STATE INVESTMENT HOUSE, INC., petitioner, vs.

COURT
OF APPEALS and NORA B. MOULIC, respondents.

the checks and requested that it be paid in cash instead,

although MOULIC avers that no such notice was given her.

Escober, Alon & Associates for petitioner.

On 6 October 1983, STATE sued to recover the value of the

checks plus attorney's fees and expenses of litigation.

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
The liability to a holder in due course of the drawer of
checks issued to another merely as security, and the right of
a real estate mortgagee after extrajudicial foreclosure to
recover the balance of the obligation, are the issues in this
Petition for Review of the Decision of respondent Court of
Appeals.
Private respondent Nora B. Moulic issued to Corazon
Victoriano, as security for pieces of jewelry to be sold on
commission, two (2) post-dated Equitable Banking
Corporation checks in the amount of Fifty Thousand Pesos
(P50,000.00) each, one dated 30 August 1979 and the
other, 30 September 1979. Thereafter, the payee negotiated
the checks to petitioner State Investment House. Inc.
(STATE).
MOULIC failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The
checks, however, could no longer be retrieved as they had
already been negotiated. Consequently, before their
maturity dates, MOULIC withdrew her funds from the
drawee bank.
Upon presentment for payment, the checks were
dishonored for insufficiency of funds. On 20 December
1979, STATE allegedly notified MOULIC of the dishonor of

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 postdated 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

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.

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.

STATE INVESTMENT HOUSE, INC. VS. COURT OF

APPEALS
GR 101163, January 11, 1993
1ST Division Bellosillo

FATS:
Nora Moulic issued to Corazon Victoriano, as security for
pieces of jewelry to be sold on commission, 2 post-dated
Equitable Banking Corporation. Thereafter, the payee
negotiated the checks to the State Investment House Inc.
(SIHI). 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. SIHI 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. SIHI sued to recover the value of the
checks. 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. The trial court dismissed the Complaint as well
as the Third-Party Complaint. SIHI 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 SIHI 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. SIHI filed the petition for
review.

HELD
Section 119 of the Negotiable Instrument Law outlined the
grounds in which an instrument is discharged. The grounds
are:
(a) payment by or on behalf of the principal debtor;
(b) payment by accommodated;
(c) intentional cancellation of instrument by the holder;
(d) any act which discharges a contract;
(e) reacquisition of principal debtor in his own right.

ISSUE:
WON the alleged issuance of the post-dated checks as
mere security is a ground for the discharge of the
instrument?

a. Payment or performance;
b. Loss of the thing due;
c. Condonation or remission of debts;
d. Confusion or merger of rights of creditor and debtor;

Section 119 of the NIL is exclusive to its enumerations.

Obviously, MOULIC may only invoke paragraphs (c) and (d)
as possible grounds for the discharge of the instrument. But,
the intentional cancellation contemplated under paragraph
(c) is that cancellation effected by destroying the instrument
either by tearing it up, burning it, or writing the word
"cancelled" on the instrument. The act of destroying 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 Section 119
does not specify what these acts are, e.g., Art. 1231 of the
Civil Code which enumerates the modes of extinguishing
obligations, such as:

e. Compensation;
f. Novation
Again, none of the modes outlined therein is applicable in
the instant case as Section 119 contemplates of a situation
where the holder of the instrument is the creditor while its
drawer is the debtor. Herein, 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.

G.R. No. 93048 March 3, 1994

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

INVESTMENT HOUSE, INC., respondents.

Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.

NOCON, J.:
For our review is the decision of the Court of Appeals in the
case entitled "State Investment House, Inc. v. Bataan Cigar
& Cigarette Factory Inc.," 1 affirming the decision of the
Regional Trial Court 2 in a complaint filed by the State
Investment House, Inc. (hereinafter referred to as SIHI) for
collection on three unpaid checks issued by Bataan Cigar &
Cigarette Factory, Inc. (hereinafter referred to as BCCFI).
The foregoing decisions unanimously ruled in favor of SIHI,
the private respondent in this case.
Emanating from the records are the following facts.
Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes,
engaged one of its suppliers, King Tim Pua George (herein
after referred to as George King), to deliver 2,000 bales of
tobacco leaf starting October 1978. In consideration thereof,
BCCFI, on July 13, 1978 issued crossed checks post dated
sometime in March 1979 in the total amount of
P820,000.00. 3
Relying on the supplier's representation that he would
complete delivery within three months from December 5,
1978, petitioner agreed to purchase additional 2,500 bales
of tobacco leaves, despite the supplier's failure to deliver in
accordance with their earlier agreement. Again petitioner
issued post dated crossed checks in the total amount of
P1,100,000.00, payable sometime in September 1979. 4

During these times, George King was simultaneously

dealing with private respondent SIHI. On July 19, 1978, he
sold at a discount check TCBT 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. 10 This 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.
xxx xxx xxx
That the subject checks had been issued subject to the
condition that private respondents (Anita and her husband)
on due date would make the back up deposit for said
checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to
be granted by private respondents to New Sikatuna Wood
Industries, Inc., constitutes a good defense against
petitioner who is not a holder in due course. 12
It is then settled that crossing of checks should put the
holder on inquiry and upon him devolves the duty to
ascertain the indorser's title to the check or the nature of his
possession. Failing in this respect, the holder is declared

guilty of gross negligence amounting to legal absence of

good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, 13 and as such the consensus of authority
is to the effect that the holder of the check is not a holder in
due course.
In the present case, BCCFI's defense in stopping payment
is as good to SIHI as it is to George King. Because, really,
the checks were issued with the intention that George King
would supply BCCFI with the bales of tobacco leaf. There
being failure of consideration, SIHI is not a holder in due
course. Consequently, BCCFI cannot be obliged to pay the
checks.
The foregoing does not mean, however, that respondent
could not recover from the checks. The only disadvantage
of a holder who is not a holder in due course is that the
instrument is subject to defenses as if it werenonnegotiable. 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.


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.
Facts
Bataan Cigar & Cigarette Factory, Inc. engaged one of its
suppliers, King Tim Pua
George to deliver 2,000 bales of tobacco leaf starting
October 1978. BCCFI, on July
13, 1978 issued crossed checks post dated sometime in
March 1979 in the total
amount of P820,000.00.
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. 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
Efforts of SIHI to collect from BCCFI failed, the trial court
pronounced SIHI as
having a valid claim being a holder in due course. Which
was affirmed by the CA
Issue whether or not SIHI, a second indorser, a holder of
crossed checks, is a holder in

due course, to be able to collect from the drawer, BCCFI?

Held: No
Ratio
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
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.

G.R. No. L-15126

November 30, 1961

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

ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.Reyes and
Pangalagan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of
Manila, Hon. Conrado M. Velasquez, presiding, sentencing
the defendants to pay the plaintiff the sum of P600, with
legal interest from September 10, 1953 until paid, and to
pay the costs.
The action is for the recovery of the value of a check for
P600 payable to the plaintiff and drawn by defendant Anita
C. Gatchalian. The complaint sets forth the check and
alleges that plaintiff received it in payment of the
indebtedness of one Matilde Gonzales; that upon receipt of
said check, plaintiff gave Matilde Gonzales P158.25, the
difference between the face value of the check and Matilde
Gonzales' indebtedness. The defendants admit the
execution of the check but they allege in their answer, as
affirmative defense, that it was issued subject to a condition,
which was not fulfilled, and that plaintiff was guilty of gross
negligence in not taking steps to protect itself.
At the time of the trial, the parties submitted a stipulation of
facts, which reads as follows:
Plaintiff and defendants through their respective
undersigned attorney's respectfully submit the following
Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening,
defendant Anita C. Gatchalian who was then interested in
looking for a car for the use of her husband and the family,

was shown and offered a car by Manuel Gonzales who was

accompanied by Emil Fajardo, the latter being personally
known to defendant Anita C. Gatchalian;
Second. That Manuel Gonzales represented to defend
Anita C. Gatchalian that he was duly authorized by the
owner of the car, Ocampo Clinic, to look for a buyer of said
car and to negotiate for and accomplish said sale, but which
facts were not known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the
price of the car quoted by Manuel Gonzales to her
satisfaction, requested Manuel Gonzales to bring the car the
day following together with the certificate of registration of
the car, so that her husband would be able to see same;
that on this request of defendant Anita C. Gatchalian,
Manuel Gonzales advised her that the owner of the car will
not be willing to give the certificate of registration unless
there is a showing that the party interested in the purchase
of said car is ready and willing to make such purchase and
that for this purpose Manuel Gonzales requested defendant
Anita C. Gatchalian to give him (Manuel Gonzales) a check
which will be shown to the owner as evidence of buyer's
good faith in the intention to purchase the said car, the said
check to be for safekeeping only of Manuel Gonzales and to
be returned to defendant Anita C. Gatchalian the following
day when Manuel Gonzales brings the car and the
certificate of registration, but which facts were not known to
plaintiff;
Fourth. That relying on these representations of Manuel
Gonzales and with his assurance that said check will be
only for safekeeping and which will be returned to said
defendant the following day when the car and its certificate
of registration will be brought by Manuel Gonzales to
defendants, but which facts were not known to plaintiff,
defendant Anita C. Gatchalian drew and issued a check,

Exh. "B"; that Manuel Gonzales executed and issued a

receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear
the day following and on his failure to bring the car and its
certificate of registration and to return the check, Exh. "B",
on the following day as previously agreed upon, defendant
Anita C. Gatchalian issued a "Stop Payment Order" on the
check, Exh. "3", with the drawee bank. Said "Stop Payment
Order" was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who
furthermore had no reason to know check was given to
plaintiff;
Sixth. That defendants, both or either of them, did not
know personally Manuel Gonzales or any member of his
family at any time prior to September 1953, but that
defendant Hipolito Gatchalian is personally acquainted with
V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no
arrangements or agreement with the Ocampo Clinic at any
time prior to, on or after 9 September 1953 for the
hospitalization of the wife of Manuel Gonzales and neither
or both of said defendants had assumed, expressly or
impliedly, with the Ocampo Clinic, the obligation of Manuel
Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no
obligation or liability, directly or indirectly with the Ocampo
Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check
Exh. "B" from defendant Anita C. Gatchalian under the
representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the
fees and expenses arising from the hospitalization of his

wife;
Tenth. That plaintiff for and in consideration of fees and
expenses of hospitalization and the release of the wife of
Manuel Gonzales from its hospital, accepted said check,
applying P441.75 (Exhibit "A") thereof to payment of said
fees and expenses and delivering to Manuel Gonzales the
amount of P158.25 (as per receipt, Exhibit "D") representing
the balance on the amount of the said check, Exh. "B";
Eleventh. That the acts of acceptance of the check and
application of its proceeds in the manner specified above
were made without previous inquiry by plaintiff from
defendants:
Twelfth. That plaintiff filed or caused to be filed with the
Office of the City Fiscal of Manila, a complaint for estafa
against Manuel Gonzales based on and arising from the
acts of said Manuel Gonzales in paying his obligations with
plaintiff and receiving the cash balance of the check, Exh.
"B" and that said complaint was subsequently dropped;
Thirteenth. That the exhibits mentioned in this stipulation
and the other exhibits submitted previously, be considered
as parts of this stipulation, without necessity of formally
offering them in evidence;
WHEREFORE, it is most respectfully prayed that this
agreed stipulation of facts be admitted and that the parties
hereto be given fifteen days from today within which to
submit simultaneously their memorandum to discuss the
issues of law arising from the facts, reserving to either party
the right to submit reply memorandum, if necessary, within
ten days from receipt of their main memoranda. (pp. 21-25,
Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation

the court rendered the judgment already alluded above.

personally acquainted with V. R. de Ocampo (Paragraph

Sixth, Stipulation of Facts.).

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.

The maker Anita C. Gatchalian is a complete stranger to

Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph
Sixth, Stipulation of Facts).

In support of the contention that plaintiff-appellee is not a

holder in due course, the appellant argues that plaintiffappellee 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:

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 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

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).

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, plaintiffappellee 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 plaintiffappellee 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 plaintiffappellee 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, 187201. 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.

FACTS:
The action is for the recovery of the value of a check for
P600 payable to the plaintiff and drawn
by defendant Anita Gatchalian (Gatchalian). The complaint
sets forth the check and alleges that plaintiff
received it in payment of the indebtedness of one
Matilde Gonzales (wife); that upon receipt of said
check, plaintiff gave Manuel Gonzales (Gonzales) P158.25,
the difference between the face value of the
check and Gonzales' indebtedness. The defendants admit
the execution of the check but they allege that
i t w a s i s s u e d s u b j e c t t o a c o n d i t i o n , w h i c h
w a s n o t f u l f i l l e d , a n d t h a t p l a i n t i f f w a s g u i l t y
o f g r o s s
negligence in not taking steps to protect itself.
During trial, the parties submitted a stipulation of facts,
which reads that:
On September 8 1953, defendant 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 Gonzales who represented to
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. Gatchalian, finding the price of the car to her
satisfaction, requested 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
Gatchalian, 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 Gonzales requested Gatchalian to
give him (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 Gonzales and
to be returned
Gatchalian the
following day when Gonzales brings the car and the
certificate of registration.
Relying on these representations of 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
Gonzales to defendants, Gatchalian drew and
issued a check, in which Gonzales executed and
issued a receipt for said check. However,
Gonzales failed to appear the following day and
failed to bring the car and its certificate of
registration and to return the check as previously
agreed upon. Hence, defendant Gatchalian
issued a "Stop Payment Order" on the check with the
drawee bank. Said "Stop Payment Order"
was issued without previous notice on plaintiff who was not
being know personally to defendants,
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.
That Defendants had no arrangements or agreement with
the Ocampo Clinic at any time prior to
the hospitalization of the wife of Gonzales and neither or

both of said defendants had assumed,

expressly or impliedly, with the Ocampo Clinic, the
obligation of Gonzales or his wife for the
hospitalization of the latter and that defendants had no
obligation or liability, directly or indirectly
with the Ocampo Clinic.
Gonzales having received the check from Gatchalian,
delivered the same to the Ocampo Clinic in
payment of the fees and expenses arising from the
hospitalization of his wife, in which Plaintiff,
for and in consideration of the fees and expenses of
hospitalization and the release of Gonzales
w i f e , a c c e p t e d c h e c k , a p p l y i n g P 4 4 1 . 7 5
h e r e o f t o p a y m e n t o f s a i d f e e s a n d e x p e n s e s
and
delivering to Gonzales the amount of P158.25 as balance
on the amount of the said check. 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. As a result, plaintiff filed or
caused to be filed with the Office of the City Fiscal
of Manila, a complaint for
estafa
against
Gonzales based on and arising from the acts latter
in paying his obligations with plaintiff and
receiving the cash balance of the check but that said
complaint was subsequently dropped.
No other evidences were submitted and upon this
stipulation the trial court rendered judgement
s e n t e n c i n g d e f e n d a n t s t o p a y t h e a m o u n t o f
t h e c h e c k ( P 6 0 0 ) w i t h l e g a l i n t e r e s t .
Defendants
appealed from the decision and contended that the check is
not a negotiable instrument and plaintiff is
not a holder in due course.

ISSUE:
Whether or not plaintiff-appellee is a holder in due course.
HELD:
When the agent of drawer (Gatchalian) 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 Gonzales. 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 plaintiffappellee 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.
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.
Judgement of trial court
Reversed

Justice Secretary Leila de Lima reinforced Thursday a

government team looking into an alleged P10-billion pork barrel
scam linked to businesswoman Janet Lim-Napoles, and said the
lawyer of whistle-blower Benhur Luy had told her his client
wanted to be placed under state protection.
The lawyers of Napolespresident and CEO of the trading firm
JLN Corp.earlier claimed that the affidavits executed by Luy
and another JLN employee, Merlina Suas, were not backed by
evidence.
The lawyers of the businesswoman said to be behind the scam
involving alleged misuse of pork barrel funds also said the
National Bureau of Investigation might have been unwittingly
used by Luy in his bid to destroy the reputation of Napoles, who
is a relative of Luys.

MANILA, PhilippinesBenhur Luy, who spilled the beans on the

P10-billion pork barrel scam, is already under provisional
coverage of the governments witness protection program
(WPP), Justice Secretary Leila De Lima said in a text message
late Thursday.
Earlier Thursday De Lima said the whistle-blower had agreed to
be included in the WPP.
The Department of Justice chief also confirmed that Luy
personally met with WPP officers on Thursday.
A witness provisionally accepted will stay under WPP for several
months, during which WPP officers will determine if the witness is
entitled to a full coverage under the program.
Luys counsel, Levito Baligod, had earlier told reporters his client
would appear before the DOJ WPP on Friday for purposes of his
application for coverage.
However, WPP insiders said the meeting was rescheduled and
was intentionally kept out of the medias knowledge.