G.R. No.

93048 March 3, 1994 despite the supplier's failure to deliver in accordance with their
earlier agreement. Again petitioner issued post dated crossed
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, checks in the total amount of P1,100,000.00, payable sometime
vs. in September 1979. 4

THE COURT OF APPEALS and STATE INVESTMENT HOUSE,

INC., respondents. During these times, George King was simultaneously dealing with
private respondent SIHI. On July 19, 1978, he sold at a discount
Teresita Gandiongco Oledan for petitioner. check TCBT 551826  bearing an amount of P164,000.00, post
5

dated March 31, 1979, drawn by petitioner, naming George King

Acaban & Sabado for private respondent. as payee to SIHI. On December 19 and 26, 1978, he again sold
to respondent checks TCBT Nos. 608967 & 608968,  both in the
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amount of P100,000.00, post dated September 15 & 30, 1979

respectively, drawn by petitioner in favor of George King.
NOCON, J.:
In as much as George King failed to deliver the bales of tobacco
leaf as agreed despite petitioner's demand, BCCFI issued on
For our review is the decision of the Court of Appeals in the case March 30, 1979, a stop payment order on all checks payable to
entitled "State Investment House, Inc. v. Bataan Cigar & George King, including check TCBT 551826. Subsequently, stop
Cigarette Factory Inc.,"  affirming the decision of the Regional
1
payment was also ordered on checks TCBT Nos. 608967 &
Trial Court  in a complaint filed by the State Investment House,
2
608968 on September 14 & 28, 1979, respectively, due to
Inc. (hereinafter referred to as SIHI) for collection on three unpaid George King's failure to deliver the tobacco leaves.
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 Efforts of SIHI to collect from BCCFI having failed, it instituted the
case. 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
Emanating from the records are the following facts. Petitioner, George as party defendant is immaterial in this case, since he, as
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation payee, is not an indispensable party.
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 The main issue then is whether SIHI, a second indorser, a holder
October 1978. In consideration thereof, BCCFI, on July 13, 1978 of crossed checks, is a holder in due course, to be able to collect
issued crossed checks post dated sometime in March 1979 in the from the drawer, BCCFI.
total amount of P820,000.00. 3

The Negotiable Instruments Law states what constitutes a holder

Relying on the supplier's representation that he would complete in due course, thus:
delivery within three months from December 5, 1978, petitioner
agreed to purchase additional 2,500 bales of tobacco leaves,
 Sec. 52 — A holder in due course is a holder who It is crossed generally when only the words "and company" are
has taken the instrument under the following written or nothing is written at all between the parallel lines. It may
conditions: be issued so that the presentment can be made only by a bank.
Veritably the Negotiable Instruments Law (NIL) does not mention
(a) That it is complete and regular upon its face; "crossed checks," although Article 541   of the Code of
9

Commerce refers to such instruments.

(b) That he became the holder of it before it was
overdue, and without notice that it had been According to commentators, the negotiability of a check is not
previously dishonored, if such was the fact; affected by its being crossed, whether specially or generally. It
may legally be negotiated from one person to another as long as
(c) That he took it in good faith and for value; the one who encashes the check with the drawee bank is another
bank, or if it is specially crossed, by the bank mentioned between
the parallel lines.   This is specially true in England where the
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(d) That at the time it was negotiated to him he

Negotiable Instrument Law originated.
had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
In the Philippine business setting, however, we used to be beset
with bouncing checks, forging of checks, and so forth that banks
Section 59 of the NIL further states that every holder is
have become quite guarded in encashing checks, particularly
deemed prima facie a holder in due course. However, when it is
those which name a specific payee. Unless one is a valued client,
shown that the title of any person who has negotiated the
a bank will not even accept second indorsements on checks.
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. 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
The facts in this present case are on all fours to the case of State
but only deposited in the bank; (b) the check may be
Investment House, Inc. (the very respondent in this case) v.
negotiated only once — to one who has an account with a bank;
Intermediate Appellate Court   wherein we made a discourse on
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(c) and the act of crossing the check serves as warning to the
the effects of crossing of checks.
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
As preliminary, a check is defined by law as a bill of exchange purpose, otherwise, he is not a holder in due course.  11

drawn on a bank payable on demand.   There are a variety of

8

checks, the more popular of which are the memorandum check,

The foregoing was adopted in the case of SIHI v. IAC, supra. In
cashier's check, traveler's check and crossed check. Crossed
that case, New Sikatuna Wood Industries, Inc. also sold at a
check is one where two parallel lines are drawn across its face or
discount to SIHI three post dated crossed checks, issued by Anita
across a corner thereof. It may be crossed generally or specially.
Peña Chua naming as payee New Sikatuna Wood Industries, Inc.
Ruling that SIHI was not a holder in due course, we then said:
A check is crossed specially when the name of a particular
banker or a company is written between the parallel lines drawn.
 The three checks in the case at bar had been In the present case, BCCFI's defense in stopping payment is as
crossed generally and issued payable to New good to SIHI as it is to George King. Because, really, the checks
Sikatuna Wood Industries, Inc. which could only were issued with the intention that George King would supply
mean that the drawer had intended the same for BCCFI with the bales of tobacco leaf. There being failure of
deposit only by the rightful person, i.e. the payee consideration, SIHI is not a holder in due course. Consequently,
named therein. Apparently, it was not the payee BCCFI cannot be obliged to pay the checks.
who presented the same for payment and
therefore, there was no proper presentment, and The foregoing does not mean, however, that respondent could
the liability did not attach to the drawer. Thus, in not recover from the checks. The only disadvantage of a holder
the absence of due presentment, the drawer did who is not a holder in due course is that the instrument is subject
not become liable. Consequently, no right of to defenses as if it were
recourse is available to petitioner (SIHI) against non-negotiable.   Hence, respondent can collect from the
14

the drawer of the subject checks, private immediate indorser, in this case, George King.
respondent wife (Anita), considering that
petitioner is not the proper party authorized to WHEREFORE, finding that the court a quo erred in the
make presentment of the checks in question. application of law, the instant petition is hereby GRANTED. The
decision of the Regional Trial Court as affirmed by the Court of
xxx xxx xxx Appeals is hereby REVERSED. Cost against private respondent.

That the subject checks had been issued subject SO ORDERED.

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

It is then settled that crossing of checks should put the holder on

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

of authority is to the effect that the holder of the check is not a

holder in due course.