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.1aw phîl.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

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. 109491 February 28, 2001

ATRIUM MANAGEMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR.,
AND HI-CEMENT CORPORATION, respondents.

----------------------------------------
G.R. No. 121794 February 28, 2001

LOURDES M. DE LEON, petitioner,

vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION,respondents.

PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling that Hi-Cement
Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to
Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for
collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through
its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer, and the late Antonio de las Alas, Chairman,
issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four
checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the
drawee bank dishonored all four checks for the common reason "payment stopped". Atrium, thus, instituted this
action after its demand for payment of the value of the checks was denied.3

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her
husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and
severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees.4

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying the
decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it.
The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of
E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.5

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of
E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of
P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed
to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry
delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued
by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T.
Henry in payment for petroleum products.6

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the
treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the
postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry
offered to give Hi-Cement a loan which the subject checks would secure as collateral.7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which
reads:

"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by
preponderance of evidence, judgment is hereby rendered ordering all the defendants except defendant
Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00)
PESOS with the legal rate of interest from the filling of the complaint until fully paid, plus the sum of
TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed.

SO ORDERED."8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-Cement for the
amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due
course of the rediscounted checks.10

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not authorize the
issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its
authorization, the same was without any consideration, which is a defense against a holder in due course and that
the liability shall be borne alone by E.T. Henry.11

On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the
dispositive portion of which reads:

"Judgement is hereby rendered:

(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and Antonio De las
Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay
the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filling
of the complaint until fully paid, plus P20,000.00 for attorney's fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorney's fees.

With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes
Victoria M. de Leon.

So ordered."12

Hence, the recourse to this Court.13

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay
P20,000.00 as attorney's fees.14

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks
issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the
checks was personally liable for the value of the checks, which were declared to be issued without
consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees and costs.15
We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that Hi-
Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the
balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner
de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T.
Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry
engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance.
The Court finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the
treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the
checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a
valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra
viresact.

"An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its
organization and therefore beyond the power conferred upon it by law"16 The term "ultra vires" is "distinguished from
an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while
the latter is void and cannot be validated."17

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for
the checks issued as corporate officers and authorized signatories of the check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may
so validly attach, as a rule, only when:

"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;

"2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;

"3. He agrees to hold himself personally and solidarily liable with the corporation; or

"4. He is made, by a specific provision of law, to personally answer for his corporate action."18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were
authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter
requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in
favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account
and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is,
"that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her
negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. 1âwphi 1.nêt

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable
Instruments Law, Section 52 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 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."

In the instant case, the checks were crossed checks 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.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due
course for having taken the instruments in question with notice that the same was for deposit only to the account of
payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments
Law does not provide that a holder not in due course can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable.20 One such defense is absence or failure of consideration.21

We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R.
CV No. 26686, are hereby AFFIRMED in toto.

No costs.

SO ORDERED.

G.R. No. 70145 November 13, 1986

MARCELO A. MESINA, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in his capacity as
Judge of Regional Trial Court — Manila (Branch VIII), JOSE GO, and ALBERT UY, respondents.

PARAS, J.:

This is an appeal by certiorari from the decision of the then Intermediate Appellate Court (IAC for short), now the
Court of Appeals (CA) in AC-G.R. S.P. 04710, dated Jan. 22, 1985, which dismissed the petition for certiorari and
prohibition filed by Marcelo A. Mesina against the trial court in Civil Case No. 84-22515. Said case (an Interpleader)
was filed by Associated Bank against Jose Go and Marcelo A. Mesina regarding their conflicting claims over
Associated Bank Cashier's Check No. 011302 for P800,000.00, dated December 29, 1983.

Briefly, the facts and statement of the case are as follows:

Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Check No. 011302 for
P800,000.00. Unfortunately, Jose Go left said check on the top of the desk of the bank manager when he left the
bank. The bank manager entrusted the check for safekeeping to a bank official, a certain Albert Uy, who had then a
visitor in the person of Alexander Lim. Uy had to answer a phone call on a nearby telephone after which he
proceeded to the men's room. When he returned to his desk, his visitor Lim was already gone. When Jose Go
inquired for his cashier's check from Albert Uy, the check was not in his folder and nowhere to be found. The latter
advised Jose Go to go to the bank to accomplish a "STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the loss of the
check, pointing to the person of Alexander Lim as the one who could shed light on it.

The records of the police show that Associated Bank received the lost check for clearing on December 31, 1983,
coming from Prudential Bank, Escolta Branch. The check was immediately dishonored by Associated Bank by
sending it back to Prudential Bank, with the words "Payment Stopped" stamped on it. However, the same was again
returned to Associated Bank on January 4, 1984 and for the second time it was dishonored. Several days later,
respondent Associated Bank received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro
demanding payment on the cashier's check in question, which was being held by his client. He however refused to
reveal the name of his client and threatened to sue, if payment is not made. Respondent bank, in its letter, dated
January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank and is laying claim to it.

On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta Branch, requesting
assistance in Identifying the person who tried to encash the check but said bank refused saying that it had to protect
its client's interest and the Identity could only be revealed with the client's conformity. Unsure of what to do on the
matter, respondent Associated Bank on February 2, 1984 filed an action for Interpleader naming as respondent,
Jose Go and one John Doe, Atty. Navarro's then unnamed client. On even date, respondent bank received
summons and copy of the complaint for damages of a certain Marcelo A. Mesina from the Regional Trial Court
(RTC) of Caloocan City filed on January 23, 1984 bearing the number C-11139. Respondent bank moved to amend
its complaint, having been notified for the first time of the name of Atty. Navarro's client and substituted Marcelo A.
Mesina for John Doe. Simultaneously, respondent bank, thru representative Albert Uy, informed Cpl. Gimao of the
Western Police District that the lost check of Jose Go is in the possession of Marcelo Mesina, herein petitioner.
When Cpl. Gimao went to Marcelo Mesina to ask how he came to possess the check, he said it was paid to him by
Alexander Lim in a "certain transaction" but refused to elucidate further. An information for theft (Annex J) was
instituted against Alexander Lim and the corresponding warrant for his arrest was issued (Annex 6-A) which up to
the date of the filing of this instant petition remains unserved because of Alexander Lim's successful evation thereof.

Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and moved to participate as
intervenor in the complain for damages. Albert Uy filed a motion of intervention and answer in the complaint for
Interpleader. On the Scheduled date of pretrial conference inthe interpleader case, it was disclosed that the "John
Doe" impleaded as one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner instead of filing his
answer to the complaint in the interpleader filed on May 17, 1984 an Omnibus Motion to Dismiss Ex Abudante
Cautela alleging lack of jurisdiction in view of the absence of an order to litigate, failure to state a cause of action
and lack of personality to sue. Respondent bank in the other civil case (CC-11139) for damages moved to dismiss
suit in view of the existence already of the Interpleader case.

The trial court in the interpleader case issued an order dated July 13, 1984, denying the motion to dismiss of
petitioner Mesina and ruling that respondent bank's complaint sufficiently pleaded a cause of action for itnerpleader.
Petitioner filed his motion for reconsideration which was denied by the trial court on September 26, 1984. Upon
motion for respondent Jose Go dated October 31, 1984, respondent judge issued an order on November 6, 1984,
declaring petitioner in default since his period to answer has already expirecd and set the ex-parte presentation of
respondent bank's evidence on November 7, 1984.

Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set aside 1) order of respondent
court denying his omnibus Motion to Dismiss 2) order of 3) the order of default against him.

On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari. Petitioner Mesina filed his
Motion for Reconsideration which was also denied by the same court in its resolution dated February 18, 1985.

Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515 (Interpleader) rendered a
decisio, the dispositive portion reading as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering plaintiff Associate
Bank to replace Cashier's Check No. 011302 in favor of Jose Go or its cas equivalent with legal rate
of itnerest from date of complaint, and with costs of suit against the latter.

SO ORDERED.

On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, issued an order, the
pertinent portion of which states:

The records of this case show that on August 20, 1984 proceedings in this case was (were) ordered
suspended because the main issue in Civil Case No. 84-22515 and in this instant case are the same
 which is: who between Marcelo Mesina and Jose Go is entitled to payment of Associated Bank's
Cashier's Check No. CC-011302? Said issue having been resolved already in Civil casde No. 84-
22515, really this instant case has become moot and academic.

WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted and this case is
ordered dismissed.

In view of the foregoing ruling no more action should be taken on the "Motion For Reconsideration
(of the order admitting the Intervention)" dated June 21, 1984 as well as the Motion For
Reconsideration dated September 10, 1984.

SO ORDERED.

Petitioner now comes to Us, alleging that:

1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of a holder in due course.

2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party who had earlier been
sued on the same claim.

3. IAC erred in upholding the trial court's order declaring petitioner as in default when there was no proper order for
him to plead in the interpleader complaint.

4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in advance of trial.

Petitioner now interposes the following prayer:

1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February 18, 1985 resolution denying
the Motion for Reconsideration.

2. Annul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit and declaring
petitioner in default.

Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and effects of a
cashier's check such as 1) it cannot be countermanded in the hands of a holder in due course and 2) a cashier's
check is a bill of exchange drawn by the bank against itself-are general principles which cannot be aptly applied to
the case at bar, without considering other things. Petitioner failed to substantiate his claim that he is a holder in due
course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became
the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and
why it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder
of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which
dishonors the same. If a payee of a cashier's check obtained it from the issuing bank by fraud, or if there is some
other reason why the payee is not entitled to collect the check, the respondent bank would, of course, have the right
to refuse payment of the check when presented by the payee, since respondent bank was aware of the facts
surrounding the loss of the check in question. Moreover, there is no similarity in the cases cited by petitioner since
respondent bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from respondent
bank for purposes of transferring his funds from respondent bank to another bank near his establishment realizing
that carrying money in this form is safer than if it were in cash. The check was Jose Go's property when it was
misplaced or stolen, hence he stopped its payment. At the outset, respondent bank knew it was Jose Go's check
and no one else since Go had not paid or indorsed it to anyone. The bank was therefore liable to nobody on the
check but Jose Go. The bank had no intention to issue it to petitioner but only to buyer Jose Go. When payment on
it was therefore stopped, respondent bank was not the one who did it but Jose Go, the owner of the check.
Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it represents and he is
therefore the drawer and the drawee in the same manner as if he has a current account and he issued a check
against it; and from the moment said cashier's check was lost and/or stolen no one outside of Jose Go can be
termed a holder in due course because Jose Go had not indorsed it in due course. The check in question suffers
from the infirmity of not having been properly negotiated and for value by respondent Jose Go who as already been
said is the real owner of said instrument.

In his second assignment of error, petitioner stubbornly insists that there is no showing of conflicting claims and
interpleader is out of the question. There is enough evidence to establish the contrary. Considering the
aforementioned facts and circumstances, respondent bank merely took the necessary precaution not to make a
mistake as to whom to pay and therefore interpleader was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because petitioner and Jose Go were both laying their claims on the
check, petitioner asking payment thereon and Jose Go as the purchaser or owner. The allegation of petitioner that
respondent bank had effectively relieved itself of its primary liability under the check by simply filing a complaint for
interpleader is belied by the willingness of respondent bank to issue a certificate of time deposit in the amount of
P800,000 representing the cashier's check in question in the name of the Clerk of Court of Manila to be awarded to
whoever wig be found by the court as validly entitled to it. Said validity will depend on the strength of the parties'
respective rights and titles thereto. Bank filed the interpleader suit not because petitioner sued it but because
petitioner is laying claim to the same check that Go is claiming. On the very day that the bank instituted the case in
interpleader, it was not aware of any suit for damages filed by petitioner against it as supported by the fact that the
interpleader case was first entitled Associated Bank vs. Jose Go and John Doe, but later on changed to Marcelo A.
Mesina for John Doe when his name became known to respondent bank.

In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial court's order
declaring petitioner in default when there was no proper order for him to plead in the interpleader case. Again, such
contention is untenable. The trial court issued an order, compelling petitioner and respondent Jose Go to file
their Answers setting forth their respective claims. Subsequently, a Pre-Trial Conference was set with notice to
parties to submit position papers. Petitioner argues in his memorandum that this order requiring petitioner to file his
answer was issued without jurisdiction alleging that since he is presumably a holder in due course and for value,
how can he be compelled to litigate against Jose Go who is not even a party to the check? Such argument is trite
and ridiculous if we have to consider that neither his name or Jose Go's name appears on the check. Following such
line of argument, petitioner is not a party to the check either and therefore has no valid claim to the Check.
Furthermore, the Order of the trial court requiring the parties to file their answers is to all intents and purposes an
order to interplead, substantially and essentially and therefore in compliance with the provisions of Rule 63 of the
Rules of Court. What else is the purpose of a law suit but to litigate?

The records of the case show that respondent bank had to resort to details in support of its action for Interpleader.
Before it resorted to Interpleader, respondent bank took an precautionary and necessary measures to bring out the
truth. On the other hand, petitioner concealed the circumstances known to him and now that private respondent
bank brought these circumstances out in court (which eventually rendered its decision in the light of these facts),
petitioner charges it with "gratuitous excursions into these non-issues." Respondent IAC cannot rule on whether
respondent RTC committed an abuse of discretion or not, without being apprised of the facts and reasons why
respondent Associated Bank instituted the Interpleader case. Both parties were given an opportunity to present their
sides. Petitioner chose to withhold substantial facts. Respondents were not forbidden to present their side-this is the
purpose of the Comment of respondent to the petition. IAC decided the question by considering both the facts
submitted by petitioner and those given by respondents. IAC did not act therefore beyond the scope of the remedy
sought in the petition.

WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the assailed orders
of the respondent court are hereby AFFIRMED in toto.

SO ORDERED.

G.R. No. 175350 June 13, 2012

EQUITABLE BANKING CORPORATION, INC. Petitioner,

vs.
SPECIAL STEEL PRODUCTS, and AUGUSTO L. PARDO, Respondents.

DECISION

DEL CASTILLO, J.:

A crossed check with the notation "account payee only" can only be deposited in the named payee’s account. It is
gross negligence for a bank to ignore this rule solely on the basis of a third party’s oral representations of having a
good title thereto.

Before the Court is a Petition for Review on Certiorari of the October 13, 2006 Decision of the Court of Appeals (CA)
in CA-G.R. CV No. 62425. The dispositive portion of the assailed Decision reads:

WHEREFORE, premises considered, the May 4, 1998 Decision of the Regional Trial Court of Pasig City, Branch
168, in Civil Case No. 63561, is hereby AFFIRMED.

SO ORDERED.1

Factual Antecedents

Respondent Special Steel Products, Inc. (SSPI) is a private domestic corporation selling steel products. Its co-
respondent Augusto L. Pardo (Pardo) is SSPI’s President and majority stockholder.2

International Copra Export Corporation (Interco) is its regular customer.3

Jose Isidoro4 Uy, alias Jolly Uy (Uy), is an Interco employee, in charge of the purchasing department, and the son-in-
law of its majority stockholder.5

Petitioner Equitable Banking Corporation (Equitable or bank) is a private domestic corporation engaged in
banking6and is the depository bank of Interco and of Uy.

In 1991, SSPI sold welding electrodes to Interco, as evidenced by the following sales invoices:

Sales Invoice No. 65042 dated February 14, 1991 for ₱325,976.347

Sales Invoice No. 65842 dated April 11, 1991 for ₱345,412.808

Sales Invoice No. 65843 dated April 11, 1991 for ₱313,845.849

The due dates for these invoices were March 16, 1991 (for the first sales invoice) and May 11, 1991 (for the others).
The invoices provided that Interco would pay interest at the rate of 36% per annum in case of delay.

In payment for the above welding electrodes, Interco issued three checks payable to the order of SSPI on July 10,
1991,10 July 16, 1991,11 and July 29, 1991.12 Each check was crossed with the notation "account payee only" and was
drawn against Equitable. The records do not identify the signatory for these three checks, or explain how Uy,
Interco’s purchasing officer, came into possession of these checks.

The records only disclose that Uy presented each crossed check to Equitable on the day of its issuance and claimed
that he had good title thereto.13 He demanded the deposit of the checks in his personal accounts in Equitable,
Account No. 18841-2 and Account No. 03474-0.14

Equitable acceded to Uy’s demands on the assumption that Uy, as the son-in-law of Interco’s majority
stockholder,15was acting pursuant to Interco’s orders. The bank also relied on Uy’s status as a valued client.16 Thus,
Equitable accepted the checks for deposit in Uy’s personal accounts17 and stamped "ALL PRIOR ENDORSEMENT
AND/OR LACK OF ENDORSEMENT GUARANTEED" on their dorsal portion.18 Uy promptly withdrew the proceeds
of the checks.

In October 1991, SSPI reminded Interco of the unpaid welding electrodes, amounting to ₱985,234.98.19 It reiterated
its demand on January 14, 1992.20 SSPI explained its immediate need for payment as it was experiencing some
financial crisis of its own. Interco replied that it had already issued three checks payable to SSPI and drawn against
Equitable. SSPI denied receipt of these checks.
On August 6, 1992, SSPI requested information from Equitable regarding the three checks. The bank refused to
give any information invoking the confidentiality of deposits.21

The records do not disclose the circumstances surrounding Interco’s and SSPI’s eventual discovery of Uy’s scheme.
Nevertheless, it was determined that Uy, not SSPI, received the proceeds of the three checks that were payable to
SSPI. Thus, on June 30, 1993 (twenty-three months after the issuance of the three checks), Interco finally paid the
value of the three checks to SSPI, plus a portion of the accrued interests. Interco refused to pay the entire accrued
interest of ₱767,345.64 on the ground that it was not responsible for the delay. Thus, SSPI was unable to collect
₱437,040.35 (at the contracted rate of 36% per annum) in interest income.22

SSPI and its president, Pardo, filed a complaint for damages with application for a writ of preliminary attachment
against Uy and Equitable Bank. The complaint alleged that the three crossed checks, all payable to the order of
SSPI and with the notation "account payee only," could be deposited and encashed by SSPI only. However, due to
Uy’s fraudulent representations, and Equitable’s indispensable connivance or gross negligence, the restrictive
nature of the checks was ignored and the checks were deposited in Uy’s account. Had the defendants not diverted
the three checks in July 1991, the plaintiffs could have used them in their business and earned money from them.
Thus, the plaintiffs prayed for an award of actual damages consisting of the unrealized interest income from the
proceeds of the checks for the two-year period that the defendants withheld the proceeds from them (from July 1991
up to June 1993).23

In his personal capacity, Pardo claimed an award of ₱3 million as moral damages from the defendants. He allegedly
suffered hypertension, anxiety, and sleepless nights for fear that the government would charge him for tax evasion
or money laundering. He maintained that defendants’ actions amounted to money laundering and that it unfairly
implicated his company in the scheme. As for his fear of tax evasion, Pardo explained that the Bureau of Internal
Revenue might notice a discrepancy between the financial reports of Interco (which might have reported the checks
as SSPI’s income in 1991) and those of SSPI (which reported the income only in 1993). Since Uy and Equitable
were responsible for Pardo’s worries, they should compensate him jointly and severally therefor.24

SSPI and Pardo also prayed for exemplary damages and attorney’s fees.25

In support of their application for preliminary attachment, the plaintiffs alleged that the defendants are guilty of fraud
in incurring the obligation upon which the action was brought and that there is no sufficient security for the claim
sought to be enforced in this action.26

The trial court granted plaintiffs’ application.27 It issued the writ of preliminary attachment on September 20,
1993,28upon the filing of plaintiffs’ bond for ₱500,000.00. The sheriff served and implemented the writ against the
personal properties of both defendants.29

Upon Equitable’s motion and filing of a counter-bond, however, the trial court eventually discharged the
attachment30against it.31

Equitable then argued for the dismissal of the complaint for lack of cause of action. It maintained that interest
income is due only when it is expressly stipulated in writing. Since Equitable and SSPI did not enter into any
contract, Equitable is not liable for damages, in the form of unobtained interest income, to SSPI.32 Moreover, SSPI’s
acceptance of Interco’s payment on the sales invoices is a waiver or extinction of SSPI’s cause of action based on
the three checks.33

Equitable further argued that it is not liable to SSPI because it accepted the three crossed checks in good
faith.34Equitable averred that, due to Uy’s close relations with the drawer of the checks, the bank had basis to
assume that the drawer authorized Uy to countermand the original order stated in the check (that it can only be
deposited in the named payee’s account). Since only Uy is responsible for the fraudulent conversion of the checks,
he should reimburse Equitable for any amounts that it may be made liable to plaintiffs.35

The bank counter-claimed that SSPI is liable to it in damages for the wrongful and malicious attachment of
Equitable’s personal properties. The bank maintained that SSPI knew that the allegation of fraud against the bank is
a falsehood. Further, the bank is financially capable to meet the plaintiffs’ claim should the latter receive a favorable
judgment. SSPI was aware that the preliminary attachment against the bank was unnecessary, and intended only to
humiliate or destroy the bank’s reputation.36
Meanwhile, Uy answered that the checks were negotiated to him; that he is a holder for value of the checks and that
he has a good title thereto.37 He did not, however, explain how he obtained the checks, from whom he obtained his
title, and the value for which he received them. During trial, Uy did not present any evidence but adopted Equitable’s
evidence as his own.

Ruling of the Regional Trial Court 38

The RTC clarified that SSPI’s cause of action against Uy and Equitable is for quasi-delict. SSPI is not seeking to
enforce payment on the undelivered checks from the defendants, but to recover the damage that it sustained from
the wrongful non-delivery of the checks.39

The crossed checks belonged solely to the payee named therein, SSPI. Since SSPI did not authorize anyone to
receive payment in its behalf, Uy clearly had no title to the checks and Equitable had no right to accept the said
checks from Uy. Equitable was negligent in permitting Uy to deposit the checks in his account without verifying Uy’s
right to endorse the crossed checks. The court reiterated that banks have the duty to scrutinize the checks
deposited with it, for a determination of their genuineness and regularity. The law holds banks to a high standard
because banks hold themselves out to the public as experts in the field. Thus, the trial court found Equitable’s
explanation regarding Uy’s close relations with the drawer unacceptable.40

Uy’s conversion of the checks and Equitable’s negligence make them liable to compensate SSPI for the actual
damage it sustained. This damage consists of the income that SSPI failed to realize during the delay.41 The trial court
then equated this unrealized income with the interest income that SSPI failed to collect from Interco. Thus, it ordered
Uy and Equitable to pay, jointly and severally, the amount of ₱437,040.35 to SSPI as actual damages.42

It also ordered the defendants to pay exemplary damages of ₱500,000.00, attorney’s fees amounting to
₱200,000.00, as well as costs of suit.43

The trial court likewise found merit in Pardo’s claim for moral damages. It found that Pardo suffered anxiety,
sleepless nights, and hypertension in fear that he would face criminal prosecution. The trial court awarded Pardo the
amount of ₱3 million in moral damages.44

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Special Steel Products, Inc., and Augusto L. Pardo
and against defendants Equitable Banking Corporation [and] Jose Isidoro Uy, alias "Jolly Uy," ordering defendants
to jointly and severally pay plaintiffs the following:

1. ₱437,040.35 as actual damages;

2. ₱3,000,000.00 as moral damages to Augusto L. Pardo;

3. ₱500,000.00 as exemplary damages;

4. ₱200,000.00 as attorney’s fees; and

5. Costs of suit.

Defendant EBC’s counterclaim is hereby DISMISSED for lack of factual and legal basis.

Likewise, the crossclaim filed by defendant EBC against defendant Jose Isidoro Uy and the crossclaim filed by
defendant Jose Isidoro Uy against defendant EBC are hereby DISMISSED for lack of factual and legal basis.

SO ORDERED.

Pasig City, May 4, 1998.45

The trial court denied Equitable’s motion for reconsideration in its Order dated November 19, 1998.46

Only Equitable appealed to the CA,47 reiterating its defenses below.

Appealed Ruling of the Court of Appeals48

The appellate court found no merit in Equitable’s appeal.

It affirmed the trial court’s ruling that SSPI had a cause of action for quasi-delict against Equitable.49 The CA noted
that the three checks presented by Uy to Equitable were crossed checks, and strictly made payable to SSPI only.
This means that the checks could only be deposited in the account of the named payee.50 Thus, the CA found that
Equitable had the responsibility of ensuring that the crossed checks are deposited in SSPI’s account only. Equitable
violated this duty when it allowed the deposit of the crossed checks in Uy’s account.51

The CA found factual and legal basis to affirm the trial court’s award of moral damages in favor of Pardo.52

It likewise affirmed the award of exemplary damages and attorney’s fees in favor of SSPI.53

Issues

1. Whether SSPI has a cause of action against Equitable for quasi-delict;

2. Whether SSPI can recover, as actual damages, the stipulated 36% per annum interest from Equitable;

3. Whether speculative fears and imagined scenarios, which cause sleepless nights, may be the basis for the award
of moral damages; and

4. Whether the attachment of Equitable’s personal properties was wrongful.

Our Ruling

SSPI’s cause of action

This case involves a complaint for damages based on quasi-delict. SSPI asserts that it did not receive prompt
payment from Interco in July 1991 because of Uy’s wilful and illegal conversion of the checks payable to SSPI, and
of Equitable’s gross negligence, which facilitated Uy’s actions. The combined actions of the defendants deprived
SSPI of interest income on the said moneys from July 1991 until June 1993. Thus, SSPI claims damages in the form
of interest income for the said period from the parties who wilfully or negligently withheld its money from it.

Equitable argues that SSPI cannot assert a right against the bank based on the undelivered checks.54 It cites
provisions from the Negotiable Instruments Law and the case of Development Bank of Rizal v. Sima Wei55 to argue
that a payee, who did not receive the check, cannot require the drawee bank to pay it the sum stated on the checks.

Equitable’s argument is misplaced and beside the point. SSPI’s cause of action is not based on the three checks.
SSPI does not ask Equitable or Uy to deliver to it the proceeds of the checks as the rightful payee. SSPI does not
assert a right based on the undelivered checks or for breach of contract. Instead, it asserts a cause of action based
on quasi-delict. A quasi-delict is an act or omission, there being fault or negligence, which causes damage to
another. Quasi-delicts exist even without a contractual relation between the parties. The courts below correctly ruled
that SSPI has a cause of action for quasi-delict against Equitable.

The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPI’s order, and contained the
notation "account payee only." This creates a reasonable expectation that the payee alone would receive the
proceeds of the checks and that diversion of the checks would be averted. This expectation arises from the
accepted banking practice that crossed checks are intended for deposit in the named payee’s account only and no
other.56 At the very least, the nature of crossed checks should place a bank on notice that it should exercise more
caution or expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized the
holder to deposit the same in a different account. It is well to remember that "[t]he banking system has become an
indispensable institution in the modern world and plays a vital role in the economic life of every civilized society.
Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business
and commerce, banks have attained an [sic] ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and, above all, trust and confidence. In this connection, it is important that banks
should guard against injury attributable to negligence or bad faith on its part. As repeatedly emphasized, since the
banking business is impressed with public interest, the trust and confidence of the public in it is of paramount
importance. Consequently, the highest degree of diligence is expected, and high standards of integrity and
performance are required of it."57

Equitable did not observe the required degree of diligence expected of a banking institution under the existing
factual circumstances.

The fact that a person, other than the named payee of the crossed check, was presenting it for deposit should have
put the bank on guard. It should have verified if the payee (SSPI) authorized the holder (Uy) to present the same in
its behalf, or indorsed it to him. Considering however, that the named payee does not have an account with
Equitable (hence, the latter has no specimen signature of SSPI by which to judge the genuineness of its
indorsement to Uy), the bank knowingly assumed the risk of relying solely on Uy’s word that he had a good title to
the three checks. Such misplaced reliance on empty words is tantamount to gross negligence, which is the
"absence of or failure to exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless
disregard of consequences without exerting any effort to avoid them."58

Equitable contends that its knowledge that Uy is the son-in-law of the majority stockholder of the drawer, Interco,
made it safe to assume that the drawer authorized Uy to countermand the order appearing on the check. In other
words, Equitable theorizes that Interco reconsidered its original order and decided to give the proceeds of the
checks to Uy.59 That the bank arrived at this conclusion without anything on the face of the checks to support it is
demonstrative of its lack of caution. It is troubling that Equitable proceeded with the transaction based only on its
knowledge that Uy had close relations with Interco. The bank did not even make inquiries with the drawer, Interco
(whom the bank considered a "valued client"), to verify Uy’s representation. The banking system is placed in peril
when bankers act out of blind faith and empty promises, without requiring proof of the assertions and without making
the appropriate inquiries. Had it only exercised due diligence, Equitable could have saved both Interco and the
named payee, SSPI, from the trouble that the bank’s mislaid trust wrought for them.

Equitable’s pretension that there is nothing under the circumstances that rendered Uy’s title to the checks
questionable is outrageous. These are crossed checks, whose manner of discharge, in banking practice, is
restrictive and specific. Uy’s name does not appear anywhere on the crossed checks. Equitable, not knowing the
named payee on the check, had no way of verifying for itself the alleged genuineness of the indorsement to Uy. The
checks bear nothing on their face that supports the belief that the drawer gave the checks to Uy. Uy’s relationship to
Interco’s majority stockholder will not justify disregarding what is clearly ordered on the checks.

Actual damages

For its role in the conversion of the checks, which deprived SSPI of the use thereof, Equitable is solidarily liable with
Uy to compensate SSPI for the damages it suffered.

Among the compensable damages are actual damages, which encompass the value of the loss sustained by the
plaintiff, and the profits that the plaintiff failed to obtain.60 Interest payments, which SSPI claims, fall under the second
category of actual damages.

SSPI computed its claim for interest payments based on the interest rate stipulated in its contract with Interco. It
explained that the stipulated interest rate is the actual interest income it had failed to obtain from Interco due to the
defendants’ tortious conduct.

The Court finds the application of the stipulated interest rate erroneous.

SSPI did not recover interest payments at the stipulated rate from Interco because it agreed that the delay was not
Interco’s fault, but that of the defendants’. If that is the case, then Interco is not in delay (at least not after issuance
of the checks) and the stipulated interest payments in their contract did not become operational. If Interco is not
liable to pay for the 36% per annum interest rate, then SSPI did not lose that income. SSPI cannot lose something
that it was not entitled to in the first place. Thus, SSPI’s claim that it was entitled to interest income at the rate
stipulated in its contract with Interco, as a measure of its actual damage, is fallacious.

More importantly, the provisions of a contract generally take effect only among the parties, their assigns and
heirs.61SSPI cannot invoke the contractual stipulation on interest payments against Equitable because it is neither a
party to the contract, nor an assignee or an heir to the contracting parties.

Nevertheless, it is clear that defendants’ actions deprived SSPI of the present use of its money for a period of two
years. SSPI is therefore entitled to obtain from the tortfeasors the profits that it failed to obtain from July 1991 to
June 1993. SSPI should recover interest at the legal rate of 6% per annum,62 this being an award for damages based
on quasi-delict and not for a loan or forbearance of money.

Moral damages

Both the trial and appellate courts awarded Pardo ₱3 million in moral damages. Pardo claimed that he was
frightened, anguished, and seriously anxious that the government would prosecute him for money laundering and
tax evasion because of defendants’ actions.63 In other words, he was worried about the repercussions that
defendants’ actions would have on him.

Equitable argues that Pardo’s fears are all imagined and should not be compensated. The bank points out that none
of Pardo’s fears panned out.64

Moral damages are recoverable only when they are the proximate result of the defendant’s wrongful act or
omission.65 Both the trial and appellate courts found that Pardo indeed suffered as a result of the diversion of the
three checks. It does not matter that the things he was worried and anxious about did not eventually materialize. It is
rare for a person, who is beset with mounting problems, to sift through his emotions and distinguish which fears or
anxieties he should or should not bother with. So long as the injured party’s moral sufferings are the result of the
defendants’ actions, he may recover moral damages.

The Court, however, finds the award of ₱3 million excessive. Moral damages are given not to punish the defendant
but only to give the plaintiff the means to assuage his sufferings with diversions and recreation.66 We find that the
award of ₱50,000.0067 as moral damages is reasonable under the circumstances.

Equitable to recover amounts from Uy

Equitable then insists on the allowance of their cross-claim against Uy. The bank argues that it was Uy who was
enriched by the entire scheme and should reimburse Equitable for whatever amounts the Court might order it to pay
in damages to SSPI.68

Equitable is correct. There is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is
derived at the expense of or with damages to another.69 In the instant case, the fraudulent scheme concocted by Uy
allowed him to improperly receive the proceeds of the three crossed checks and enjoy the profits from these
proceeds during the entire time that it was withheld from SSPI. Equitable, through its gross negligence and mislaid
trust on Uy, became an unwitting instrument in Uy’s scheme. Equitable’s fault renders it solidarily liable with Uy,
insofar as respondents are concerned. Nevertheless, as between Equitable and Uy, Equitable should be allowed to
recover from Uy whatever amounts Equitable may be made to pay under the judgment. It is clear that Equitable did
not profit in Uy’s scheme. Disallowing Equitable’s cross-claim against Uy is tantamount to allowing Uy to unjustly
enrich himself at the expense of Equitable. For this reason, the Court allows Equitable’s cross-claim against Uy.

Preliminary attachment

Equitable next assails as error the trial court’s dismissal of its counter-claim for wrongful preliminary attachment. It
maintains that, contrary to SSPI’s allegation in its application for the writ, there is no showing whatsoever that
Equitable was guilty of fraud in allowing Uy to deposit the checks. Thus, the trial court should not have issued the
writ of preliminary attachment in favor of SSPI. The wrongful attachment compelled Equitable to incur expenses for
a counter-bond, amounting to ₱30,204.26, and caused it to sustain damage, amounting to ₱5 million, to its goodwill
and business credit.70

SSPI submitted the following affidavit in support of its application for a writ of preliminary attachment:

I, Augusto L. Pardo, of legal age, under oath hereby depose and declare:

1. I am one of the plaintiffs in the above-entitled case; the other plaintiff is our family corporation, Special
Steel Products, Inc., of which I am the president and majority stockholder; I caused the preparation of the
foregoing Complaint, the allegations of which I have read, and which I hereby affirm to be true and correct
out of my own personal knowledge;

2. The corporation and I have a sufficient cause of action against defendants Isidoro Uy alias Jolly Uy and
Equitable Banking Corporation, who are guilty of fraud in incurring the obligation upon which this action is
brought, as particularly alleged in the Complaint, which allegations I hereby adopt and reproduce herein;

3. There is no sufficient security for our claim in this action and that the amount due us is as much as the
sum for which the order is granted above all legal counterclaims;

4. We are ready and able to put up a bond executed to the defendants in an amount to be fixed by the
Court[,] conditioned on the payment of all costs[,] which may be adjudged to defendants[,] and all
damages[,] which they may sustain by reason of the attachment of the court, should [the court] finally
adjudge that we are not entitled thereto.71

The complaint (to which the supporting affidavit refers) cites the following factual circumstances to justify
SSPI’s application:

6. x x x Yet, notwithstanding the fact that SPECIAL STEEL did not open an account with EQUITABLE BANK
as already alleged, thru its connivance with defendant UY in his fraudulent scheme to defraud SPECIAL
STEEL, or at least thru its gross negligence EQUITABLE BANK consented to or allowed the opening of
Account No. 18841-2 at its head office and Account No. 03474-0 at its Ermita Branch in the name of
SPECIAL STEEL without the latter’s knowledge, let alone authority or consent, but obviously on the bases of
spurious or falsified documents submitted by UY or under his authority, which documents EQUITABLE
BANK did not bother to verify or check their authenticity with SPECIAL STEEL.72

xxxx

9. On August 6, 1992, plaintiffs, thru counsel, wrote EQUITABLE BANK about the fraudulent transactions
involving the aforesaid checks, which could not have been perpetrated without its indispensable participation
and cooperation, or gross negligence, and therein solicited its cooperation in securing information as to the
anomalous and irregular opening of the false accounts maintained in SPECIAL STEEL’s name, but
EQUITABLE BANK malevolently shirking from its responsibility to prevent the further perpetration of fraud,
conveniently, albeit unjustifiably, invoked the confidentiality of the deposits and refused to give any
information, and accordingly denied SPECIAL STEEL’s valid request, thereby knowingly shielding the
identity of the ma[le]factors involved [in] the unlawful and fraudulent transactions.73

The above affidavit and the allegations of the complaint are bereft of specific and definite allegations of fraud against
Equitable that would justify the attachment of its properties. In fact, SSPI admits its uncertainty whether Equitable’s
participation in the transactions involved fraud or was a result of its negligence. Despite such uncertainty with
respect to Equitable’s participation, SSPI applied for and obtained a preliminary attachment of Equitable’s properties
on the ground of fraud. We believe that such preliminary attachment was wrongful. "[A] writ of preliminary
attachment is too harsh a provisional remedy to be issued based on mere abstractions of fraud. Rather, the rules
require that for the writ to issue, there must be a recitation of clear and concrete factual circumstances manifesting
that the debtor practiced fraud upon the creditor at the time of the execution of their agreement in that said debtor
had a preconceived plan or intention not to pay the creditor."74 No proof was adduced tending to show that Equitable
had a preconceived plan not to pay SSPI or had knowingly participated in Uy’s scheme.
That the plaintiffs eventually obtained a judgment in their favor does not detract from the wrongfulness of the
preliminary attachment. While "the evidence warrants [a] judgment in favor of [the] applicant, the proofs may
1âwphi 1

nevertheless also establish that said applicant’s proffered ground for attachment was inexistent or specious, and
hence, the writ should not have issued at all x x x."75

For such wrongful preliminary attachment, plaintiffs may be held liable for damages. However, Equitable is entitled
only to such damages as its evidence would allow,76 for the wrongfulness of an attachment does not automatically
warrant the award of damages. The debtor still has the burden of proving the nature and extent of the injury that it
suffered by reason of the wrongful attachment.77

The Court has gone over the records and found that Equitable has duly proved its claim for, and is entitled to
recover, actual damages. In order to lift the wrongful attachment of Equitable’s properties, the bank was compelled
to pay the total amount of ₱30,204.26 in premiums for a counter-bond.78 However, Equitable failed to prove that it
sustained damage to its "goodwill and business credit" in consequence of the alleged wrongful attachment. There
was no proof of Equitable’s contention that respondents’ actions caused it public embarrassment and a bank run.

WHEREFORE, premises considered, the Petition is PARTIALLY GRANTED. The assailed October 13, 2006
Decision of the Court of Appeals in CA-G.R. CV No. 62425 is MODIFIED by:

1. REDUCING the award of actual damages to respondents to the rate of 6% per annum of the value of the
three checks from July 1991 to June 1993 or a period of twenty-three months;

2. REDUCING the award of moral damages in favor of Augusto L. Pardo from ₱3,000,000.00 to ₱
50,000.00; and

3. REVERSING the dismissal of Equitable Banking Corporation’s cross-claim against Jose Isidoro Uy, alias
Jolly Uy. Jolly Uy is hereby ORDERED to REIMBURSE Equitable Banking Corporation the amounts that the
latter will pay to respondents.

Additionally, the Court hereby REVERSES the dismissal of Equitable Banking Corporation’s counterclaim for
damages against Special Steel Products, Inc. This Court ORDERS Special Steel Products, Inc. to PAY Equitable
Banking Corporation actual damages in the total amount of ₱30,204.36, for the wrongful preliminary attachment of
its properties.

The rest of the assailed Decision is AFFIRMED.

SO ORDERED.

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

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

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

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing
the defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to
pay the costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita
C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the
indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the
difference between the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the
execution of the check but they allege in their answer, as affirmative defense, that it was issued subject to a
condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following
Agreed Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then
interested in looking for a car for the use of her husband and the family, was shown and offered a car by
Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant
Anita C. Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized
by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish
said sale, but which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her
satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of
registration of the car, so that her husband would be able to see same; that on this request of defendant
Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the
certificate of registration unless there is a showing that the party interested in the purchase of said car is
ready and willing to make such purchase and that for this purpose Manuel Gonzales requested defendant
Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of
buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only of
Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel
Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales and with his assurance that said check
will be only for safekeeping and which will be returned to said defendant the following day when the car and
its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not
known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales
executed and issued a receipt for said check, Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the
car and its certificate of registration and to return the check, Exh. "B", on the following day as previously
agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the
drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to
defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member
of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally
acquainted with V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo
Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel
Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo
Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the
Ocampo Clinic before, or on 9 September 1953;

Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian
under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic,
in payment of the fees and expenses arising from the hospitalization of his wife;
 Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the
wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to
payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per
receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner
specified above were made without previous inquiry by plaintiff from defendants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for
estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his
obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was
subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be
considered as parts of this stipulation, without necessity of formally offering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the
parties hereto be given fifteen days from today within which to submit simultaneously their memorandum to
discuss the issues of law arising from the facts, reserving to either party the right to submit reply
memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's
Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and
circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first
contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it
was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable
Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was
conditional and the condition was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-
appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring
the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation
proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It
is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of
defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of
facts there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff
could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff
had the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally acquainted with V.
R. de Ocampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of
Facts.)

The check could not have been intended to pay the hospital fees which amounted only to P441.75. The
check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of
Facts).
 It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of
Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and
wary in accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries.
EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same
inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best
authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing
Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a
holder in due course and says that to this effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a
question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of
the act read as a whole leads to the conclusion that a payee may be a holder in due course under any
circumstance in which he meets the requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work has never been successfully answered
and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the
instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became
the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was
the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title of the person negotiating it."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first
clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read
"a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable
Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a
holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate
party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did
not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving
effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales,
and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to
purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she
delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the
check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by
Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel
Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So,
when the agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from plaintiff-
appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-
appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales. Our
resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the
plaintiff-appellee may be considered as a holder in due course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

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

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

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

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

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

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the
check was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances
indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic;
that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the
check could only be deposited but may not be converted into cash — all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and
why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature of his possession. Having failed in this respect, we must
declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of
Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check
in good faith. To such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had
notice that there was something wrong about his assignor's acquisition of title, although he did not have
notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is
required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v.
Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet
tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk for
sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without
any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not
necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the
defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself constitute bad
faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the
defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts.
Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp.
945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to
recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law
pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is
one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to
be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary
that "at the time the instrument was negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply
because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to
him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that
the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his
possession and why he was using it for the payment of his own personal account — show that holder's title was
defective or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the
payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that
it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no
evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other
words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the
fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the
title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt.
438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first
had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court
of King's Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and
that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man,
and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by
the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper.
Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position
and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the
character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances
of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the
American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v.
Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the
question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in
subsequent cases, including those cited above. Stated briefly, one line of cases including our own had
adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it
was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test.
That such is the view generally accepted by the courts appears from a recent review of the cases
concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general
purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we
are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of
the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves
prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See
G. L. 3113, 3172, where such a course is required in construing other uniform acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a
holder in due course to be entitled to recover, he is required to establish the conditions entitling him to
standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts
and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the
holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to
prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good
faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good
faith and may not be deemed a holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the
defendants are absolved from the complaint. With costs against plaintiff-appellee.

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

G.R. No. 138074 August 15, 2003

CELY YANG, Petitioner,

vs.
HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST
CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, Respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the decision1 of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398,
which affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117,
dated July 4, 1995, in Civil Cases Nos. 54792 and 5492.3 The trial court dismissed the complaint against herein
respondents Far East Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine
Commercial International Bank (PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the
two cashier’s checks, including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David
moral damages of ₱100,000.00 and attorney’s fees also in the amount of ₱100,000.00.

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

On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani entered into an
agreement whereby the latter was to give Yang a PCIB manager’s check in the amount of ₱4.2 million in exchange
for two (2) of Yang’s manager’s checks, each in the amount of ₱2.087 million, both payable to the order of private
respondent Fernando David. Yang and Chandiramani agreed that the difference of ₱26,000.00 in the exchange
would be their profit to be divided equally between them.

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

Accordingly, on December 22, 1987, Yang procured the following:

a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00, dated December 22,
1987, payable to the order of Fernando David;

b) FEBTC Cashier’s Check No. 287078, in the amount of ₱2,087,000.00, dated December 22, 1987,
likewise payable to the order of Fernando David; and

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

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

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

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

At three o’clock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in Makati City,
Chandiramani delivered to respondent Fernando David at China Banking Corporation branch in San Fernando City,
Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078, dated December 22, 1987, in the sum of ₱2.087
million; and (b) Equitable Cashier’s Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of
₱2.087 million. In exchange, Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the
savings account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No.
124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also
deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York for
US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.

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

On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction and damages against Equitable,
Chandiramani, and David, with prayer for a temporary restraining order, with the Regional Trial Court of Pasay City.
The Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently amended to include a
prayer for Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully paid.5

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

On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary injunction in Civil
Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case No. 5492 also.

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

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

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

1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation (EBC)
Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00 dated December 22, 1987, and Far
East Bank and Trust Company (FEBTC) Cashier’s Check No. 287078 in the sum of ₱2,087,000.00 dated
December 22, 1987, together with the earnings derived therefrom pendente lite?

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

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

WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely Yang
and declaring the former entitled to the proceeds of the two (2) cashier’s checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando David moral damages in the amount of
₱100,000.00; attorney’s fees in the amount of ₱100,000.00 and to pay the costs. The complaint against Far East
Bank and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking
Corporation (EBC) is dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file
against defendant Prem Chandiramani for reimbursement of the amounts received by him from defendant Fernando
David.
SO ORDERED.8

In finding for David, the trial court ratiocinated:

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

Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of
September 20, 1995.

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

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

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the
plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (₱25,000.00).

SO ORDERED.10

In affirming the trial court’s judgment with respect to herein respondent David, the appellate court found that:

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

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

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

The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found the action filed by Yang against said
bank to be "clearly unfounded and baseless." Since PCIB was compelled to litigate to protect itself, then it was
entitled under Article 220812 of the Civil Code to attorney’s fees and litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:

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

b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO

DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;
 c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A
FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES
AND ATTORNEY’S FEES.13

At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure. It
is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of
law, questions of fact are not entertained absent a showing that the factual findings complained of are totally devoid
of support in the record or are glaringly erroneous.14 Given the facts in the instant case, despite petitioner’s
formulation, we find that the following are the pertinent issues to be resolved:

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

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

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

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

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

We shall now resolve the first issue.

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

In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority
sustains the view that a payee may be a holder in due course.16 Hence, the presumption that he is a prima
facieholder in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to
the resolution of this issue is whether David took possession of the checks under the conditions provided for in
Section 5217 of the Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in David’s
case, otherwise he cannot be deemed a holder in due course.

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

First, with respect to consideration, Section 2418 of the Negotiable Instruments Law creates a presumption that every
party to an instrument acquired the same for a consideration19 or for value.20 Thus, the law itself creates a
presumption in David’s favor that he gave valuable consideration for the checks in question. In alleging otherwise,
the petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the
petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of the records, however,
shows that the petitioner failed to discharge her burden of proof. The petitioner’s averment that David did not give
valuable consideration when he took possession of the checks is unsupported, devoid of any concrete proof to
sustain it. Note that both the trial court and the appellate court found that David did not receive the checks gratis, but
instead gave Chandiramani US$360,000.00 as consideration for the said instruments. Factual findings of the Court
of Appeals are conclusive on the parties and not reviewable by this Court; they carry great weight when the factual
findings of the trial court are affirmed by the appellate court.21

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

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

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

The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce23 makes
reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into
cash.24 The effects of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of
the check by the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross
checks and paying cash for them, despite the warning of the crossing, the subsequent holder could not be
considered in good faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that in De
Ocampo & Co. v. Gatchalian.25

The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no
dispute that the crossed checks were delivered and duly deposited by David, the payee named therein, in his bank
account. In other words, the purpose behind the crossing of the checks was satisfied by the payee.

Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not entitled to
damages, attorney’s fees, and costs of suit as both acted in bad faith towards her, as shown by her version of the
facts which gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously dragged into this suit for reasons which
have nothing to do with him at all, but which arose from petitioner’s failure to receive her share of the profit promised
her by Chandiramani. Moreover, in filing this suit which has lasted for over a decade now, the petitioner deprived
1âw phi 1

David of the rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to hire the
services of counsel to vindicate his rights, and subjected him to social humiliation and besmirched reputation, thus
harming his standing as a person of good repute in the business community of Pampanga. David thus contends that
it is but proper that moral damages, attorney’s fees, and costs of suit be awarded him.

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

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

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

A careful reading of the findings of facts made by both the trial court and appellate court clearly shows that the
petitioner, in including David as a party in these proceedings, is barking up the wrong tree. It is apparent from the
factual findings that David had no dealings with the petitioner and was not privy to the agreement of the latter with
Chandiramani. Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions of
Chandiramani, and hence, her recourse should have been against him and not against David. By needlessly
dragging David into this case all because he and Chandiramani knew each other, the petitioner not only unduly
delayed David from obtaining the value of the checks, but also caused him anxiety and injured his business
reputation while waiting for its outcome. Recall that under Article 221727 of the Civil Code, moral damages include
mental anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and similar injury.
Hence, we find the award of moral damages to be in order.

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

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

SO ORDERED.

Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur.

Callejo, Sr., J., 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.,"1 affirming the decision of the Regional Trial Court2 in a complaint filed by the State
Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan
Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in
favor of SIHI, the private respondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein
after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration
thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of
P820,000.00.3

Relying on the supplier's representation that he would complete delivery within three months from December 5,
1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver
in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of
P1,100,000.00, payable sometime in September 1979.4

During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he
sold at a discount check TCBT 5518265 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by
petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent
checks TCBT Nos. 608967 & 608968,6 both in the amount of P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by petitioner in favor of George King.

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

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

The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be
able to collect from the drawer, BCCFI.

The Negotiable Instruments Law states what constitutes a holder in due course, thus:

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

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

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

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

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

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

The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in
this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a
variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and
crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It
may be crossed generally or specially.

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

According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or
generally. It may legally be negotiated from one person to another as long as the one who encashes the check with
the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel
lines. 10This 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, 13 and as such the consensus of authority is to the effect that the holder of the check is
not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because,
really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco
leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be
obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage
of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.

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

SO ORDERED.

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

Padilla, J., took no part.

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. 1 On seven
(7) different occasions in September and 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" 2 — a check drawn against Metrobank in the 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." 3 Why the check was made out in the amount of
P126,129.86 is not explained. 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, 4 in payment of an obligation. When the latter
deposited the check at its bank, it was dishonored because "drawn against insufficient funds." 5 When so deposited,
the check bore two(2) endorsements, 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. 7 They were acquitted in a decision rendered on June 28, 1984 "on the ground that
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 9 against both RYL and STEELWELD
for the recovery of the valued of the 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 . . . ." 10 Among the allegations of 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. 11 A preliminary 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. 12 It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985. 13 In said pleading,
it specifically denied the facts alleged in the complaint, the truth, 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. 14 The judgment sentenced
"the defendant Steelweld Corporation to pay to . . . (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 . . . 15 That disposition was justified 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 17 and there succeeded in reversing the
judgment. By Decision promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint against
appellant (STEELWELD) DISMISSED; (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. 20 The Court stressed that —
 . . . 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, 21 that the acquittal of the two (2) accused (Limson and 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, 22 "is a holder who has taken the instrument under 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. 168842 August 11, 2010

VICENTE GO, Petitioner,
vs.
METROPOLITAN BANK AND TRUST CO., Respondent.

DECISION

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
Decision1dated May 27, 2005 and the Resolution2 dated August 31, 2005 of the Court of Appeals (CA) in CA-G.R.
CV No. 63469.

The Facts

The facts of the case are as follows:

Petitioner filed two separate cases before the Regional Trial Court (RTC) of Cebu. Civil Case No. CEB-9713 was
filed by petitioner against Ma. Teresa Chua (Chua) and Glyndah Tabañag (Tabañag) for a sum of money with
preliminary attachment. Civil Case No. CEB-9866 was filed by petitioner for a sum of money with damages against
herein respondent Metropolitan Bank and Trust Company (Metrobank) and Chua.3

In both cases, petitioner alleged that he was doing business under the name "Hope Pharmacy" which sells medicine
and other pharmaceutical products in the City of Cebu. Petitioner had in his employ Chua as his pharmacist and
trustee or caretaker of the business; Tabañag, on the other hand, took care of the receipts and invoices and
assisted Chua in making deposits for petitioner’s accounts in the business operations of Hope Pharmacy.4

In CEB-9713, petitioner claimed that there were unauthorized deposits and encashments made by Chua and
Tabañag in the total amount of One Hundred Nine Thousand Four Hundred Thirty-three Pesos and Thirty Centavos
(₱109,433.30). He questioned particularly the following:

(1) FEBTC Check No. 251111 dated April 29, 1990 in the amount of ₱22,635.00 which was issued by
plaintiff’s [petitioner’s] customer Loy Libron in payment of the stocks purchased was deposited under
Metrobank Savings Account No. 420-920-6 belonging to the defendant Ma. Teresa Chua;

(2) RCBC Checks Nos. 330958 and 294515, which were in blank but pre-signed by him (plaintiff [petitioner]
Vicente Go) for convenience and intended for payment to plaintiff’s [petitioner’s] suppliers, were filled up and
dated September 22, 1990 and September 7, 1990 in the amount of ₱30,000.00 and ₱50,000.00
respectively, and were deposited with defendant Chua’s aforestated account with Metrobank;

(3) PBC Check No. 005874, drawn by Elizabeth Enriquez payable to the Hope Pharmacy in the amount of
₱6,798.30 was encashed by the defendant Glyndah Tabañag;

(4) There were unauthorized deposits and encashments in the total sum of ₱109,433.30;5

In CEB-9866, petitioner averred that there were thirty-two (32) checks with Hope Pharmacy as payee, for varying
sums, amounting to One Million Four Hundred Ninety-Two Thousand Five Hundred Ninety-Five Pesos and Six
Centavos (₱1,492,595.06), that were not endorsed by him but were deposited under the personal account of Chua
with respondent bank,6 and these are the following:

CHECK NO. DATE AMOUNT

FEBTC 251166 5-23-90 ₱ 65,214.88

FEBTC 239399 5-08-90 24,917.75

FEBTC 251350 7-24-90 212,326.56

PBC 279887 6-27-90 2,000.00

PBC 162387 1-24-90 6,300.00

PBC 162317 12-22-89 3,300.00

PBC 279881 6-23-90 7,650.00

PBC 009005 7-21-89 3,584.00

PBC 279771 5-14-90 3,600.00

PBC 279726 4-25-90 2,000.00

PBC 168004 3-22-90 2,800.00

PBC 167963 3-07-90 1,700.00

FEBTC 267793 8-20-90 80,085.66

FEBTC 267761 7-21-90 45,304.63

FEBTC 251252 6-03-90 64,000.00

FEBTC 267798 8-15-90 40,078.67

PBC 367292 8-06-90 2,100.00

PBC 376445 9-26-90 1,125.00

PBC 009056 8-07-89 2,500.00

PBC 376402 9-12-90 12,105.40

BPI 197074 7-17-90 5,240.00

BPI 197051 7-06-90 1,350.00

BPI 204358 9-19-90 5,402.60

BPI 204252 7-31-90 6,715.60

FEBTC 251171 6-27-90 83,175.54

FEBTC 251165 6-28-90 231,936.10

FEBTC 251251 6-30-90 47,087.25

FEBTC 251163 6-21-90 170,600.85

FEBTC 251170 5-23-90 16,440.00

FEBTC 251112 5-31-90 211,592.69

FEBTC 239400 6-15-90 47,664.03

FEBTC 251162 6-22-90 82,697.85

 ₱1,492,595.067

Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and that without the
participation and connivance of respondent bank, the checks could not have been accepted for deposit to any other
account, except petitioner’s account.8

Thus, in CEB-9866, petitioner prayed that Chua and respondent bank be ordered, jointly and severally, to pay the
principal amount of ₱1,492,595.06, plus interest at 12% from the dates of the checks, until the obligation shall have
been fully paid; moral damages of Five Hundred Thousand Pesos (₱500,000.00); exemplary damages of
₱500,000.00; and attorney’s fees and costs in the amount of ₱500,000.00.9

On February 23, 1995, the RTC rendered a Joint Decision,10 the dispositive portion of which reads:

WHEREFORE, premises considered, the Court hereby renders judgment dismissing plaintiff Vicente Go’s complaint
against the defendant Ma. Teresa Chua and Glyndah Tabañag in Civil Case No. CEB-9713, as well as plaintiff’s
complaint against the same defendant Ma. Teresa Chua in Civil Case No. CEB-9866.

Plaintiff Vicente Go is moreover sentenced to pay ₱50,000.00 in attorney’s fees and litigation expenses to the
defendants Ma. Teresa Chua and Glyndah Tabañag in Civil Case No. CEB-9713.

Defendant Metrobank in Civil Case No. CEB-9866 is hereby condemned to pay unto plaintiff Vicente Go/Hope
Pharmacy the amount of ₱50,000.00 as moral damages, and attorney’s fees and litigation expenses in the
aggregate sum of ₱25,000.00.

The defendant Metrobank’s crossclaim against its co-defendant Ma. Teresa Chua in Civil Case No. CEB-9866 is
dismissed for lack of merit.

No special pronouncement as to costs in both instances.

SO ORDERED.11

In striking down the complaint of the petitioner against Chua and Tabañag in CEB-9713, the RTC made the
following findings:

(1) FEBTC Check No. 251111, dated April 29, 1990, in the amount of ₱22,635.00 payable to cash, was
drawn by Loy Libron in payment of her purchases of medicines and other drugs which Ma. Teresa Chua was
selling side by side with the medicines and drugs of the Hope Pharmacy, for which she (Maritess) was
granted permission by its owner, Mr. Vicente Chua. These medicines and drugs from Thailand were
Maritess’ sideline, and were segregated from the stocks of Hope Pharmacy; x x x.

(2) RCBC Check Nos. 294519 and 330958 were checks belonging to plaintiff Vicente Go payable to cash x
x x; these checks were replacements of the sums earlier advanced by Ma. Teresa Chua, but which were
deposited in the account of Vicente Go with RCBC, as shown by the deposit slips x x x, and confirmed by
the statement of account of Vicente Go with RCBC.

(3) Check No. PCIB 005374 drawn by Elizabeth Enriquez payable to Hope Pharmacy/Cash in the amount of
₱6,798.30 dated September 6, 1990, was admittedly encashed by the defendant, Glyndah Tabañag. As per
instruction by Vicente Go, Glyndah requested the drawer to insert the word "Cash," so that she could
encash the same with PCIB, to meet the Hope Pharmacy’s overdraft.

The listings x x x, made by Glyndah Tabañag and Flor Ouano will show that the corresponding amounts covered
thereby were in fact deposited to the account of Mr. Vicente Go with RCBC; the Bank Statement of Mr. Go x x x,
confirms defendants’ claim independently of the deposit slip[s] x x x.12

The trial court absolved Chua in CEB-9866 because of the finding that the subject checks in CEB-9866 were
payments of petitioner for his loans or borrowings from the parents of Ma. Teresa Chua, through Ma. Teresa, who
was given the total discretion by petitioner to transfer money from the offices of Hope Pharmacy to pay the
advances and other obligations of the drugstore; she was also given the full discretion where to source the funds to
cover the daily overdrafts, even to the extent of borrowing money with interest from other persons.13

While the trial court exonerated Chua in CEB-9866, it however declared respondent bank liable for being negligent
in allowing the deposit of crossed checks without the proper indorsement.

Petitioner filed an appeal before the CA. On May 27, 2005, the CA rendered a Decision,14 the fallo of which reads:

WHEREFORE, except for the award of attorney’s fees and litigation expenses in favor of defendants Chua and
Tabañag which is hereby deleted, the decision of the lower court is hereby AFFIRMED.

SO ORDERED.15

Hence, this petition.

The Issue

Petitioner presented this sole issue for resolution:

The Court of Appeals Erred In Not Holding Metrobank Liable For Allowing The Deposit, Of Crossed Checks Which
Were Issued In Favor Of And Payable To Petitioner And Without Being Indorsed By The Petitioner, To The Account
Of Maria Teresa Chua.16

The Ruling of the Court

A check is a bill of exchange drawn on a bank payable on demand.17 There are different kinds of checks. In this
case, crossed checks are the subject of the controversy. A crossed check is one where two parallel lines are drawn
across its face or across the corner thereof. It may be crossed generally or specially.18

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, as in this case. It may be issued so that presentment can be made only by a bank.19

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check has 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 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.20

The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand
corner means that it could only be deposited and not converted into cash. The effect of crossing a check,

thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the
rightful person, i.e., the payee named therein.21 The crossing of a check is a warning that the check should be
deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be
deposited to the payee’s account only.22

In the instant case, there is no dispute that the subject 32 checks with the total amount of ₱1,492,595.06 were
crossed checks with petitioner as the named payee. It is the submission of petitioner that respondent bank should
be held accountable for the entire amount of the checks because it accepted the checks for deposit under Chua’s
account despite the fact that the checks were crossed and that the payee named therein was not Chua.

In its defense, respondent bank countered that petitioner is not entitled to reimbursement of the total sum of
₱1,492,595.06 from either Maria Teresa Chua or respondent bank because petitioner was not damaged thereby.23
Respondent bank’s contention is meritorious. Respondent bank should not be held liable for the entire amount of the
checks considering that, as found by the RTC and affirmed by the CA, the checks were actually given to Chua as
payments by petitioner for loans obtained from the parents of Chua. Furthermore, petitioner’s non-inclusion of Chua
and Tabañag in the petition before this Court is, in effect, an admission by the petitioner that Chua, in representation
of her parents, had rightful claim to the proceeds of the checks, as payments by petitioner for money he borrowed
from the parents of Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the
account of Chua. ten.lihpw al

However, we affirm the finding of the RTC that respondent bank was negligent in permitting the deposit and
encashment of the crossed checks without the proper indorsement. An indorsement is necessary for the proper
negotiation of checks specially if the payee named therein or holder thereof is not the one depositing or encashing it.
Knowing fully well that the subject checks were crossed, that the payee was not the holder and that the checks
contained no indorsement, respondent bank should have taken reasonable steps in order to determine the validity of
the representations made by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence
dictates that respondent bank should not have merely relied on the assurances given by Chua. 1avvphi1

Respondent presented Jonathan Davis as its witness in the trial before the RTC. He was the officer-in-charge and
ranked second to the assistant vice president of the bank at the time material to this case. Davis’ testimony was
summarized by the RTC as follows:

Davis also testified that he allowed Ma. Teresa Chua to deposit the checks subject of this litigation which were
payable to Hope Pharmacy. According to him, it was a privilege given to valued customers on a highly selective
case to case basis, for marketing purposes, based on trust and confidence, because Ma. Teresa [Chua] told him
that those checks belonged to her as payment for the advances she extended to Mr. Go/Hope Pharmacy. x x x

Davis stressed that Metrobank granted the privilege to Ma. Teresa Chua that for every check she deposited with
Metrobank, the same would be credited outright to her account, meaning that she could immediately make use of
the amount credited; this arrangement went on for about three years, without any complaint from Mr. Go/Hope
Pharmacy, and Ma. Teresa Chua made warranty that she would reimburse Metrobank if Mr. Go complained. He did
not however call or inform Mr. Go about this arrangement, because their bank being a Chinese bank, transactions
are based on trust and confidence, and for him to inform Mr. Vicente Go about it, was tantamount to questioning the
integrity of their client, Ma. Teresa Chua. Besides, this special privilege or arrangement would not bring any
monetary gain to the bank.24

Negligence was committed by respondent bank in accepting for deposit the crossed checks without indorsement
and in not verifying the authenticity of the negotiation of the checks. The law imposes a duty of extraordinary
diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their
genuineness and regularity.25 As a business affected with public interest and because of the nature of its functions,
the banks are under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of the relationship.26 The fact that this arrangement had been practiced for three years without Mr.
Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise extraordinary
diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages
is sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business which is
imbued with public interest.

WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated August 31, 2005 of the Court of Appeals
in CA-G.R. CV No. 63469 are hereby AFFIRMED.

SO ORDERED.

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 4 which she alleges is applicable
here, no contract ever existed between her 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., 6 this Court had
the occasion to clearly distinguish between a 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.

xxx xxx xxx

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 10 and it is an indorsement of the entire 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. 13 This being so, 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.

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 Co. 036512 Dec. 22, 1980 98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State
Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the
former assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three (3)
postdated checks issued by herein private respondent-wife Anita 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 1 rendered judgment against herein private respondents spouses, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants
ordering the defendants to pay jointly and severally to the plaintiff the following amounts:

1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981
until fully paid;

2. P 29,945.00 as and for attorney's fees; and

3. the costs of suit.

On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to
pay third party plaintiffs Anita Pena Chua and Harris Chua all amounts said defendants' third- party
plaintiffs may pay to the plaintiff on account of this case. 2

On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court 3 (now Court of
Appeals) reversed the lower court's judgment in the now assailed decision, the dispositive portion of which reads:

WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment,
dated April 30, 1984 and a new judgment is hereby rendered dismissing the complaint, with costs
against plaintiff-appellee. 4

Hence, this petition.

The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to proceed against
private respondents for the amount stated in the dishonored checks.

Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in
good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due
course, it is necessary that "at the time the instrument was negotiated to him he had no notice of any x x x defect in
the title of the person negotiating it." However, under Section 59 every holder is deemed prima facie to be a holder
in due course.

Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the lights and
liabilities arising therefrom, does not mention "crossed checks". But this Court has taken cognizance of the practice
that a check with two parallel lines in the upper left hand corner means that it could only be deposited and may not
be converted into cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves
the duty to ascertain the holder's title to the check or the nature of his possession. Failing in this respect, the payee
is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of
authority is to the effect that the holder of the check is not a holder in good faith. 5

Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna
Wood Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private
respondents.

We agree with respondent appellate court.

Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of Appeals),
correctly elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in
the bank; the check may be negotiated only once to one who has an account with a bank; and the act of crossing
the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. Further,
the appellate court said:

It results therefore that when appellee rediscounted the check knowing that it was a crossed check
he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to
inquire from the holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which
the three checks were cross despite the warning of the crossing, prevents him from being
considered in good faith and thus he is not a holder in due course. Being not a holder in due course,
plaintiff is subject to personal defenses, such as lack of consideration between appellants and New
Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued only as a
loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks.
Such deposits were not made, hence no loan was made, hence the three checks are without
consideration (Sec. 28, Negotiable Instruments Law).

Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of
Article (sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of
the check.6

In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:

Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid
to a certain banker or institution, which he shall do by writing across the face the name of said
banker or institution, or only the words "and company."

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. 7 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.

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.

G.R. No. L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,

vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and
MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo Construction Company,
JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo Construction Company, and THE DISTRICT
ENGINEER, Puerto Princesa, Palawan, respondents.

Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the
Intermediate Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for
cancellation of their real estate mortgage and held them jointly and severally liable with the principal debtors on a
promissory note which they signed as accommodation makers.

The factual background of this case is stated in the decision of the appellate court:

Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered
by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was
mortgaged by the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a
loan of P1,000.00 extended to one Domingo Prudencio.
 Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company,
had a pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the
construction of the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and,
as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-
in-fact of the Company, approached the appellants asking them to mortgage their property to secure
the loan of P10,000.00 which the Company was negotiating with the PNB.

After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate
Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to
the Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral
part of the new mortgage for P10,000.00 and both documents were registered with the Register of
Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955,
maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by
the appellants. Appellants also signed the portion of the promissory note indicating that they are
requesting the PNB to issue the Check covering the loan to the Company. On the same date
(December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same
capacity as attorney-in- fact of the Company, executed also the 'Deed of Assignment' assigning all
payments to be made by the Bureau to the Company on account of the contract for the construction
of the Puerto Princesa building in favor of the PNB.

This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB,
conditioned, however that they should be for labor and materials, made three payments to the
Company on account of the contract price totalling P11,234.40. The Bureau's last request for
P5,000.00 on June 20, 1956, however, was denied by the PNB for the reason that since the loan
was already overdue as of April 28, 1956, the remaining balance of the contract price should be
applied to the loan.

The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau
rescinded the construction contract and assumed the work of completing the building. On November
14, 1958, appellants wrote the PNB contending that since the PNB authorized payments to the
Company instead of on account of the loan guaranteed by the mortgage there was a change in the
conditions of the contract without the knowledge of appellants, which entitled the latter to a
cancellation of their mortgage contract.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this
action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District
Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The
complaint was amended to exclude the Company as defendant, it having been shown that its life as
a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo,
partners of the defunct Company, were impleaded in their private capacity as defendants.

After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved
from their obligation under the mortgage contract and that the said mortgage be released or cancelled. The
petitioners were ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M.
Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint
on June 27, 1959 until fully paid and Pl,000.00 attorney's fees.

The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged
properties together with all the improvements thereon belonging to the petitioners would be sold at public auction
and applied to the judgment debt.

The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the
petitioners' liability is that of solidary co-makers and that since "the amounts released to the construction company
were used therein and, therefore, were spent for the successful accomplishment of the work constructed for, the
authorization made by the Philippine National Bank of partial payments to the construction company which was also
one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors. Moreover,
those who rendered services and furnished materials in the construction are preferred creditors and have a lien on
the price of the contract." The appellate court further held that PNB had no obligation whatsoever to notify the
petitioners of its authorizing the three payments in the total amount of Pll,234.00 in favor of the Company because
aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said
deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the
Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage.

In this petition, the petitioners raise the following issues which they present in the form of errors:

I. First Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS

WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:

II. Second Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT
RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB,
WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND
CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR;
CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL
DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN
ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.

The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties
instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor
without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the
contract of suretyship. " They state that when respondent PNB did not apply the initial and subsequent payments to
the petitioners' debt as provided for in the deed of assignment, they were released from their obligation as sureties
and, therefore, the real estate mortgage executed by them should have been cancelled.

Section 29 of the Negotiable Instrument Law provides:

Liability of 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.

In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to
the accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of
suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for
value such that even if the accommodated party receives an extension of the period for payment without the
consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not
release him because as far as a holder for value is concerned, he is a solidary co- debtor.

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled
in Ang Tiong v. Ting (22 SCRA 713, 716):

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security
from the maker to protect himself against the danger of insolvency of the latter, cannot in any
manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively
between accommodation indorser and accommodated party. So that the appellant stands only as a
surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the
claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder
for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's
theory is to give unwarranted legal recognition to the patent absurdity of a situation where an
indorser, when sued on an instrument by a holder in due course and for value, can escape liability
 on his indorsement by the convenient expedient of interposing the defense that he is a mere
accommodation indorser.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally
liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-
debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is
concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because
the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There
has to be another basis for their claim of having been freed from their obligation. The question which should be
resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section
29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the
defense of want of consideration or some other personal defenses which may be set up against a party who is not a
holder in due course.

A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of
a holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani,
Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds
the instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law).

In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?

Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and
stands on no better footing than a mere assignee.

In those cases where a payee was considered a holder in due course, such payee either acquired the note from
another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and
Savings v. Randell (186 NorthWestern Reporter 71):

We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for
value, before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom
it was negotiated as a completed instrument, is a holder in due course within the purview of a
Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration
between the maker and the holder to whom the instrument, was delivered.

Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:

It is a general principle of the law merchant that, as between the immediate parties to a negotiable
instrument-the parties between whom there is a privity-the consideration may be inquired into; and
as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima
facie imports a consideration.

Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot
apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note,
that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation
makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB
which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to
believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet,
PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the
Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto
the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public
Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving
the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and
conditions of the promissory note and or any other kind of documents which the Philippine National Bank have
required or may require the assignor to execute to evidence the above-mentioned obligation."

Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the
agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the
payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of
P10,000.00.

This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of
paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the
petitioners who stood to lose their property once the promissory note falls due without the same having been paid
because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB
can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under
Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB
had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was
approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to
the petitioners.

We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their
personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment
to the Company after the promissory note became due, in effect, extended the term of the payment of the note
without the consent of the accommodation makers who stand as sureties to the accommodated party and to all
other parties who are not holders in due course or who do not derive their right from the same, including PNB.

It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The
records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose
attorney-in-fact was their relative. The spouses did not need the money for themselves.

The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in
favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the
spouses that they consented to the mortgage and signed the promissory note in the Bank's favor.

Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the
validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and
extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's
detriment.

The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining
whether the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount
of indebtedness there would have been no basis for the mortgage.

True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their
creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However,
the assignee and the creditor in this case are one and the same—the Bank itself. When the Bank violated the deed
of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its
capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to
foreclose on their property.

Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment
with the condition that the wages of laborers and materials needed in the construction work must take precedence
over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if
it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages
and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this
case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And
thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over
the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine
Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors
had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition imposed by the
Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated
earlier, was the principal reason why the petitioners consented to become accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial
court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the
promissory note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate
mortgage constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS
(P3,000.00) as attorney's fees.

SO ORDERED.

G.R. No. L-19461 March 28, 1923

CHARLES A. FOSSUM, plaintiff-appellant,

vs.
FERNANDEZ HERMANOS, a general partnership, and JOSE F. FERNANDEZ Y CASTRO and RAMON
FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ HERMANOS, defendants-
appellees.

Chas. E. Tenney for appellant.

Ernesto Zaragoza and Jose Varela Calderon for appellees.

STREET, J.:

Prior to the date of the making of the contract which gave rise to this litigation the plaintiff, Charles A. Fossum, was
the resident agent in Manila of the American Iron Products Company, Inc., a concern engaged in business in New
York City; and on February 10, 1920, the said Fossum, acting as agent of that company, procured an order from
Fernandez Hermanos, a general commercial partnership engaged in business in the Philippine Islands, to deliver to
said firm a tail shaft, to be installed on the ship Romulus, then operated by Fernandez Hermanos, as managers of
La Compañía Marítima. It was stipulated that said tail shaft would be in accordance with the specifications contained
in a blueprint which had been placed in the hands of Fossum on or about December 18, 1919; and it was further
understood that the shaft should be shipped from New York upon some steamer sailing in March or April of the year
1920.

Considerable delay seems to have been encountered in the matter of the manufacture and shipment of the shaft;
but in the autumn of 1920 it was dispatched to Manila, having arrived in January, 1921. Meanwhile the American
Iron Products Company, Inc., had drawn a time draft, at sixty days, upon Fernandez Hermanos, for the purchase
price of the shaft, the same being in the amount of $2,250, and payable to the Philippine National Bank. In due
course the draft was presented to Fernandez Hermanos for acceptance, and was accepted by said firm on
December 15, 1920, according to its tenor.

Upon inspection after arrival in Manila the shaft was found not to be in conformity with the specifications and was
incapable of use for the purpose for which it had been intended. Upon discovering this, Fernandez Hermanos
refused to pay the draft, and it remained for a time dishonored in the hands of the Philippine National Bank in
Manila. Later the bank indorsed the draft in blank, without consideration, and delivered it to the plaintiff, Charles A.
Fossum, who thereupon instituted the present action on the instrument against the acceptor, Fernandez Hermanos,
and the two individuals named as defendants in the complaint, in the character of members of said partnership.

On the foregoing statement it is evident that the consideration for the draft in question and for the acceptance placed
thereon by Fernandez Hermanos, has completely failed; and no action whatever can be maintained on the
instrument by the American Iron Products Company, Inc., or by any other person against whom the defense of
failure of consideration is available. In recognition of this fact, and considering that the plaintiff Fossum, in whose
name the action is brought, was the individual who had acted for the American Iron Products Company, Inc., in the
making of the contract, the trial court held that the action could not be maintained and absolved the defendants from
the complaint. From this judgment the plaintiff appealed.

We are of the opinion that the trial judge has committed no error. To begin with, the plaintiff himself is far from being
a holder of this draft in due course. In the fact place, he was himself a party to the contract which supplied the
consideration for the draft, albeit he there acted in a representative capacity. In the second place, he procured the
instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue,
and with full notice that, as between the original parties, the consideration had completely failed. Under these
circumstance recovery on this draft by the plaintiff by virtue of any merit in his own position is out of the question.
His attorney, however, calls attention to the familiar rule that a person who is not himself a holder in due course may
yet recover against the person primarily liable where it appears that such holder derives his title through a holder in
due course.

The difficulty of the plaintiff's position from this point of view is that there is not a line of proof in the record tending to
show as a fact that the bank itself was ever a holder of this draft in due course. In this connection it was incumbent
on the plaintiff to show, as an independent claims, i.e., the bank, was a holder in due course; and upon this point the
plaintiff can have no assistance from the presumption, expressed in section 59 of the Negotiable Instrument Law, to
the effect that every holder is deemed prima facie to be a holder in due course. The presumption expressed in that
section arise only in favor of a person who is a holder in the sense defined in section 191 of the same Law, that is, a
payee or indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a
holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum, 191 Mo.
App., 559, 574.) If this action had been instituted by the bank itself, the presumption that the bank was a holder in
due course would have arisen from the tenor of the draft and the fact that it was in the bank's possession; but when
the instrument passed out of the possession of the bank and into the possession of the present plaintiff, no
presumption arises as to the character in which the bank held the paper. The bank's relation to the instrument
became past history when it delivered the document to the plaintiff; and it was incumbent upon the plaintiff in this
action to show that the bank had in fact acquired the instrument for value and under such conditions as would
constitute it a holder in due course. In the entire absence of proof on this point, the action must fail.

There is another circumstance which exerted a decisive influence on the mind of the trial judge in deciding the case
for the defendants. This is found in the fact that the plaintiff personally made the contract which constituted the
consideration for this draft. He was therefore a party in fact, if not in law, to the transaction giving origin to the
instrument; and it is difficult to see how the plaintiff could strip himself of the character to agent with respect to the
origin of the contract and maintain this action in his own name where his principal could not. Certainly an agent who
actually makes a contract, and who has notice of all equities emanating therefrom, can stand on no better footing
than his principal with respect to commercial paper growing out of the transaction. To place him on any higher plane
would be incompatible with the fundamental conception underlying the relation of principal and agent. We note that
in the present case there is no proof that the plaintiff Fossum has ceased to be the agent of the American Iron
Products Company, Inc.; and in the absence of proof the presumption must be that he still occupies the relation of
agent to that company.

it is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchase
the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands
to the same defenses to which it would have been subject if the paper had never passed through the hands of a
holder in due course. (Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271; 8 C. J., 470.) The
same is true where the instrument is retransferred to an agent of the payee (Battersbee vs. Calkins, 128 Mich., 569).

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent of a corporation engaged in manufacturing
agricultural implements, sold to the defendant a separator for threshing small grain, with a general warranty that the
machine, properly handled, would thresh and clean grain as well as any other separator of like size. The notes in
suit were executed by the defendant in payment of the separator, and were assigned to the plaintiff before maturity.
They were then indorsed by the plaintiff to a bank which became holder in due course; but afterwards, and before
the commencement of the action, the notes were retransferred by the bank to the plaintiff. In an action upon the
notes the defendant alleged and proved breach of warranty and showed that the plaintiff knew of the defect in the
separator at the time he purchased the notes. It was held that the plaintiff could not recover, notwithstanding the fact
that the notes had passed through a bank, in whose hands they would not have been subject to the defense which
had been interposed (54 L. R. A., 678).

We find nothing in the Negotiable Instrument Law that would interfere with the application of the doctrine applied in
the cases above cited, for the rule that identifies the agent with the principal, so far as the legal consequences of
certain acts are concerned, is a rule of general jurisprudence that must operate in conjunction with that Law. We
consider the situation to be the same in practical effect as if the action had been brought in the name of the
American Iron Products Company, Inc., itself; and the use of the name of Fossum strikes us as a mere attempt at an
evasion of the rule of law that would have been fatal to the success of an action instituted by that company.
It appears from statements of Mr. Fossum on the witness stand that the draft in question was indorsed and delivered
to him by the bank in order that suit might be brought thereon in his name for the use and benefit of the bank, which
is said to be the real party in interest. In addition to this it appears that during the pendency of the cause in this court
on appeal a formal transfer, or assignment, to the bank was made by Fossum of all his interest in the draft and in
the cause of action.

Assuming that the suggestion thus made is true, and that the bank is the real party in interest, the result of the
lawsuit in this court is not thereby affected, since it has not been affirmatively shown that the bank is an innocent
purchaser for value. It is therefore unnecessary to discuss the bearing of this circumstance on the second feature to
the case discussed in this opinion.

For the reasons stated the judgment appealed from must be affirmed, and it is so ordered, with costs against the
appellant.

Araullo, C.J., Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

Ostrand, J., concurs in the result.

Separate Opinions

MALCOLM, J., dissenting:

The bill of exchange mentioned in the majority opinion, and here in question, was drawn by the American Iron
Products Company, Inc., in New York, payable sixty days after sight to the order of the Philippine National Bank,
and addressed to Fernandez Hermanos of Manila as drawee. The said bill of exchange was accepted by Fernandez
Hermanos, as appears from the following: "Accepted, 15th Dec., 1920, Due, 13 February, 1920, A/C Varadero de
Manila. (Sgd.) Fernandez Hermanos." The Philippine National Bank later indorsed the bill of exchange to Charles A.
Fossum, as appears from the following: "Philippine National Bank, Manila, P. I., (Sgd.) E. O. Kaufman," Such are
the facts.

Section 58 of the Negotiable Instrument Law provides: ". . . A holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the latter." Under the provisions of this section, Fossum is in exactly
the same situation as the Philippine National Bank would be. Fossum is entitled to all the rights that pertain to the
Philippine National Bank as holder in due course. Such is the law.

The absence or failure of consideration is not a defense against a holder in due course, although it is a defense
against a holder not in due course, as clearly appears from the Negotiable Instrument Law. (Act No. 2031, secs. 28,
51, 52, 57, 58, 59.)

The plain provisions of the Negotiable Instruments Law should not be ignored and they should be construed and
applied in accordance with the language of the Act and in accordance with precedents construing and applying the
Uniform Negotiable Instruments Law. Accordingly, I must dissent.