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CASE LIST 4

1. DE OCAMPO V GATCHALIAN

Emergeny Recit:
GONZALES offered GATCHALIAN a car of DE OCAMPO (a doctor). Upon agreeing to the sale,
Gonzales asked Gatchalian for a check a P600 to show De Ocampo that he was serious about the
sale (this check was only for safekeeping and was to be returned). Next day, car did not arrive.
Gatchalian issued a Stop Payment Order. Concurrently, De Ocampo was now in possession of the
check, having received it as payment for the medical bills of Gonzaless wife, and even giving the
latter change for the excess of the checks value. De Ocampo now wants payment.

First of all, court ruled that there was a valid negotiation, appearing to De Ocampo that Gonzales
became a delivery agent of Gatchalian.

De Ocampo was ruled not a holder in due course. The circumstances (F-I of facts) attending the
possession of Gonzales of the check should have put De Ocampo on guard. He was ruled to be guilty
of gross neglect, amounting to legal access of good faith.

Facts:
Stipulation of Facts:
a. Gatchalian was interested in a car for her husband and family.
b. Gonzales represented to Gatchalian that he was authorized by the owner, Ocampo Clinic, to look
for a buyer. De Ocampo did not know about this.
c. Finding the price okay, Gatchalian requested Gonzales to present the car so that her husband can
inspect it. With respect to this, Gonzales advised her that the owner will not be willing to give
certificate of registration the party interested is ready and willing to make such purchase. For this
purpose, Gonzales requested Gatchalian to give him (Gonzales) a check which will be shown to
the owner as evidence of buyers good faith. The said check to be for safekeeping only and to be
returned the day when the car is shown. De Ocampo did not know about this.
In the ratio, it was stated that payee was De Ocampo.
d. Check was drawn and delivered, Gonzales issued a receipt for this. Check was for P600.
e. Failure of Gonzales to appear next day, Gatchalian issued a stop payment order. De Ocampo
was not given notice of said order. Gatchalian did not know De Ocampo was already given the
check.
f. Gatchalians did not know Gonzales personally before this. However, the husband personally knew
De Ocampo.
g. Gatchalian had no debts owing to De Ocampo. There neither was any arrangement that
Gatchalians assumed, expressly or impliedly, to shoulder the hospitalization of Gonzaless wife in
the Ocampo clinic.
h. Gonzales delivered the check to De Ocampo in payment of expenses arising from the
hospitalization of his wife. De Ocampo never made inquiries to Gatchalian regarding this check.
i. For and in consideration of this check, De Ocampo applied it to said fees. De Ocampo even gave
Gonzales change, the excess of the checks value over the fees owed. Bills were like P440
something.
j. De Ocampo filed a complaint for estafa against Gonzales, then dropped it.

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ISSUES:
1. W/N there was a valid negotiation of the check Yes.
2. W/N De Ocampo is a holder in due course No.

HELD:

Gatchalian is absolved from the complaint.

RATIO:

Valid Negotiation

The other contention of the other plaintiff (Drawee Bank) 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 Gatchalian 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 De Ocampo if Gonzales delivered the check or
negotiated it. As the check was payable to the De Ocampo, 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 De Ocampo,
negotiation took place through no fault of the De Ocampo, unless it can be shown that the De
Ocampo should be considered as having notice of the defect in the possession of the holder
Manuel Gonzales.

Not a Holder in Due Course

The stipulation of facts expressly states that De Ocampo was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the Gatchalian that
the circumstances indicated by them in their briefs, such as the fact that Gatchalian 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 De Ocampo to inquiry as to the why and wherefore of the possession of the check by
Manuel Gonzales, and why he used it to pay his wife'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 De Ocampo 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.

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Some case doctrines cited:


o 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.
o 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.
o 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. (this last case was about a squatter looking 15 year
old boy selling bonds to a Loan Company)
In the case at bar the rule that a possessor of the instrument is prima facie a 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 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.
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.

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2. GREEN V. LOPEZ

Emergency Recit:
GREEN and another purchaser (one is a lawyer and one is a broker) bought a negotiable note from
the PAYEE of the note. It was in the regular course of their business to buy discounted notes and
subsequently cash them in.
For one negotiable note they bought, the makers of the note (LOPEZ et al) now oppose its payment
on the grounds that:
1) The allegation did not specify the consideration GREEN paid the PAYEE for the note
2) Green knew of equitable defences LOPEZ had against the PAYEE before acquiring it and
therefore was in bad faith and is vulnerable to their equitable defenses
LOPEZ relies on his testimony that prior to purchasing the note, GREEN sent his agent to him to
inquire on the validity of the note and it was during this encounter that he told the agent all the
equitable defences he had against the PAYEE. GREEN confirmed that he indeed sent an agent to
inquire but said that such agent came back telling him LOPEZ affirmed the good standing of the note.
The SC held that LOPEZ is liable because:
1) The face of the instrument stated for value received and is thus sufficient and equivalent
to a formal allegation that the instrument was with valuable consideration
2) LOPEZ self-serving testimony, unsupported by any other evidence, is insufficient to establish
that GREEN was in bad faith and knew of the existence of equitable defences. The SC gave
the following reasons:
As a broker and lawyer engaging in this business regularly, it can be seen how prudent
they are. The fact that they even sent an agent to ascertain the validity of the note
further supports this.
Hence, greater evidence is needed to establish their bad faith especially since they are
holders for value

CARSON, J:

FACTS:
(Case is just one long ratio. Hardly any facts were given but the general story can be deduced from
the discussion)
GREEN and another purchaser (one is a lawyer and one is a broker) bought a negotiable note
from the PAYEE thereof
It was in the regular course of their business to buy notes on a discount and subsequently
cash them in
For one negotiable note they bought from the notes PAYEE, the makers of the note (LOPEZ
et al) now oppose its payment
LOPEZ and the other makers contend:
1) LOPEZ filed a demurrer to the complaint because of the lack of an allegation setting forth
specifically the nature and amount of consideration paid by GREEN to the PAYEE of the note
who indorsed it in their favor

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2) GREEN et al were not bona fide holders of the note by indorsement because they had
knowledge of the existence of certain equitable defences which the makers were entitled to
set up as against the payee of the note, before they acquired it by indorsement of the payee

During trial, two conflicting testimonies were adduced as evidence:

LOPEZ testimony:
A person unknown to him, representing himself to be an employee of GREEN, came to him
and made inquiries as to the validity and genuineness of the note stating that his principal
desired this information because he was contemplating its purchase
It was during this encounter that LOPEZ then allegedly the nature of his equitable defense as
against the payee, and repudiated any obligation to meet the note

GREEN testimony:
That he sent an employee to inquire whether the note was good or not and upon return of
his employee stated that he had been informed by the makers that it was a good note duly
executed by them and that it would be paid upon maturity

CFI Manila ruled in favour of GREEN to be entitled to payment for the face value of a negotiable note
they purchased from LOPEZ, and the subsidiary liability of the PAYEE from whom the note was
purchased

ISSUE W/N LOPEZ and makers are liable to pay the note YES!

RATIO:

Answering each of Lopez contentions:

CONTENTION 1: An allegation that a negotiable note was indorsed by the payee to a purchaser for
value received is substantially equivalent to a formal allegation that the endorsement was made for
a valuable consideration

The complaint alleged that the note was indorsed by the payee to the plaintiffs for value
received and this was conclusively established by evidence adduced in trial
This is equivalent to a formal allegation that he endorsement was made for a valuable
consideration
It is not required to allege expressly the amount which was in fact paid by the indorser
And since this was further supported by evidence, the purchasers are clearly entitled to judgment
for the face value of the note

Where negotiable paper has been put in circulation, and there is no infirmity or defense between
the antecedent parties thereto, a purchaser of such security is entitled to recover thereon, as against
the maker, the whole amount, irrespective of what he may have paid therefor.

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CONTENTION 2: Evidence adduced is insufficient to show that GREEN knew of the existence of
equitable defences therefore putting him in bad faith in acquiring the note

There was nothing on the face of the note to put the purchasers on notice of the existence
of such personal defences
It was regular in form and came into their possession in the usual course of business
Hence, the burden of proof is with the makers of the note to show the fact of knowledge of these
equitable defences.

Regarding LOPEZ testimony - there is also NO EVIDENCE on record to show that these alleged
disclosures were true and in fact effectively made to an employee of Green

Even if the employee of GREEN was the person referred to by LOPEZ as the one he disclosed his
equitable defences to, SC does not believe that such evidence is sufficient to prove that GREEN et al
had sufficient knowledge of the alleged equitable defences because:
One purchaser is a broker and one is a lawyer
Hence, it would require stronger and more convincing evidence than the interested
testimony of one of the makers of the note to satisfy us, as against their testimony to the
contrary, that these gentlemen were so imprudent as to discount negotiable paper, in the
ordinary course of business, after having received formal notice of the existence of equitable
defences against the payee
Their prudence is further supported by the fact that they even took the precaution to send
an agent to verify the validity of the note

We must therefore reject LOPEZ testimony either on the ground that it is:
1) Wholly false, or
2) He failed to make himself understood to the agent during such encounter hence failing to
inform GREEN of the existence of equitable defences

Equitable defences of this nature can in no event defeat the right of holders of a negotiable note by
indorsement and for valuable consideration,
UNTIL and unless knowledge of the existence of such equitable defences is brought home to them,
or until it appears that the holders had such knowledge of the existence of defects in the instrument
as to charge them with bad faith in acquiring it under all the attendant circumstances.

Where there is nothing on the face of a negotiable note to put the purchaser from the payee on
notice of the existence of an equitable defense as between the maker of the note and the payee, the
existence of such equitable defense can in no event defeat the right of the holder of the note by
indorsement and for valuable consideration, until and unless knowledge of the existence of defects
in the instrument as to charge him with bad faith in acquiring it under all the attendant
circumstances.


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3. BATAAN CIGAR V. CA
Emergency Recits:
- Bataan Cigar issued checks in favor of George for the delivery of several bales of tobacco
leaves (2 transactions)
- George sold 3 checks to Investment.
- Having failed to deliver the tobacco leaves, Bataan Cigar issued a stop payment order on all
checks payable to George.
- Investment tried to collect from Bataan Cigar. Having failed, they instituted a case with
Bataan Cigar as the only party defendant. The trial court held that Investment was a holder
and due course and that Bataan Cigar was liable.
- Issue: W/N Investment is a holder in due course
- 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.
- Sec. 52 A holder in due course is a holder who has taken the instrument under the
following conditions
(c) That he took it in good faith and for value

Facts
- Bataan Cigar and Cigarette Company Inc. (Bataan Cigar) engaged one of its suppliers, King
Tim Pau George (George) to deliver 2,000 bales of tobacco leaves starting Oct. 1978.
o In consideration thereof, Bataan Cigar issued crossed checks post dated in March
1979 in the amount of P820,000.
- Relying on Georges representation that he would be able to complete delivery within 3
months, Bataan Cigar agreed to purchase additional 2,5000 bales of tobacco leaves despites
Georges initial failure to
deliver under the first agreement. Bataan Cigar issued
another crossed check payable in September 1979 in the amount of P1,100,000.
- During this time, George was also dealing with State Investment House, Inc. (Investment).
o July 1978: He sold at a discount a check bearing an amount of P164,000.00, post
dated March 31, 1979, drawn by petitioner, naming George as payee to Investment.
o Dec. 1978: He again sold to Investment checks both in the amount of P100,000.00,
post dated September 15 & 30, 1979 respectively, drawn by Bataan Cigar in favor of
George.
- George failed to deliver the bales of tobacco leaf as agreed despite demand, hence Bataan
Cigar issued a stop payment order on all checks payable to George, which included the
checks that George sold to Investment.
- Investment tried to collect from Bataan Cigar, and having failed,
instituted a case
against the latter naming only Bataan Cigar as party defendant.
o The trial court pronounced that investment has a valid claim being a holder in due
course. It added the non-inclusion of George as party defendant is immaterial.
- Hence this current petition.
Issue:
W/N Investment, a second indorser, a holder of crossed checks, is a holder in due course, to
be able to collect from the drawer, Bataan Cigar. (Investment not a holder in due course)
Ratio:

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-

Sec. 52 A holder in due course is a holder who has taken the instrument under the
following conditions
(c) That he took it in good faith and for value
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. v.
Intermediate Appellate Court
o A check is defined by law as a bill of exchange drawn on a bank payable on demand.
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.
o 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.
o 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.
o 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,
Bataan Cigars defense in stopping payment is as good to Investment as it is to George.
There being failure of consideration, Investment is not a holder in due course. Consequently,
Bataan Cigar 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.


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.



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4. CHAN WAN V. TAN KIM

Emergency Recit:
Facts: Suit to enforce payment on 11 checks totaling P4,290. Chan Wan presented the checks to the
drawee bank (Equitable) but they were all dishonored. All checks were payable to cash or to bearer.
Trial court declined to order payment.
Issue: W/N Chan Wan had the right to enforce payment on the checks.
Held: Remanded to determine whether defendants have adequate defenses as to prevent collection
by Chan Wan, who is not a holder in due course (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)

I.
Facts
This suit to collect eleven (11) checks totaling P4,290 is here for decision because it involves
no issue of fact.
o 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."
Chan Wans 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. Chan Wan failed to prove he was a holder in due course, and
b. The checks being crossed checks1 should not have been deposited instead with the
bank mentioned in the crossing.

II.
Issues
W/N Chan Wan has the right to collect on the eleven (11) commercial documents.

III.
Held
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.

IV.
Ratio
The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and

A check that has lines drawn across its face and writing that specifies the bank to which the check must be presented for
payment

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the liabilities arising therefrom, does not mention "crossed checks".


Art. 541 of the Code of Commerce refers to such instruments.
The Bills of Exchange Act of England of 1882 contains several provisions about them.
o The Philippine National Bank vs. Zulueta, 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. (S. 196, NIL)
Eight (8) of the checks here in question bear across their face two parallel transverse2 lines
between which these words are written: non-negotiable China Banking Corporation.
o 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.3
o 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.
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" (S. 61, NIL).
o 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 (Equitable Bank) for collection.

o 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.
o

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.
o

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.

Definition Situated or extending across something


If it is not presented by said Bank for payment, the drawee runs the risk, in case of payment to persons not entitled
thereto. So the practice is for the drawee to refuse when presented by individuals. The check is generally deposited with
the bank mentioned in the crossing, so that the latter may take charge of the collection.
3

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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".
o How they reached his hands, Chan Wan did not indicate.
o 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.
o Naturally and rightly, the lower court held him not to be a holder in due course
under the circumstances, since he knew, upon taking them up, that the checks had
already been dishonored
Yet it does not follow as a legal proposition, that simply because he was not a holder in due
course Chan Wan could not recover on the checks.
The NIL does not provide that a holder (he was a holder because he was in possession of
checks payable to bearer) 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 (S. 51, NIL), 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 (S. 58, NIL).
o Now what defense did the defendant Tan Kim prove?
o 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.
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.




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5. CONSOLIDATED PLYWOOD V. IFC LEASING
Emergency Recit: PLYWOOD bought 2 tractors from ATLANTIC on installment. For this, it paid a
downpayment and issued 2 promissory notes with chattel mortgage for the balance. ATLANTIC
assigned the 2 PNs to IFC, a financing company. The tractors broke down before warranty expired,
but ATLANTIC did not honor the warranty. PLYWOOD did not pay for the PNs and so IFC sued. RTC
and CA ruled for IFC, ordered PLYWOOD to pay. SC reversed this.
Primarily, it pronounced that indeed there was a breach in the warranty. As such, there was failure
of consideration between PLYWOOD and ATLANTIC.
Secondly, the SC made apparent that the note was not negotiable, it lacked any indication of the
instrument being made payable to order or the bearer.
Thirdly, and only for sake of argument that the note was negotiable, IFC was not a holder in due
course as it appears that it was aware of the transaction between PLYWOOD and ATLANTIC from the
beginning, his knowledge of this thus making him a holder in bad faith, and not a holder in due
course. As such, defenses of PLYWOOD to ATLANTIC will also apply to IFC, whether he be a mere
assignee, or a holder not in good fait.
Facts:
1. Parties:
a. PLYWOOD (maker of PN),
b. ATLANTIC (payee of PN, assigned it to IFC), - not party to the suit.
c. IFC (assignee of PNs, current holder)
2. Antecedent Facts.:
a. Consolidated Plywood Industries, Inc. (PLYWOOD) is engaged in the logging
business. For this purpose, it needed two (2) additional units of tractors.
b. Atlantic Gulf & Pacific Company of Manila (ATLANTIC), through its sister company
and marketing arm, Industrial Products Marketing (Ill just refer to it as ATLANTIC
also), engaged in the equipment business, offered to sell Plywood two (2) used
tractors.
c. To make sure these tractors were fit for the job, site inspections were conducted,
etc. Tractors were then sold with a 90-day warranty for performance and parts
replacement.
d. Plywood agreed to pay for the tractors in installments. It made a down payment of
P210,000. The Deed of Sale was then accompanied by 2 Promissory Notes and a
chattel mortgage.
e. Immediately, Atlantic then executed a Deed of Assignment in favor of IFC Leasing
and Acceptance Corp. (IFC), for the chattel mortgage and the 2 promissory notes.
f. After 14 days, 1 tractor broke down. 9 days after that, the other one broke down.
Atlantic sent its men to repair them, but to no avail.
g. Plywood advised Atlantic that the payments of the installments as listed in the
promissory note would likewise be delayed until the Atlantic completely fulfills its
obligation under its warranty.

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h. No response was received from Atlantic. Eventually, this complaint was filed by IFC,
seeking collection of principal and interest of the 2 PNs.
i. Trial Court ruled for IFC. CA affirmed.
Ruled basically saying that assuming there was breach of warranty,
this should not affect IFC, as it was not a party to that agreement. IFC
is a holder in due course and the instrument is clearly a negotiable
one.
ISSUES and HELD:
1. W/N the promissory note in question is a negotiable instrument so as to bar completely all
the available defenses of PLYWOOD against IFC. Decisions of RTC and CA reversed.
Plywood does not have to pay.
RATIO:
1. The issues on warranty
First, there is no question that the ATLANTIC breached its express 90-day warranty. PLYWOOD
was clearly a victim of a warranty not honored by the maker. Under various provisions of the
Civil Code, there exist express and implied warranties made by a seller to a buyer.
It is patent then, that ATLANTIC is liable for its breach of warranty against PLYWOOD. This
liability as a general rule, extends to the corporation to whom it assigned its rights and interests
unless the assignee is a holder in due course of the promissory note in question, assuming the
note is negotiable, in which case the latter's rights are based on the negotiable instrument and
assuming further that the PLYWOOD's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the PLYWOOD-
corporation notified the ATLANTIC's sister company, AG & P, about the breakdown based on the
ATLANTIC's express 90-day warranty, with which the latter complied by sending its mechanics.
However, due to the ATLANTIC's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were purchased.
Thirdly, the PLYWOOD, thereafter, unilaterally rescinded its contract with the ATLANTIC.
PLYWOOD, having unilaterally and extrajudicially rescinded its contract with the ATLANTIC,
necessarily can no longer sue the ATLANTIC except by way of counterclaim if the ATLANTIC sues
it because of the rescission.

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

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

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Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer, " it cannot be denied that the promissory
note in question is not a negotiable instrument.
Therefore, considering that the subject promissory note is not a negotiable instrument, it
follows that the respondent can never be a holder in due course but remains a mere assignee of
the note in question. Thus, PLYWOOD may raise against the respondent all defenses available to
it as against the ATLANTIC Industrial Products Marketing.
This being so, there was no need for PLYWOOD to have implied the ATLANTIC when it was sued
by the IFC because PLYWOOD's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere assignee of the
promissory note in question, to wit (Court events omitted).

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

The evidence presented in the instant case shows that prior to the sale on installment of the
tractors, there was an arrangement between ATLANTIC and IFC whereby IFC would pay
ATLANTIC the entire purchase price and ATLANTIC, in turn, would assign its rights to the IFC
which acquired the right to collect the price from the buyer, herein PLYWOOD.
A mere perusal of the Deed of Sale (between PLYWOOD and ATLANTIC) and the Deed of
Assignment (between ATLANTIC and IFC) would show that they were all executed on the same
day by and among 3 parties. Therefore, IFC had actual knowledge of the fact that the ATLANTIC's
right to collect the purchase price was not unconditional, and that it was subject to the condition
that the tractors sold were not defective. The IFC knew that when the tractors turned out to be
defective, it would be subject to the defense of failure of consideration and cannot recover the
purchase price from PLYWOODs. Even assuming for the sake of argument that the promissory
note is negotiable, the IFC, which took the same with actual knowledge of the foregoing facts so
that its action in taking the instrument amounted to bad faith, is not a holder in due course. As
such, the IFC is subject to all defenses which PLYWOOD may raise against the ATLANTIC. Any
other interpretation would be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee for the entire purchase
price and all its incidents without being able to raise valid defenses available as against the
assignor.
Lastly, the IFC failed to present any evidence to prove that it had no knowledge of any fact,
which would justify its act of taking the promissory note as not amounting to bad faith.

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a
holder who has taken the instrument under the following conditions:
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the
instrument of defect in the title of the person negotiating it

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SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument amounts to bad faith.
(Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is not a holder in
good faith as to the buyer. NG to paraphrase: In installment sales, generally when a financing
company is involved (as in the present case), Courts generally rule in favor of the buyer when
there arises a breach in the original transaction (such as want of consideration). The Courts
believe that the financing companies are more capable of bearing this risk, rather than have the
installment buying public suffer.
We note, however, that since the ATLANTIC has not been impleaded herein, there is no obstacle
for the IFC to file a civil Suit and litigate its claims against the seller- assignor in the rather
unlikely possibility that it so desires,


6. STATE INVESTMENT HOUSE V. IAC
Emergency Recit:
New Sikatuna requested a loan from the Chuas, which were given as 3 postdated crossed checks.
New Sikatuna entered into an agreement with State Investment and assigned with the latter 11
postdated checksincluding the 3 from the Chuas. When State Investment deposited the checks,
they were dishonored. ISSUE: W/N SIH is a holder in due course? HELD: No!
Ratio: The Negotiable Instruments Law, 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.

DOCTRINE:

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.

Presentment for payment to be sufficient must be made by the holder, or by some


person authorized to receive payment on his behalf. Absence of due presentment, the
drawer did not become liable.

I. FACTS

It appears that New Sikatuna Wood Industries, Inc. requested for a loan from private
respondent Harris Chua.
o
The latter agreed agreed

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,

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1980 as
o
The total value P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with
State Investment House(SIH), Inc. for the sum of Pl,047,402.91 under a deed of sale

New Sikatuna assigned with SIH eleven (11) postdated checks including the
aforementioned three (3) postdated checks issued by herein private respondent-wife Anita
Pea Chua

When the three checks issued by Anita Pena Chua were deposited, these checks
were dishonored by reason of "insufficient funds", "stop payment" and "account closed",
respectively.

STH claims that despite demands on private respondent Anita Pea to make good
said checks, the latter failed to pay.

STH filed an action for collection against the Chuas


RTC: Judgment for the State Investment, ordering Chuas to pay jointly and severally P 229,450.00
with interest at 12% per annum. CA: Reversed RTCs judgement.

ISSUE:
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.
HELD: No.
RATIO:

The Negotiable Instruments Law, 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.

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:
1. the check may not be encashed but only deposited in the bank;
2. the check may be negotiated only once to one who has an account with a bank;
3. 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.

It results therefore that when SIH 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
the purpose for which the three checks were crossed despite the warning of the crossing,
prevents him from being considered in good faith and thus he is not a holder in due course.
o
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.

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Note that under the facts the checks were postdated and issued only as a loan to
New Sikatunano deposits = no loan
o
the three checks are without consideration
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.

Crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check.
o
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.
o
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.
o
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 ...

The three subject checks in the case at bar had been crossed generally and issued
payable to New Sikatuna which could only mean that the drawer had intended the same for
deposit only by the rightful person

Apparently, it was not the New Sikatuna (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.

Yet it does not follow as a legal proposition that simply because SIH was not a holder in due
course it could not recover on the checks. SIH may recover from the New Sikatuna.
CA decision affirmed.




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7. VIOLAGO V. BA FINANCE CORP

EMERGENCY RECIT
AVELINO is the president of Violago Motor Sales Corporation (VMSC). AVELINO sold a car to spouses
PEDRO and FLORENCIA. Terms were that spouses would pay down payment and the balance would
be paid through BA Finance. Spouses executed a Promissory Note in favor of VMSC plus chattel
mortgage on car. Deed of Assignment from VMSC in favor of BA Finance. Spouses didnt know that
AVELINO sold and delivered the car to another cousin, ESMERALDO. Since they didnt get the car,
they stopped paying BA Finance.

BA Finance filed a case in the RTC against spouses and Avelino. Found the spouses guilty but are
entitled to be repaid by Avelino. CA said that the PN was a negotiable instrument, BA finance was a
holder in due course and that Avelino was not to pay due to the spouses fault for failing to implead
VMSC, seller of vehicle and creditor in PN, as a party in the Third Party Complaint.

Issue in SC:
1. W/N the PN is a negotiable instrument? Yes
2. W/N BA Finance is a holder in due course, therefore making the spouses Violago liable to
them? Yes
3. W/N the veil of corporate entity may be invoked and sustained despite the fraud and
deception of Avelino. No.

Doctrine:
The promissory note is clearly negotiable. The appellate court was correct in finding all the
requisites of a negotiable instrument present. (Based on Sec 1. of the NIL) It is in writing;
signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e.,
PhP 209,601, on specific dates in the future which could be determined from the terms of
the note; made payable to the order of VMSC; and names the drawees with certainty. The
indorsement by VMSC to BA Finance appears likewise to be valid and regular.

A holder in due course holds the instrument free from any defect of title of prior parties and
from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. Since BA Finance is a holder in due course,
petitioners cannot raise the defense of non-delivery of the object and nullity of the sale
against the corporation. Thus, petitioners are liable to respondent corporation for the
payment of the amount stated in the instrument.


FACTS
Petitioners-spouses Pedro and Florencia Violago pray for the reversal of the CA ruling which held
them liable to respondent BA Finance Corporation (BA Finance) under a promissory note and a
chattel mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged directly
liable to BA Finance.

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Sometime in 1983, AVELINO Violago, President of Violago Motor Sales Corporation (VMSC),
offered to sell a Toyota Cressida Model 1983 to his cousin, PEDRO F. Violago, and the latter's
wife, FLORENCIA.
o needed to sell to increase the sales quota of VMSC
o Pedro and Florencia only had to pay down payment of P60,500. Balance would be paid
by BA Finance
o Spouses would pay monthly installments to BA Finance
o Avelino would take care of documentation and approval of financing

Promissory Note - Spouses bound themselves to pay jointly and severally to the order of
VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the
first installment to be due and payable on September 16, 1983. Chattel mortgage on car for
payment of Php 209,601

Disclosure Statement of Loan/Credit Transportation showed net purchase price, down


payment, balance, finance charges
Sales Invoice was issued to the spouses
VMSC, through Avelino, endorsed the PN to BA Finance without recourse.
VMSC received the P 209,601. Executed a Deed of Assignment of rights and interests under
PN and Chattel Mortgage in favor of BA Finance.
Spouses paid Php 60,500 to VMSC through Avelino

Sales Invoice filed with LTO Baliwag Branch. Certificate of Registration in the name of Pedro
(August 1983)
o Spouses unaware that the car had been previously sold to ESMERALDO Violago
(1982). Registered in LTO San Rafael.
o No delivery of the vehicle. Since there was no delivery, Pedro did not pay any
monthly amortization to BA Finance.


Case in the RTC
BA Finance filed a complaint for Replevin with Damages against spouses.
Prayed for delivery of vehicle to BA Finance or payment of Php 199,049.41 plus penalty at
3%/month.
BA Finance also asked for the payment of attorney's fees, liquidated damages, replevin bond
premium, expenses in the seizure of the vehicle, and costs of suit.
RTC issued an Order for Replevin
Spouses Violago declared in default for failing to file an answer
Decision in favor if BA Finance.

Same time as case in RTC, Esmeraldo conveyed the vehicle to Jose V. Olvido
issued a Certificate of Registration by LTO-Cebu City
Olvido executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security
for a loan covered by a promissory note. This promissory note was endorsed to BA Finance,
Cebu Branch

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Spouses failed to get a Motion for Reconsideration and Motion to Quash Writ of Execution on the
basis of lack of a valid service of summons on them. RTC denied. Petition for Certiorari before the
CA. CA nullified RTC ruling, became final and executory.

New case in the RTC alleging the facts stated above. The RTC rendered a Decision on March 5, 1994,
finding for BA Finance but against the Violago spouses. The RTC, however, declared that they are
entitled to be indemnified by Avelino.

Case in the CA
Spouses contention
o PN is a Negotiable Instrument, RTC should have applied NIL and not the Civil Code
o Since VMSC was not the owner of the vehicle at the time of the sale, the sale was
null and void for failure in the cause or consideration of the PN
o BA Finance was not a holder in due court since it knew, through its Cebu City branch,
that the car was never delivered to the spouses
Avelinos prayer
o dismissal of the complaint against him because he was not a party to the transaction
o spouses should pay him moral damages and costs of suit

Ruling of the CA
PN was a negotiable instrument
BA Finance was a holder in due course
Spouses fault for failing to implead VMSC, seller of vehicle and creditor in PN, as a party in
the Third Party Complaint
Set aside the trial court's order holding Avelino liable for damages to the spouses without
prejudice to the action of the spouses against VMSC and Avelino in a separate action

Issues/Held
4. W/N the PN is a negotiable instrument? Yes
5. W/N BA Finance is a holder in due course, therefore making the spouses Violago liable to
them? Yes
6. W/N the veil of corporate entity may be invoked and sustained despite the fraud and
deception of Avelino. No.

RATIO

The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites
of a negotiable instrument present. (Based on Sec 1. of the NIL) It is in writing; signed by the Violago
spouses; has an unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates
in the future which could be determined from the terms of the note; made payable to the order of
VMSC; and names the drawees with certainty. The indorsement by VMSC to BA Finance appears
likewise to be valid and regular.

CA is correct in finding that BA Finance is a holder in due course:

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

A holder in due course holds the instrument free from any defect of title of prior parties and from
defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof. Since BA Finance is a holder in due course, petitioners cannot raise the
defense of non-delivery of the object and nullity of the sale against the corporation. Thus,
petitioners are liable to respondent corporation for the payment of the amount stated in the
instrument.

(Corp. Issue not relevant to Nego)
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
acts in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

This case meets the foregoing test. Avelino clearly defrauded petitioners. His actions were the
proximate cause of petitioners' loss. He cannot now hide behind the separate corporate personality
of VMSC to escape from liability for the amount adjudged by the trial court in favor of petitioners.

The fact that VMSC was not included as defendant in petitioners' third party complaint does not
preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to
the application of the piercing-of-the-corporate-veil doctrine.

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

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8. ROBERT DINO V. MARIA LUISA LOOT

Emergency Recit:
A syndicate induced Dino to lend them P3M to be secured by a real estate mortgage. Dino issued 3
checks. One of these checks was worth P1M. When Dino discovered that he was deceived, he
advised Metrobank to stop payment of checks. The other 2 checks were already encashed but the
check worth P1M (CHECK) was ordered stopped. Lobitana, the payee of the check, negotiated the
instrument to Loot. The question is whether spouses Loot are holders in due course of the CHECK as
to entitle them to collect the face value of the check from Dino. The Court held that they are not
holders in due course. The check was crossed. Therefore the Loots had the duty to ascertain the
indorsers, in this case Lobitanas, title to the check or the nature of her possession. This they failed
to do. However, the fact that the Loots are not holders in due course does not automatically mean
that they cannot recover on the check. 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. Among such
defenses is the absence or failure of consideration. Spouses Loot can recover from the indorser,
Lobitana.

April 19, 2010
CARPIO, J.:

I. FACTS

Sometime in December 1992, a syndicate, approached Dino and induced him to lend the
group P3M to be secured by a real estate mortgage on the properties. They offered to
execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage
contract. Petitioner issued three Metrobank checks totaling P3M , one of which is a CHECK in
the amount of P1M payable to Vivencia Ompok Consing and/or Fe Lobitana.

Subsequently, Dino discovered that the documents covered rights over government
properties. Realizing he had been deceived, petitioner advised Metrobank to stop payment
of his checks. However only the check worth 1M (CHECK) was ordered stopped. The other
two checks were already encashed by the payees.

Lobitana negotiated and CHECK to spouses Loot in exchange for cash in the sum of
P948,000.00. Drawee bank guaranteed that the check was sufficiently funded.. However,
when respondents deposited the check with Metrobank, it was dishonored by the drawee
bank for reason PAYMENT STOPPED.

SPOUSES LOOT: they are holders in due course and for value of CHECK and that they had no
prior information concerning the transaction between defendants.

TRIAL COURT: ruled in favor of Loot and declared them due course holders of the subject
check,

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CA: affirmed the trial courts finding that spouses Loot are holders in due course of CHECK.
The CA pointed out that Dinos own admission that the Loots were never parties to the
transaction among petitioner, Lobitana, Concordio Toring, Cecilia Villacarlos, and Consing,
proved their lack of knowledge of any infirmity in the instrument or defect in the title of the
person negotiating it.


Issue
Whether spouses Loot are holders in due course of the CHECK as to entitle them to collect the face
value of the check from Dino.

Held:
Spouses Loot NOT a holder in due course.
Ratio:

Dino maintained that the Loots are not holders in due course of the subject check, and as
such, they could not recover any liability on the check from petitioner. The act of crossing a
check serves as a warning to the holder that the check has been issued for a definite
purpose so that the holder thereof must inquire if he has received the check pursuant to
that purpose; otherwise, he is not a holder in due course.

Section 52 of the NIL states: A holder in due course is a holder who has taken the instrument
under the following conditions: (a) That it is complete and regular upon its face; (b) That he
became the holder of it before it was overdue, and without notice that it has been
previously dishonored, if such was the fact; (c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must additionally be
considered: A crossed check (a) may not be encashed but only deposited in the bank; (b)
may be negotiated only once to one who has an account with a bank; and (c) warns the
holder that it has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder
in due course.

Based on the foregoing, the Loots had the duty to ascertain the indorsers, in this case
Lobitanas, title to the check or the nature of her possession. This they failed to do. Loots
verification from Metrobank on the funding of the check does not amount to determination
of Lobitanas title to the check. Failing in this respect, the Loots are guilty of gross
negligence. Hence, they are not deemed holders in due course of the subject check.

However, the fact that the Loots are not holders in due course does not automatically
mean that they cannot recover on the check. The only disadvantage of a holder who is not

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in due course is that the negotiable instrument is subject to defenses as if it were non-
negotiable. Among such defenses is the absence or failure of consideration.

Petitioner issued the subject check supposedly for a loan in favor of Consings group, who
turned out to be a syndicate defrauding gullible individuals. Since there is in fact no valid
loan to speak of, there is no consideration for the issuance of the check. Consequently, Dino
cannot be obliged to pay the face value of the check. However, the Loots can collect from
the immediate indorser, in this case Lobitana.

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