model 1983 from VMSC.3

On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of
VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25
a month, the first installment to be due and payable on September 16, 1983.
Avelino prepared a Disclosure Statement of Loan/Credit Transportation which
showed the net purchase price of the vehicle, down payment, balance, and
finance charges. VMSC then issued a sales invoice in favor of the spouses with
a detailed description of the Toyota Cressida car. In turn, the spouses
executed a chattel mortgage over the car in favor of VMSC as security for the
amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory
note to BA Finance without recourse. After receiving the amount of PhP
209,601, VMSC executed a Deed of Assignment of its rights and interests
under the promissory note and chattel mortgage in favor of BA Finance.
Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through
Avelino.4

The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag
Branch, which issued Certificate of Registration No. 0137032 in the name of
Pedro on August 8, 1983. The spouses were unaware that the same car had
already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino,
and registered in Esmeraldo's name by the LTO-San Rafael Branch. Despite
the spouses' demand for the car and Avelino's repeated assurances, there
was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did
not pay any monthly amortization to BA Finance.5

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC),
Branch 116 in Pasay City a complaint for Replevin with Damages against the
spouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the
delivery of the vehicle in favor of BA Finance or, if delivery cannot be effected,
for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month
from February 15, 1984 until fully paid. BA Finance also asked for the
payment of attorney's fees, liquidated damages, replevin bond premium,
expenses in the seizure of the vehicle, and costs of suit. The RTC issued an
Order of Replevin on March 28, 1984. The Violago spouses, as defendants a
quo, were declared in default for failing to file an answer. Eventually, the RTC
rendered on December 3, 1984 a decision in favor of BA Finance. A writ of
execution was thereafter issued on January 11, 1985, followed by an alias writ
of execution.6

In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was
then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City
Branch on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage
over the vehicle in favor of Generoso Lopez as security for a loan covered by a
promissory note in the amount of PhP 260,664. This promissory note was later
endorsed to BA Finance, Cebu City branch.7

On August 21, 1989, the spouses Violago filed a Motion for Reconsideration
and Motion to Quash Writ of Execution on the basis of lack of a valid service of
summons on them, among other reasons. The RTC denied the motions;
hence, the spouses filed a petition for certiorari under Rule 65 before the CA,
docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTC's
order. This CA decision became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging
the following: they never received the vehicle from VMSC; the vehicle was
previously sold to Esmeraldo; BA Finance was not a holder in due course
under Section 59 of the Negotiable Instruments Law (NIL); and the recourse of
BA Finance should be against VMSC. On February 25, 1995, the Violago
spouses, with prior leave of court, filed a Third Party Complaint against
Avelino praying that he be held liable to them in the event that they be held
liable to BA Finance, as well as for damages. VMSC was not impleaded as third
party defendant. In his Motion to Dismiss and Answer, Avelino contended that
he was not a party to the transaction personally, but VMSC. Avelino's motion
was denied and the third party complaint against him was entertained by the
trial court. Subsequently, the spouses belabored to prove that they affixed
their signatures on the promissory note and chattel mortgage in favor of
VMSC in blank.8

The RTC rendered a Decision on March 5, 1994, finding for BA Finance but
against the Violago spouses. The RTC, however, declared that they are
entitled to be indemnified by Avelino. The dispositive portion of the RTC's
decision reads:

WHEREFORE, defendant - [third]-party plaintiffs spouses Pedro F. Violago and

Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation,
at its principal office the BAFC Building, Gamboa St., Legaspi Village, Makati,
Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R-
02854117, and with Serial No. RX60-804614, covered by the deed of chattel
mortgage dated August 4, 1983; or if such delivery cannot be made, to pay,
jointly and severally, to the plaintiff the sum of P198,003.06 together with the
penalty [thereon] at three percent (3%) a month, from March 1, 1984, until
the amount is fully paid.

In either case, the defendant-third-party plaintiffs are required to pay, jointly

and severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of
P198,003.06 as attorney's fees, and another amount also equivalent to twenty
five percent (25%) of the said unpaid balance, as liquidated damages. The
defendant-third party-plaintiffs are also required to shoulder the litigation
expenses and costs. ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ

As indemnification, third-party defendant Avelino Violago is ordered to deliver

to defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R.
Violago the aforedescribed motor vehicle; or if such delivery is not possible, to
pay to the said spouses the sum of P198,003.06, together with the penalty
thereon at three (3%) a month from March 1, 1984, until the amount is
entirely paid.

In either case, the third-party defendant should pay to the defendant-third-

party plaintiffs spouses a sum equivalent to twenty-five percent (25%) of
P198,003.06 as attorney's fees, and another sum equivalent also to twenty-
five percent (25%) of the said unpaid balance, as liquidated damages.

Third-party defendant Avelino Violago is further ordered to return to the third-

party plaintiffs the sum of P60,500.00 they paid to him as down payment for
the car; and to pay them P15,000.00 as moral damages; P10,000.00 as
exemplary damages; and reimburse them for all the expenses and costs of
the suit.

The counterclaims of the defendants and third-party defendant, for lack of

merit, are dismissed.9

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that
the promissory note is a negotiable instrument; hence, the trial court should
have applied the NIL and not the Civil Code. The spouses also asserted that
since VMSC was not the owner of the vehicle at the time of sale, the sale was
null and void for the failure in the "cause or consideration" of the promissory
note, which in this case was the sale and delivery of the vehicle. The spouses
also alleged that BA Finance was not a holder in due course of the note since
it knew, through its Cebu City branch, that the car was never delivered to the
spouses.10 On the other hand, Avelino prayed for the dismissal of the
complaint against him because he was not a party to the transaction, and for
an order to the spouses to pay him moral damages and costs of suit.

The appellate court ruled that the promissory note was a negotiable
instrument and that BA Finance was a holder in due course, applying Secs. 8,
24, and 52 of the NIL. The CA faulted petitioners for failing to implead VMSC,
the seller of the vehicle and creditor in the promissory note, as a party in their
Third Party Complaint. Citing Salas v. Court of Appeals,11 the appellate court
reasoned that since VMSC is an indispensable party, any judgment will not
bind it or be enforced against it. The absence of VMSC rendered the
proceedings in the RTC and the judgment in the Third Party Complaint "null
and void, not only as to the absent party but also to the present parties,
namely the Defendants-Appellants (petitioners herein) and the Third-Party-
Defendant-Appellant (Avelino Violago)." The CA set aside the trial court's
order holding Avelino liable for damages to the spouses without prejudice to
the action of the spouses against VMSC and Avelino in a separate action.12

The dispositive portion of the August 20, 2002 CA Decision reads:

IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants

is DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED.
The Decision of the Court a quo is AFFIRMED, with the modification that the
Third-Party Complaint against the Third-Party-Defendant-appellant is
DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant
Appellant against the Defendants-Appellants are DISMISSED, also without
prejudice.13

The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.

The Issues

Petitioners raise the following issues:

WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE

PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE
COURSE
 WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE
CONSIDERED VALID DESPITE VITIATION OF CONSENT OF, AND
THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO,
AND THE CLEAR ABSENCE OF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE

INVOKED AND SUSTAINED DESPITE THE FRAUD AND DECEPTION
OF AVELINO

The Court's Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby
effectively absolving Avelino from any liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in due

course of the promissory note, we must determine whether the note is a
negotiable instrument and, hence, covered by the NIL. In their appeal to the
CA, petitioners argued that the promissory note is a negotiable instrument
and that the provisions of the NIL, not the Civil Code, should be applied. In the
present petition, however, petitioners claim that Article 1318 of the Civil
Code14 should be applied since their consent was vitiated by fraud, and, thus,
the promissory note does not carry any legal effect despite its negotiation.
Either way, the petitioners' arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL provides:

Section 1. Form of Negotiable Instruments. - An instrument to be negotiable

must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum

certain in money;

(c) Must be payable on demand, or at a fixed or determinable

future time;

(d) Must be payable to order or to bearer; and cralawlibrary

(e) Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable certainty.

The promissory note signed by petitioners reads:

209,601.00 Makati, Metro Manila, Philippines, August 4, 1983

For value received, I/we, jointly and severally, promise to pay to

the order of VIOLAGO MOTOR SALES CORPORATION, its office,
the principal sum of TWO HUNDRED NINE THOUSAND SIX
HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency,
with interest at the rate stipulated herein below, in installments
as follows:
 Thirty Six (36) successive monthly installments of P5,822.25, the
first installment to be paid on 9-16-83, and the succeeding
monthly installments on the 16th day of each and every
succeeding month thereafter until the account is fully paid,
provided that the penalty charge of three (3%) per cent per
month or a fraction thereof shall be added on each unpaid
installment from maturity thereof until fully paid.

x    x    x

Notice of demand, presentment, dishonor and protest are

hereby waived.

(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
763 Constancia St., Sampaloc, Manila same
(Address) (Address)
(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATION

By: (Sgd.)
AVELINO A. VIOLAGO, Pres.15

The promissory note clearly satisfies the requirements of a negotiable

instrument under the NIL. It is in writing; signed by the Violago spouses; has
an unconditional promise to pay a certain amount, i.e., PhP 209,601, on
specific dates in the future which could be determined from the terms of the
note; made payable to the order of VMSC; and names the drawees with
certainty. The indorsement by VMSC to BA Finance appears likewise to be
valid and regular.

The more important issue now is whether or not BA Finance is a holder in due
course. The resolution of this issue will determine whether petitioners'
defense of fraud and nullity of the sale could validly be raised against
respondent corporation. Sec. 52 of the NIL provides:

Section 52. What constitutes a holder in due course. A holder in due course is

a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and

without notice that it had been previously dishonored, if such
was the fact;
 (c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of

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

The law presumes that a holder of a negotiable instrument is a holder thereof

in due course.16 In this case, the CA is correct in finding that BA Finance meets
all the foregoing requisites:

In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A",
is complete and regular; (b) the "Promissory Note" was endorsed by the
VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note,
acted in good faith and for value; (d) the Appellee was never informed, before
and at the time the "Promissory Note" was endorsed to the Appellee, that
the vehicle sold to the Defendants-Appellants was not delivered to the latter
and that VMSC had already previously sold the vehicle to Esmeraldo Violago.
Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned
his rights to the BA Finance Corporation (Cebu Branch), the same occurred
only on May 8, 1987, much later than August 4, 1983, when VMSC assigned
its rights over the "Chattel Mortgage" by the Defendants-Appellants to the
Appellee. Hence, Appellee was a holder in due course.17

In the hands of one other than a holder in due course, a negotiable instrument
is subject to the same defenses as if it were non-negotiable. 18 A holder in due
course, however, holds the instrument free from any defect of title of prior
parties and from defenses available to prior parties among themselves, and
may enforce payment of the instrument for the full amount thereof. 19 Since BA
Finance is a holder in due course, petitioners cannot raise the defense of non-
delivery of the object and nullity of the sale against the corporation. The NIL
considers every negotiable instrument prima facie to have been issued for a
valuable consideration.20 In Salas, we held that a party holding an instrument
may enforce payment of the instrument for the full amount thereof. As such,
the maker cannot set up the defense of nullity of the contract of sale. 21 Thus,
petitioners are liable to respondent corporation for the payment of the
amount stated in the instrument.

From the third party complaint to the present petition, however, petitioners
pray that the veil of corporate fiction be set aside and Avelino be adjudged
directly liable to BA Finance. Petitioners likewise pray for damages for the
fraud committed upon them.

In Concept Builders, Inc. v. NLRC, we held:

It is a fundamental principle of corporation law that a corporation is an entity

separate and distinct from its stockholders and from other corporations to
which it may be connected. But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
justice. So, when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws, this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.
 x    x    x

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;

2. Such control must have been used by the defendant to

commit fraud or wrong, to perpetuate the violation of a statutory
or other positive legal duty, or dishonest and unjust acts in
contravention of plaintiffs legal rights; andcralawlibrary

3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complained of.22

This case meets the foregoing test. VMSC is a family-owned corporation of

which Avelino was president. Avelino committed fraud in selling the vehicle to
petitioners, a vehicle that was previously sold to Avelino's other cousin,
Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the
vehicle in this case was already previously sold to Esmeraldo; he merely
insisted that he cannot be held liable because he was not a party to the
transaction. The fact that Avelino and Pedro are cousins, and that Avelino
claimed to have a need to increase the sales quota, was likely among the
factors which motivated the spouses to buy the car. Avelino, knowing fully
well that the vehicle was already sold, and with abuse of his relationship with
the spouses, still proceeded with the sale and collected the down payment
from petitioners. The trial court found that the vehicle was not delivered to
the spouses. Avelino clearly defrauded petitioners. His actions were the
proximate cause of petitioners' loss. He cannot now hide behind the separate
corporate personality of VMSC to escape from liability for the amount
adjudged by the trial court in favor of petitioners.

The fact that VMSC was not included as defendant in petitioners' third party
complaint does not preclude recovery by petitioners from Avelino; neither
would such non-inclusion constitute a bar to the application of the piercing-of-
the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of
Appeals, an appellate proceeding involving petitioner Arcilla's bid to avoid the
adverse CA decision on the argument that he is not personally liable for the
amount adjudged since the same constitutes a corporate liability which
nevertheless cannot even be enforced against the corporation which has not
been impleaded as a party below. In that case, the Court found as well-taken
the CA's act of disregarding the separate juridical personality of the
corporation and holding its president, Arcilla, liable for the obligations incurred
in the name of the corporation although it was not a party to the collection
suit before the trial court. An excerpt from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was

incurred in the name of the corporation, the petitioner [Arcilla] would still be
personally liable therefor because for all legal intents and purposes, he and
the corporation are one and the same. Csar Marine Resources, Inc. is nothing
more than his business conduit and alter ego. The fiction of separate juridical
personality conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CA's] application of
the doctrine which permits the piercing of the corporate veil and the
disregarding of the fiction of a separate juridical personality; this is because
he knows only too well that from the beginning, he merely used the
corporation for his personal purposes.23

WHEREFORE, the CA's August 20, 2002 Decision and May 15, 2003
Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed
without prejudice the third party complaint of petitioners-spouses Pedro and
Florencia Violago against respondent Avelino Violago. The March 5, 1994
Decision of the RTC is REINSTATED and AFFIRMED. Costs against Avelino
Violago.

SO ORDERED.

[G.R. NO. 157833 : October 15, 2007]

BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. GREGORIO C.

ROXAS, Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari assailing the
Decision1 of the Court of Appeals (Fourth Division) dated February 13, 2003 in
CA-G.R. CV No. 67980.

The facts of the case, as found by the trial court and affirmed by the Court of
Appeals, are:

Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he

delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As
payment therefor, spouses Cawili issued a personal check in the
amount of P348,805.50. However, when respondent tried to encash the
check, it was dishonored by the drawee bank. Spouses Cawili then assured
him that they would replace the bounced check with a cashier's check
from the Bank of the Philippine Islands (BPI), petitioner.

On March 31, 1993, respondent and Rodrigo Cawili went to petitioner's branch
at Shaw Boulevard, Mandaluyong City where Elma Capistrano, the branch
manager, personally attended to them. Upon Elma's instructions, Lita Sagun,
the bank teller, prepared BPI Cashier's Check No. 14428 in the amount
of P348,805.50, drawn against the account of Marissa Cawili, payable
to respondent. Rodrigo then handed the check to respondent in the presence
of Elma.

The following day, April 1, 1993, respondent returned to petitioner's branch at

Shaw Boulevard to encash the cashier's check but it was dishonored.
Elma informed him that Marissa's account was closed on that date.

Despite respondent's insistence, the bank officers refused to encash the

check and tried to retrieve it from respondent. He then called his lawyer who
advised him to deposit the check in his (respondent's) account at Citytrust,
Ortigas Avenue. However, the check was dishonored on the ground
"Account Closed."

On September 23, 1993, respondent filed with the Regional Trial Court,
Branch 263, Pasig City a complaint for sum of money against petitioner,
docketed as Civil Case No. 63663. Respondent prayed that petitioner be
ordered to pay the amount of the check, damages and cost of the suit.

In its answer, petitioner specifically denied the allegations in the complaint,

claiming that it issued the check by mistake in good faith; that its dishonor
was due to lack of consideration; and that respondent's remedy was
to sue Rodrigo Cawili who purchased the check. As a counterclaim,
petitioner prayed that respondent be ordered to pay attorney's fees and
expenses of litigation.

Petitioner filed a third-party complaint against spouses Cawili. They were later
declared in default for their failure to file their answer.

After trial, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing premises, this Court hereby renders

judgment in favor of herein plaintiff and orders the defendant, Bank
of the Philippine Islands, to pay Gerardo C. Roxas:

1) The sum of P348,805.50, the face value of the cashier's

check, with legal interest thereon computed from April 1, 1993
until the amount is fully paid;

2) The sum of P50,000.00 for moral damages;

3) The sum of P50,000.00 as exemplary damages to serve as an

example for the public good;

4) The sum of P25,000.00 for and as attorney's fees; and the

5) Costs of suit.

As to the third-party complaint, third-party defendants Spouses Rodrigo and

Marissa Cawili are hereby ordered to indemnify defendant Bank of the
Philippine Islands such amount(s) adjudged and actually paid by it to herein
plaintiff Gregorio C. Roxas, including the costs of suit.

SO ORDERED.

On appeal, the Court of Appeals, in its Decision, affirmed the trial court's
judgment.

Hence, this petition.

Petitioner ascribes to the Court of Appeals the following errors: (1) in finding
that respondent is a holder in due course; and (2) in holding that it (petitioner)
is liable to respondent for the amount of the cashier's check.

Section 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 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 person negotiating it.

As a general rule, under the above provision, every holder is

presumed prima facie to be a holder in due course. One who claims otherwise
has the onus probandi to prove that one or more of the conditions required to
constitute a holder in due course are lacking. In this case, petitioner contends
that the element of "value" is not present, therefore, respondent could not be
a holder in due course.

Petitioner's contention lacks merit. Section 25 of the same law states:

SEC. 25. Value, what constitutes. - Value is any consideration sufficient to

support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed as such whether the instrument is
payable on demand or at a future time.

In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and

South Sea Surety & Insurance Co., Inc.,2 this Court ruled that value "in general
terms may be some right, interest, profit or benefit to the party who makes
the contract or some forbearance, detriment, loan, responsibility, etc. on the
other side." Here, there is no dispute that respondent received Rodrigo
Cawili's cashier's check as payment for the former's vegetable oil. The fact
that it was Rodrigo who purchased the cashier's check from
petitioner will not affect respondent's status as a holder for value
since the check was delivered to him as payment for the vegetable oil he sold
to spouses Cawili. Verily, the Court of Appeals did not err in concluding that
respondent is a holder in due course of the cashier's check.

Furthermore, it bears emphasis that the disputed check is a cashier's check.

In International Corporate Bank v. Spouses Gueco,3 this Court held that a
cashier's check is really the bank's own check and may be treated as
a promissory note with the bank as the maker. The check becomes
the primary obligation of the bank which issues it and constitutes a
written promise to pay upon demand. In New Pacific Timber & Supply Co.
Inc. v. Señeris,4 this Court took judicial notice of the "well-known and
accepted practice in the business sector that a cashier's check is deemed as
cash." This is because the mere issuance of a cashier's check is
considered acceptance thereof.

In view of the above pronouncements, petitioner bank became liable to

respondent from the moment it issued the cashier's check. Having been
accepted by respondent, subject to no condition whatsoever, petitioner should
have paid the same upon presentment by the former. ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of
Appeals (Fourth Division) in CA-G.R. CV No. 67980 is AFFIRMED. Costs
against petitioner.

SO ORDERED.