G.R. No.

89252 May 24, 1993

RAUL SESBREO, petitioner, vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the
Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32)
days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation
Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner,
with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian
Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as
payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were
dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank
("Pilipinas"). It reads as follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

February 9, 1981
VALUE DATE
TO Raul Sesbreo
April 6, 1981
MATURITY DATE
NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE
CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized representative at any time
during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you
should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and
handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR
No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the
underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the
security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;"
and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent
Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's
demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship
Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never
released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of
DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance
PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange
commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date
apparently remains in the custody of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for
damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989,
the Court of Appeals denied the appeal and held: 6

Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-
appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when
its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend
and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar;
hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost
against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due
course to the petition and required the parties to file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court
of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of
DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in
view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the
veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3)
entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-
vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship
that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of
Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the
extent it necessarily impinges upon or intersects the first and second relationships.

I. We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory
note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The
Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as
stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another
so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a
holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.) 9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred,
in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to
pay petitioner the portion of that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by
the word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended
that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A
issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions;

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject
to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from
the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof
coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument
may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may,
obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument:
 The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the
sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original
parties. 12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It
contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

April 10, 1980

Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10,
1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10,
1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

Very Truly Yours,

(Sgd.)
Florencio B. Biagan
Senior Vice President 13

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance
assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add
that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and
without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on
this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes
was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April
1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left
with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without
the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment
in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731
constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation,
which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the
sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an
entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in
money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made
the following important statement:
 There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence
Smith "the money market is a market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in
the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or
entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity,
with or without recourse". The fundamental function of the money market device in its operation is to match and
bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is
an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick
mobility of money and securities."

The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer
of a commercial paper in the money market necessarily knows in advance that it would be expenditiously
transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification
is given to the borrower or issuer of commercial paper of the sale or transfer to the investor.

There is need to individuate a money market transaction, a relatively novel institution in the Philippine
commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal
basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate
and effective protection in availing of the credit of a borrower in the commercial paper market. 18(Citations
omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the
relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-
terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner
would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33,
because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be
creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner
accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July
1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC
PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a
firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee
is merely substituted in the place of the assignor 20and that the assignee acquires his rights subject to the equities i.e.,
the defenses which the debtor could have set up against the original assignor before notice of the assignment was
given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior
to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before
notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person
who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731
had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment
anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from
Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February
1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No.
2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of
the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.

II. We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No.
10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you . 23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay
petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under
DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature
on 6 April 1981 and payable to the order of Philfinance;
 (2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to
petitioner by payee Philfinance; 24

(3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular
bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a
participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into
an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time.
We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the
Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against
him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article
1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires
solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner
argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary
liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the
terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas
had breached its undertaking under the DCR to petitioner Sesbreo.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as
custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider that
this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an
integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of
DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold
would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship
agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner)
to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market
by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The depositary in a contract
of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented
case, of the beneficiary) of the contract, even though a term for such return may have been established in the said
contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental
purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be
enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is any party that needs
the equalizing protection of the law in money market transactions, it is the members of the general public whom place
their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it is not related
either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper
dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The
providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or
dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when
petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term
was never brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance was
made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral
part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code
noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas
as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising
out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited,
Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself
benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present
purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No.
2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of
six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may
have vis-a-vis Philfinance.

III.The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas
should be treated as one corporate entity need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial
court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition
before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite
the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies
used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and
managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of
Philfinance to petitioner. 28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195
dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such
Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank
is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at
the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the
Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.
 RAUL SESBREO vs HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK

G.R. No. 89252 May 24, 1993

FACTS: Raul Sesbreno made a money market placement in the amount of P300,000 with PhilFinance, with a term of
32 days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor Corporation
Promissory Note (DMC PN No. 2731), the Certificate of Securities Delivery Receipt indicating the sale of the Note
with notation that said security was in the custody of Pilipinas Bank, and postdated checks drawn against the Insular
Bank of Asia and America for P304,533.33 payable on 13 March 1981. The checks were dishonored for having been
drawn against insufficient funds. Philfinance delivered to petitioner Denominated Custodian Receipt (DCR).

Petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, and handed her a demand letter informing
the bank that his placement with Philfinance in the amount reflected in the DCR had remained unpaid and outstanding,
and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined
the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would
mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as payee and private
respondent Delta Motors Corporation (Delta) as maker; and that on face of the promissory note was stamped
NON NEGOTIABLE. Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to
petitioner.

Petitioner later made similar demand letters again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731.

Petitioner also made a written demand upon private respondent Delta for the partial satisfaction of DMC PN No. 2731,
explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta,
however, denied any liability to petitioner on the promissory note.

As petitioner had failed to collect his investment and interest thereon, he filed an action for damages against private
respondents Delta and Pilipinas.

ISSUE: WON DMC PN No. 2731 marked as non-negotiable may be assigned?

HELD: YES. Only an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable
instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable
instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be
assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the
instrument:

The words not negotiable, stamped on the face of the bill of lading, did not destroy its assignability, but the sole
effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to the equities between the original parties. 12 (Emphasis added)

DMC PN No. 2731, while marked non-negotiable, was not at the same time stamped non-transferable or non-
assignable. It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part,
that Note.
 G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners, vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October 17,
1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

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

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

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

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

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

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

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-corporation's
job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of the machines.

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

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

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site its
mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer
serviceable (t. s. n., May 28, 1980, p. 78).

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

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the
units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to
bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up calls,
the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the respondent
against the petitioners, the corporation, Wee, and Vergara.

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

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

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

WHEREFORE, judgment is hereby rendered:

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

2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal
and to pay the costs of the suit.

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

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

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:

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

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

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of the
trial court. The pertinent portions of the decision are as follows:
 From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside
from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of
breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this
case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-
appellant herein upon application by appellant corporation granted financing for the purchase of the questioned
units of Fiat-Allis Crawler,Tractors.

Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from the contract
and/or demand a proportionate reduction of the price with damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a holder in due course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in financing
and receivable discounting extending credit facilities to consumers and industrial, commercial or agricultural
enterprises by discounting or factoring commercial papers or accounts receivable duly authorized pursuant to R.A.
5980 otherwise known as the Financing Act.

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

In view of the essential elements found in the questioned promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal without
merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)

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

Hence, this petition was filed on the following grounds:

I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.

III. SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

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

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.

V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

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

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

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

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

Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time because the
petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered pro- formal.

The petition is impressed with merit.

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

The Civil Code provides that:

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

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as
follows:

(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods
are acquired, and it appears that the buyer relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose;

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed
by the usage of trade.
 ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even though
he was not aware thereof.

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

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

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the
seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day warranty, with
which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and its failure to comply with
its warranty, the tractors became totally unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

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

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

Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no
longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:

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

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

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be
payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument.

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

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. . . .

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

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent
can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing.

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

ATTY. PALACA:

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

COURT:

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

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons; what is assigned are
rights, the rights of the mortgagee were assigned to the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want to make a
distinction, one is an assignment of mortgage right and the other one is indorsement of the promissory note. What
counsel for defendants wants is that you stipulate that it is contained in one single transaction?

ATTY. ILAGAN:
 We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

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

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

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

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

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

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 deffect in the title
of the person negotiating it

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

We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the
buyer, to wit:

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

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

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

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

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

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

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

SO ORDERED.
 G.R. No. 170912 April 19, 2010
ROBERT DINO, Petitioner, vs.
MARIA LUISA JUDAL-LOOT, joined by her husband VICENTE LOOT, Respondents.

The Case
This is a petition for review 1 of the 16 August 2005 Decision2 and 30 November 2005 Resolution3 of the Court of
Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed the decision of the Regional Trial Court, 7th
Judicial Region, Branch 56, Mandaue City (trial court), with the deletion of the award of interest, moral damages,
attorneys fees and litigation expenses. The trial court ruled that respondents Maria Luisa Judal-Loot and Vicente Loot
are holders in due course of Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as
drawer, together with co-defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check,
among others.

The Facts
Sometime in December 1992, a syndicate, one of whose members posed as an owner of several parcels of land situated
in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend the group P3,000,000.00 to be secured by a
real estate mortgage on the properties. A member of the group, particularly a woman pretending to be a certain
Vivencia Ompok Consing, even offered to execute a Deed of Absolute Sale covering the properties, instead of the usual
mortgage contract.4 Enticed and convinced by the syndicates offer, petitioner issued three Metrobank checks
totaling P3,000,000.00, one of which is Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount
of P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.5
Upon scrutinizing the documents involving the properties, petitioner discovered that the documents covered rights over
government properties. Realizing he had been deceived, petitioner advised Metrobank to stop payment of his checks.
However, only the payment of Check No. C-MA- 142119406-CA was ordered stopped. The other two checks were
already encashed by the payees.

Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in exchange for cash
in the sum of P948,000.00, which respondents borrowed from Metrobank and charged against their credit line. Before
respondents accepted the check, they first inquired from the drawee bank, Metrobank, Cebu-Mabolo Branch which is
also their depositary bank, if the subject check was sufficiently funded, to which Metrobank answered in the positive.
However, when respondents deposited the check with Metrobank, Cebu-Mabolo Branch, the same was dishonored by
the drawee bank for reason "PAYMENT STOPPED."

Respondents filed a collection suit6 against petitioner and Lobitana before the trial court. In their Complaint,
respondents alleged, among other things, that they are holders in due course and for value of Metrobank Check No. C-
MA-142119406-CA and that they had no prior information concerning the transaction between defendants.

In his Answer, petitioner denied respondents allegations that "on the face of the subject check, no condition or
limitation was imposed" and that respondents are holders in due course and for value of the check. For her part,
Lobitana denied the allegations in the complaint and basically claimed that the transaction leading to the issuance of
the subject check is a sale of a parcel of land by Vivencia Ompok Consing to petitioner and that she was made a payee
of the check only to facilitate its discounting.

The trial court ruled in favor of respondents and declared them due course holders of the subject check, since there was no
privity between respondents and defendants. The dispositive portion of the 14 March 1996 Decision of the trial court reads:

In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:
1.) defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 representing the face value of subject
Metrobank check;
2.) to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for accrued and paid interest;
3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of P100,000.00;
4.) to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for attorneys fees; and
5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of P10,000.00 and costs of the suit.
SO ORDERED.7
Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.
The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts finding that respondents are holders in due course of Metrobank Check
No. C-MA- 142119406-CA. The Court of Appeals pointed out that petitioners own admission that respondents were
never parties to the transaction among petitioner, Lobitana, Concordio Toring, Cecilia Villacarlos, and Consing, proved
respondents lack of knowledge of any infirmity in the instrument or defect in the title of the person negotiating it.
Moreover, respondents verified from Metrobank whether the check was sufficiently funded before they accepted it.
Therefore, respondents must be excluded from the ambit of petitioners stop payment order.

The Court of Appeals modified the trial courts decision by deleting the award of interest, moral damages, attorneys
fees and litigation expenses. The Court of Appeals opined that petitioner "was only exercising (although incorrectly),
what he perceived to be his right to stop the payment of the check which he rediscounted." The Court of Appeals ruled
that petitioner acted in good faith in ordering the stoppage of payment of the subject check and thus, he must not be
made liable for those amounts.

In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts decision with modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the decision of the lower court, WE hereby DISMISS the
appeal and AFFIRM the decision of the court a quo with modifications that the award of interest, moral damages, attorneys
fees and litigation expenses be deleted.
No pronouncement as to costs. SO ORDERED.8
In its 30 November 2005 Resolution, the Court of Appeals denied petitioners motion for reconsideration.

In denying the petitioners motion for reconsideration, the Court of Appeals noted that petitioner raised the defense that
the check is a crossed check for the first time on appeal (particularly in the motion for reconsideration). The Court of
Appeals rejected such defense considering that to entertain the same would be offensive to the basic rules of fair play,
justice, and due process.

Hence, this petition.

The Issues
Petitioner raises the following issues:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE HOLDERS IN DUE COURSE. THE
FACT THAT METROBANK CHECK NO. 142119406 IS A CROSSED CHECK CONSTITUTES SUFFICIENT WARNING TO
THE RESPONDENTS TO EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR RECONSIDERATION UPON THE
GROUND THAT THE ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY
DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE COMMISSION
OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.9
The Ruling of this Court

The petition is meritorious.

Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA-142119406-CA is a crossed
check for the first time in his motion for reconsideration before the Court of Appeals. Respondents insist that issues not
raised during the trial cannot be raised for the first time on appeal as it would be offensive to the elementary rules of
fair play, justice and due process. Respondents further assert that a change of theory on appeal is improper.

In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the Complaint, concerning the
allegation that on the face of the subject check, no condition or limitation was imposed, and (2) Paragraph 8 of the
Complaint, regarding the allegation that respondents were holders in due course and for value of the subject check. In
his "Special Affirmative Defenses," petitioner claimed that "for want or lack of the prestation," he could validly stop
the payment of his check, and that by rediscounting petitioners check, respondents "took the risk of what might
happen on the check." Essentially, petitioner maintained that respondents are not holders in due course of the subject
check, and as such, respondents could not recover any liability on the check from petitioner.

Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank Check No. C-MA-
142119406-CA is a crossed check. It must be stressed, however, that petitioner consistently argues that respondents are not
holders in due course of the subject check, which is one of the possible effects of crossing a check. The act of crossing a
check serves as a warning to the holder that the check has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. 10 Contrary to
respondents view, petitioner never changed his theory, that respondents are not holders in due course of the subject check, as
would violate fundamental rules of justice, fair play, and due process. Besides, the subject check was presented and admitted
as evidence during the trial and respondents did not and in fact cannot deny that it is a crossed check.

In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the lower courts in
the interest of substantial justice.11 In Casa Filipina Realty v. Office of the President,12 the Court held:

[T]he trend in modern-day procedure is to accord the courts broad discretionary power such that the appellate court
may consider matters bearing on the issues submitted for resolution which the parties failed to raise or which the lower
court ignored. Since rules of procedure are mere tools designed to facilitate the attainment of justice, their strict and
rigid application which would result in technicalities that tend to frustrate rather than promote substantial justice, must
always be avoided. Technicality should not be allowed to stand in the way of equitably and completely resolving the
rights and obligations of the parties.13

Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The main issue is
whether respondents are holders in due course of Metrobank Check No. C-MA 142119406 CA as to entitle them to
collect the face value of the check from its drawer or petitioner herein.

Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of
the person negotiating it.
In the case of a crossed check, as in this case, the following principles must additionally be considered: A crossed
check (a) may not be encashed but only deposited in the bank; (b) may be negotiated only once to one who has an
account with a bank; and (c) warns the holder that it has been issued for a definite purpose so that the holder thereof
must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. 14

Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas, title to the check
or the nature of her possession. This respondents failed to do. Respondents verification from Metrobank on the
funding of the check does not amount to determination of Lobitanas title to the check. Failing in this respect,
respondents are guilty of gross negligence amounting to legal absence of good faith, 15 contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check. 16

State Investment House v. Intermediate Appellate Court 17 squarely applies to this case. There, New Sikatuna Wood
Industries, Inc. sold at a discount to State Investment House three post-dated crossed checks, issued by Anita Pea
Chua naming as payee New Sikatuna Wood Industries, Inc. The Court found State Investment House not a holder in
due course of the checks. The Court also expounded on the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the
check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be
general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar,
in which case the drawee should not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the
Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some
person authorized to receive payment on his behalf x x x As to who the holder or authorized person will be depends on
the instructions stated on the face of the check.

The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood
Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person,
i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there
was no proper presentment, and the liability did not attach to the drawer.

Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is
available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is
not the proper party authorized to make presentment of the checks in question.

In this case, there is no question that the payees of the check, Lobitana or Consing, were not the ones who presented
the check for payment. Lobitana negotiated and indorsed the check to respondents in exchange for P948,000.00. It was
respondents who presented the subject check for payment; however, the check was dishonored for reason "PAYMENT
STOPPED." In other words, it was not the payee who presented the check for payment; and thus, there was no proper
presentment. As a result, liability did not attach to the drawer. Accordingly, no right of recourse is available to
respondents against the drawer of the check, petitioner herein, since respondents are not the proper party authorized to
make presentment of the subject check.

However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover
on the check.18 The Negotiable Instruments Law does not provide that a holder who is not a holder in due course may
not in any case recover on the instrument. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. 19 Among such defenses is the absence or
failure of consideration,20 which petitioner sufficiently established in this case. 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,
petitioner cannot be obliged to pay the face value of the check.1avvphi1

Respondents can collect from the immediate indorser, 21 in this case Lobitana. Significantly, Lobitana did not appeal the
trial courts decision, finding her solidarily liable to pay, among others, the face value of the subject check. Therefore,
the trial courts judgment has long become final and executory as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30 November 2005
Resolution of the Court of Appeals in CA-G.R. CV No. 57994.

SO ORDERED.
 Roberto Dino vs. Maria Luisa Judal-Loot

Facts:
Petitioner was induced to lend a syndicate P3,000,000.00 to be secured by a real estate mortgage on several parcels of
land situated in Cannula, Lapu-lapu City. Upon scrutinizing the documents involving the properties, petitioner
discovered that the documents covered rights over government properties. Realizing he had been deceived, petitioner
advised Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA- 142119406-
CAwas ordered stopped. The other two checks were already encased by the payees. Meanwhile, Check No. C-MA-
142119406-CA (a cross-check) was negotiated and indorsed to respondents by petitioner in exchange for cash in the
sum of P948,000.00, which respondents borrowed from Metrobank and charged against their credit line. Drawee bank,
Metrobank,Cebu-Mabolo Branch, which is also their depositary bank, answered that the checks weresuffiiently
funded. However, the same was dishonored by the drawee bank when they tried to deposit it for reason PAYMENT
STOPPED. Respondents filed a collection suit against petitioner and Lobitana before the trial court. The trial court
ruled in favor of respondents and declared them due course holders of the subject check, since there was no privity
between respondents and defendants. CA affirmed but modified the trial courts decision by deleting the award of
interest, moral damages, attorneys fees and litigation expenses. The Court of Appeals opined that petitioner was
only exercising(although incorrectly), what he perceived to be his right to stop the payment of the check which he
rediscounted. The Court of Appeals ruled that petitioner acted in good faith in ordering the stoppage of payment of the
subject check and thus, he must not be made liable for those amounts.

Issue:
WON The respondents were holders in due course?

Held:
PETITION GRANTED. Section 52 of the Negotiable Instruments Law defines a holder induce course, thus: A holder
in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has-been previously dishonored, if
such was the fact
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of
the person negotiating it.In the case of a crossed check, as in this case, the following principles must additionally be
considered: A crossed check (a) may not be encashed but only deposited in the bank; (b) maybe 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, respondents had the duty to ascertain the indorsers, in this case Lobitanas, title to
the check or the nature of her possession. This respondents failed to do. Respondents verification from Metrobank on
the funding of the check does not amount to determination of Lobitanas title to the check. Failing in this respect,
respondents are guilty of gross negligence amounting to legal absence of good faith,[15] contrary to Section 52(c) of
the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check.
However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover
on the check. 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. 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,[ which petitioner sufficiently established in this case.

Petitioner issued the subject check supposedly for a loan in favor of Consings group, who turned out to be asyndicate
defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration for the
issuance of the check. Consequently, petitioner cannot be obliged today the face value of the check.
 G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET AL., defendants-appellants.
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.
 G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET AL., defendants-appellants.

Facts:

Matilde Gonzales was a patient of the De Ocampo Clinic owned by Vicente De Ocampo. She incurred a debt
amounting to P441.75. Her husband, Manuel Gonzales designed a scheme in order to pay off this debt: In 1953,
Manuel went to a certain Anita Gatchalian. Manuel purported himself to be selling the car of Vicente De Ocampo.
Gatchalian was interested in buying said car but Manuel told her that De Ocampo will only sell the car if Gatchalian
shows her willingness to pay for it. Manuel advised Gatchalian to draw a check of P600.00 payable to De Ocampo so
that Manuel may show it to De Ocampo and that Manuel in the meantime will hold it for safekeeping. Gatchalian
agreed and gave Manuel the check. After that, Manuel never showed himself to Gatchalian.

Meanwhile, Manuel gave the check to his wife who in turn gave the check to De Ocampo as payment of her bills with
the clinic. De Ocampo received the check and even gave Matilde her change (sukli). On the other hand, since
Gatchalian never saw Manuel again, she placed a stop-payment on the P600.00 check so De Ocampo was not able to
cash on the check. Eventually, the issue reached the courts and the trial court ordered Gatchalian to pay De Ocampo the
amount of the check.

Gatchalian argued that De Ocampo is not entitled to payment because there was no valid indorsement. De Ocampo
argued tha he is a holder in due course because he is the named payee.

ISSUE: Whether or not De Ocampo is a holder in due course.

HELD: No. Section 52 of the 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 Supreme Court emphasized that if one is such a holder in due course, it is immaterial that he was the payee and an
immediate party to the instrument. The Supreme Court however ruled that De Ocampo is not a holder in due course for
his lack of good faith. De Ocampo should have inquired as to the legal title of Manuel to the said check. The fact that
Gatchalian has no obligation to De Ocampo and yet hes named as the payee in the check hould have apprised De
Ocampo; that the check did not correspond to Matilde Gonzales obligation with the clinic because of the fact that it
was for P600.00 more than the indebtedness; that why was Manuel in possession of the check all these gave De
Ocampo the duty to ascertain from the holder Manuel Gonzales what the nature of the latters title to the check was or
the nature of his possession.
 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.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after
referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI,
on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3

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

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

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.

FAR EAST BANK & TRUST COMPANY, petitioner, vs.

GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon Huat, respondent.
FACTS:
June 1998: Samuel Tagoe, a foreigner, purchased from Gold Palace Jewellery Co.'s (Gold Palace's) store at
SM-North EDSA several pieces of jewelry valued at P258,000
paid w/ Foreign Draft issued by the United Overseas Bank (Malaysia) to Land Bank of the Philippines,
Manila (LBP) for P380,000
Teller of Far East Bank, next door tenant, informed Julie Yang-Go (manager of Gold Palace) that a foreign draft has
similar nature to a manager's check, but advised her not to release the pieces of jewelry until the draft had been cleared
Yang issued Cash Invoice so the jewelries can be released
Yang deposited the draft in the company's account with the Far East on June 2, 1998
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, cleared the it and
Gold Palace's account with Far East was credited
June 6, 1998: The foreigner eventually returned to claim the purchased goods.
After ascertaining that the draft had been cleared, Yang released the pieces of jewelry and his change,
Far East Check of P122,000 paid by the bank
June 26, 1998: LBP informed Far East that the Foreign Draft had been materially altered from P300 to
P300,000and that it was returning the same
Far East refunded the amount to LBP and debit only P168,053.36 of the amount left in Gold Palace'
account without a prior written notice to the account holder
Far East only notified by phone the representatives of the Gold Palace
August 12, 1998: Far East demanded from Gold Palace the payment of balance and upon refusal filed in the
RTC
RTC: in favor of Far East on the basis that Gold Palace was liable under the liabilities of a general indorser
CA: reversed since Far East failed to undergo the proceedings on the protest of the foreign draft or to notify
Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an
indorser

ISSUE: W/N Gold Palace should be liable for the altered Foreign Draft

HELD: NO. AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorney's fees
is DELETED

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance.
This provision applies with equal force in case the drawee pays a bill without having previously accepted it.
Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to
pay
The payment of a check includes its acceptance
The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts.
LBP was liable on its payment of the check according to the tenor of the check at the time of payment,
which was the raised amount.
Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due
course
LBP, having the most convenient means to correspond with UOB, did not first verify the amount of the draft
before it cleared and paid the same
Gold Palace had no facility to ascertain with the drawer, UOB Malaysia, the true amount in the draft. It
was left with no option but to rely on the representations of LBP that the draft was good
 Principle that the drawee bank, having paid to an innocent holder the amount of an uncertified, altered check
in good faith and without negligence which contributed to the loss, could recover from the person to whom
payment was made as for money paid by mistake - NOT applicable
The Court is also aware that under the Uniform Commercial Code in the United States of America, if an
unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts the draft, the
person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the
time of transfer, warrant to the drawee making payment or accepting the draft in good faith that the draft has not
been altered - absent any similar provision in our law, cannot extend the same preferential treatment to the paying
bank
Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should not have debited the
money paid by the drawee bank from respondent company's account. When Gold Palace deposited the check with
Far East, it, under the terms of the deposit and the provisions of the NIL, became an agent of the Gold Palace for
the collection of the amount in the draft
The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the
transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a
mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of
the transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will
arise if a bank at some future time will call on the payee for the return of the money paid to him on the check
As the transaction in this case had been closed and the principal-agent relationship between the payee
and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already
acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have
acted as the representative of the drawee bank when it debited respondent's account, because, as already explained,
the drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke the warranty of the
payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is
precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a
restrictive indorsement. It did not in any way transfer the title of the instrument to the collecting bank. Far East did
not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due
course, these warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far
East. Without any legal right to do so, the collecting bank, therefore, could not debit respondent's account for the
amount it refunded to the drawee bank
 G.R. No. 168274 August 20, 2008
FAR EAST BANK & TRUST COMPANY, petitioner, vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon Huat, respondent.

The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a foreigner,
identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold Palace's) store at SM-
North EDSA several pieces of jewelry valued at P258,000.00.3 In payment of the same, he offered Foreign Draft No. M-
069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the
Land Bank of the Philippines, Manila (LBP), and payable to the respondent company for P380,000.00.4

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired from
petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall tenant, the nature
of the draft. The teller informed her that the same was similar to a manager's check, but advised her not to release the
pieces of jewelry until the draft had been cleared. 5 Following the bank's advice, Yang issued Cash Invoice No. 1609 6 to
the foreigner, asked him to come back, and informed him that the pieces of jewelry would be released when the draft
had already been cleared. 7 Respondent Julie Yang-Go, the manager of Gold Palace, consequently deposited the draft in
the company's account with the aforementioned Far East branch on June 2, 1998. 8

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the
same9-UOB's account with LBP was debited,10 and Gold Palace's account with Far East was credited with the amount
stated in the draft.11

The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods. After ascertaining
that the draft had been cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe; and because the amount in
the draft was more than the value of the goods purchased, she issued, as his change, Far East Check No.
173088112 for P122,000.00.13 This check was later presented for encashment and was, in fact, paid by the said bank.14

On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft No. M-069670
had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Attached to its official
correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of
a corporate officer of the drawer, UOB. 15It is noted at this point that the material alteration was discovered by UOB
after LBP had informed it that its funds were being depleted following the encashment of the subject draft. 16 Intending
to debit the amount from respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the outstanding
balance of its account was already inadequate, Far East was able to debit only P168,053.36,17 but this was done without a
prior written notice to the account holder.18 Far East only notified by phone the representatives of the respondent company.19

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference between the
amount in the materially altered draft and the amount debited from the respondent company's account. 20 Because Gold
Palace did not heed the demand, Far East consequently instituted Civil Case No. 99-296 for sum of money and
damages before the Regional Trial Court (RTC), Branch 64 of Makati City.21

In their Answer, respondents specifically denied the material allegations in the complaint and interposed as a defense
that the complaint states no cause of action-the subject foreign draft having been cleared and the respondent not being
the party who made the material alteration. Respondents further counterclaimed for actual damages, moral and exemplary
damages, and attorney's fees considering, among others, that the petitioner had confiscated without basis Gold Palace's
balance in its account resulting in operational loss, and had maliciously imputed to the latter the act of alteration.22

After trial on the merits, the RTC rendered its July 30, 2001 Decision 23 in favor of Far East, ordering Gold Palace to
pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees. 24The trial court ruled that, on the
basis of its warranties as a general indorser, Gold Palace was liable to Far East. 25
On appeal, the CA, in the assailed March 15, 2005 Decision, 26 reversed the ruling of the trial court and awarded
respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings on the protest of the
foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its
secondary liability as an indorser.27 The appellate court further ruled that the drawee bank had cleared the check, and its
remedy should be against the party responsible for the alteration. Considering that, in this case, Gold Palace neither altered
the draft nor knew of the alteration, it could not be held liable.28 The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30 July 2001 of the
Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the Complaint dated
January 1999 is DISMISSED; and appellee Far East Bank and Trust Company is hereby ordered to pay appellant
Gold Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legal interest of 12% per
annum from 20 July 1998, Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs
against appellee Far East Bank and Trust Company.29

The appellate court, in the further challenged May 26, 2005 Resolution, 30 denied petitioner's Motion for
Reconsideration,31 which prompted the petitioner to institute before the Court the instant Petition for Review on Certiorari. 32

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance.33 This provision applies with equal
force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the
check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the
aforementioned sum, but also, his clear compliance with that obligation. 34 Actual payment by the drawee is greater than
his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance. 35

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the
amount thereof to the collecting bank. The latter then credited to Gold Palace's account the payment it received.
Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation
to pay in accordance with the tenor of his acceptance. The tenor of the acceptance is determined by the terms of the
bill as it is when the drawee accepts. 36Stated simply, LBP was liable on its payment of the check according to the tenor
of the check at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder.
We note at this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course-it received the draft complete and regular on its face, before it became overdue and without notice
of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in
the title of the person negotiating it. 37 Having relied on the drawee bank's clearance and payment of the draft and not
being negligent (it delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply
protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his
position on the faith of the drawee bank's clearance and payment of a check or draft. 38

This construction and application of the law gives effect to the plain language of the NIL 39 and is in line with the sound
principle that where one of two innocent parties must suffer a loss, the law will leave the loss where it finds it. 40 It further
reasserts the usefulness, stability and currency of negotiable paper without seriously endangering accepted banking practices.
Indeed, banking institutions can readily protect themselves against liability on altered instruments either by qualifying their
acceptance or certification, or by relying on forgery insurance and special paper which will make alterations obvious. 41 This
is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better position,
compared to the holder, to verify with the drawer the matters stated in the instrument. As we have observed in this case, were
it not for LBP's communication with the drawer that its account in the Philippines was being depleted after the subject
foreign draft had been encashed, then, the alteration would not have been discovered. What we cannot understand is why
LBP, having the most convenient means to correspond with UOB, did not first verify the amount of the draft before it cleared
and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true
amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law jurisdictions that a
drawee bank, having paid to an innocent holder the amount of an uncertified, altered check in good faith and without
negligence which contributed to the loss, could recover from the person to whom payment was made as for money paid by
mistake.42 However, given the foregoing discussion, we find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States of America, if an unaccepted draft is
presented to a drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or
acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee
making payment or accepting the draft in good faith that the draft has not been altered.43 Nonetheless, absent any similar
provision in our law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East,
should not have debited the money paid by the drawee bank from respondent company's account. When Gold Palace
deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an
agent of the former for the collection of the amount in the draft. 44 The subsequent payment by the drawee bank and the
collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check
or his agent are concerned, converted the check into a mere voucher, 45 and, as already discussed, foreclosed the
recovery by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty
in commercial transactions, delay and annoyance will arise if a bank at some future time will call on the payee for the
return of the money paid to him on the check.46

As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank
had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be
responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank
when it debited respondent's account, because, as already explained, the drawee bank had no right to recover what it paid.
Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the
burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under
Section 36 of the NIL, is a restrictive indorsement.47 It did not in any way transfer the title of the instrument to the collecting
bank. Far East did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser
as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course, 48 these
warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to
do so, the collecting bank, therefore, could not debit respondent's account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not debit the
account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far East's remedy under the law
is not against Gold Palace but against the drawee-bank or the person responsible for the alteration. That, however, is
another issue which we do not find necessary to discuss in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have not shown that they are
entitled to moral, temperate or compensatory damages. 49 Neither was petitioner impelled by malice or bad faith in
debiting the account of the respondent company and in pursuing its cause. 50 On the contrary, petitioner was honestly
convinced of the propriety of the debit. We also delete the award of attorney's fees for, in a plethora of cases, we have
ruled that it is not a sound public policy to place a premium on the right to litigate. No damages can be charged to those
who exercise such precious right in good faith, even if done erroneously.51

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of the Court of
Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the award of exemplary
damages and attorney's fees is DELETED.

SO ORDERED.
 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.

In 1981, Hi-Cement Corporation through Lourdes De Leon (its Treasurer) and Antonio De Las Alas (its Chairman, now
deceased) issued four postdated checks to E.T. Henry and Co. The checks amount to P2 million. The checks are
crossed checks and are only made payable to E.T. Henrys account. However, E.T. Henry still indorsed the checks to
Atrium Management Corporation (AMC). AMC then made sure that the checks were validly issued by requesting E.T.
Henry to get some confirmation from Atrium. Interestingly, De Leon confirmed the checks and advised that the checks
are okay to be rediscounted by AMC notwithstanding the fact that the checks are crossed checks payable to no other
accounts but that of E.T. Henry. So when AMC presented the check, it was dishonored because Hi-Cement stopped
payment. Eventually, AMC sued Hi-Cement, E.T. Henry, and De Leon. The trial court ruled in favor of AMC and made
all the respondents liable.

On appeal, Hi-Cement averred that De Leons act in signing the check was ultra vires hence De Leon should be
personally liable for the check. De Leon, on the other hand, insisted that the checks were authorized by the corporation.

ISSUE: Whether or not De Leons act of signing the check constitutes an ultra vires act hence making her personally
liable.

HELD: No, the act is not ultra vires but De Leon is still personally liable. The act is not ultra vires because the act of
issuing the checks was well within the ambit of a valid corporate act. De Leon as treasurer is authorized to sign checks.
When the checks were issued, Hi-Cement has sufficient funds to cover the P2 million.

As a rule, there are four instances that will make a corporate director, trustee or officer along (although not necessarily)
with the corporation personally liable to certain obligations. They are:

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.

In the case at bar, De Leon is negligent. She was aware that the checks were only payable to E.T. Henrys account yet
she sent a confirmation to Atrium to the effect that the checks can be negotiated to them (Atrium) by E.T. Henry.
Therefore, she may be held personally liable along with E.T. Henry (but not with Hi-Cement where she is an officer).
 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.

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 vires act.

"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.1wphi1.nt

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. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner, vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.

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

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

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

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

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

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold
and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint
against Corazon Victoriano, who later assumed full responsibility for the checks.

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

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

We are not persuaded.

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

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

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

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in
due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who
disputes the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner
bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in
good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these
checks were merely issued to payee as security and not for value.

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

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

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

Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by
or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal
debtor becomes the holder of the instrument at or after maturity in his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument.
But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the
instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the instrument. The act of destroying
the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back
possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by
other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates
the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action,
the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of
withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability
on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such
notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:

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

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

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

The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability
in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the
parties on the face of the instrument. There is an implied representation that funds or credit are available for the
payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the
drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case,
such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

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

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

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

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is
entitled to claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its
right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to
recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from
foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art.
2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in
the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16

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

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

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

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