G.R. No.
101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA
MOULIC, respondents.
Escober, Alon & Associates for petitioner.
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
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
B. 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
State 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
1
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.
2
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
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
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
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.
be 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
the 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
is 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
3
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.

4
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE
SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R.
RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho,
together with the spouses Mr. and Mrs Flaviano
Lagasca, executed a deed of mortgage, dated
November 13, 1957, in favor of petitioner Government
Service Insurance System (hereinafter referred to as
GSIS) and subsequently, another deed of mortgage,
dated April 14, 1958, in connection with two loans
granted by the latter in the sums of P 11,500.00 and P
3,000.00, respectively. 1 A parcel of land covered by
Transfer Certificate of Title No. 38989 of the Register
of Deed of Quezon City, co-owned by said mortgagor
spouses, was given as security under the aforesaid two
deeds. 2 They also executed a 'promissory note" which
states in part:
... for value received, we the undersigned ... JOINTLY,
SEVERALLY and SOLIDARILY, promise to pay the
GOVERNMENT SERVICE INSURANCE SYSTEM the sum
of . . . (P 11,500.00) Philippine Currency, with interest
at the rate of six (6%) per centum compounded
monthly payable in . . . (120)equal monthly
installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an
instrument denominated "Assumption of Mortgage"
under which they obligated themselves to assume the
aforesaid obligation to the GSIS and to secure the
release of the mortgage covering that portion of the
land belonging to herein private respondents and
which was mortgaged to the GSIS. 4 This undertaking
was not fulfilled. 5
Upon failure of the mortgagors to comply with the
conditions of the mortgage, particularly the payment of
the amortizations due, GSIS extrajudicially foreclosed
the mortgage and caused the mortgaged property to
be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23,
1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the
former Court of
5
First Instance of Quezon City, 7 praying that the
extrajudicial foreclosure "made on, their property and
all other documents executed in relation thereto in
favor of the Government Service Insurance System" be
declared null and void. It was further prayed that they
be allowed to recover said property, and/or the GSIS
be ordered to pay them the value thereof, and/or they
be allowed to repurchase the land. Additionally, they
asked for actual and moral damages and attorney's
fees.
In their aforesaid complaint, private respondents
alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but
they merely gave their common property to the said
co-owners who were solely benefited by the loans from
the GSIS.
The trial court rendered judgment on February 25,
1968 dismissing the complaint for failure to establish a
cause of action. 8
Said decision was reversed by the respondent Court of
Appeals 9 which held that:
... although formally they are co-mortgagors, they are
so only for accomodation (sic) in that the GSIS
required their consent to the mortgage of the entire
parcel of land which was covered with only one
certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the
appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS,
appellants have a valid cause for having foreclosed the
mortgage without having given sufficient notice to
them as required either as to their delinquency in the
payment of amortization or as to the subsequent
foreclosure of the mortgage by reason of any default in
such payment. The notice published in the newspaper,
'Daily Record (Exh. 12) and posted pursuant to Sec 3
of Act 3135 is not the notice to which the mortgagor is
entitled upon the application being made for an
extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court
consequently decreed that-
In view of all the foregoing, the judgment appealed
from is hereby reversed, and another one entered (1)
declaring the foreclosure of the mortgage void insofar
as it affects the share of the appellants; (2) directing
the GSIS to reconvey to appellants their share of the
mortgaged property, or the value thereof if already
sold to third party, in the sum of P 35,000.00, and (3)
ordering the appellees Flaviano Lagasca and Esther
Lagasca to pay the appellants the sum of P 10,00.00
as moral damages, P 5,000.00 as attorney's fees, and
costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties
relied on the provisions of Section 29 of Act No. 2031,
otherwise known as the Negotiable Instruments Law,
which provide that an accommodation party is one who
has signed an instrument as maker, drawer, acceptor
of indorser without receiving value therefor, but is held
liable on the instrument to a holder for value although
the latter knew him to be only an accommodation
party.
This approach of both parties appears to be
misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the
mortgage deeds subject of this case, are clearly not
negotiable instruments. These documents do not
comply with the fourth requisite to be considered as
such under Section 1 of Act No. 2031 because they are
neither payable to order nor to bearer. The note is
payable to a specified party, the GSIS. Absent the
aforesaid requisite, the provisions of Act No. 2031
would not apply; governance shall be afforded,
instead, by the provisions of the Civil Code and special
laws on mortgages.
As earlier indicated, the factual findings of respondent
court are that private respondents signed the
documents "only to give their consent to the mortgage
as required by GSIS", with the latter having full
knowledge that the loans secured thereby were solely
for the benefit of the Lagasca spouses. 12 This appears
to be duly supported by sufficient evidence on record.
Indeed, it would be unusual for the GSIS to arrange
for and deduct the monthly amortizations on the loans
from the salary as an army officer of Flaviano Lagasca
without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then
there is also the undisputed fact, as already stated,
that the Lagasca spouses executed a so-called
"Assumption of Mortgage" promising to exclude private
respondents and their share of the mortgaged property
from liability to the mortgagee. There is no intimation
that the former executed such instrument for a
consideration, thus confirming that they did so
pursuant to their original agreement.
The parol evidence rule 13 cannot be used by
petitioner as a shield in this case for it is clear that
there was no objection in the court below regarding
the admissibility of the testimony and documents that
were presented to prove that the private respondents
signed the mortgage papers just to accommodate their
co-owners, the Lagasca spouses. Besides, the
introduction of such evidence falls under the exception
to said rule, there being allegations in the complaint of
private respondents in the court below regarding the
failure of the mortgage contracts to express the true
agreement of the parties. 14
6
However, contrary to the holding of the respondent
court, it cannot be said that private respondents are
without liability under the aforesaid mortgage
contracts. The factual context of this case is precisely
what is contemplated in the last paragraph of Article
2085 of the Civil Code to the effect that third persons
who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own
property
So long as valid consent was given, the fact that the
loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with
respect to private respondents' share in the property.
In consenting thereto, even assuming that private
respondents may not be assuming personal liability for
the debt, their share in the property shall nevertheless
secure and respond for the performance of the
principal obligation. The parties to the mortgage could
not have intended that the same would apply only to
the aliquot portion of the Lagasca spouses in the
property, otherwise the consent of the private
respondents would not have been required.
The supposed requirement of prior demand on the
private respondents would not be in point here since
the mortgage contracts created obligations with
specific terms for the compliance thereof. The facts
further show that the private respondents expressly
bound themselves as solidary debtors in the
promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS,
We cannot agree with the ruling of respondent court that lack
of notice to the private respondents of the extrajudicial
foreclosure sale impairs the validity thereof. In Bonnevie, et
al. vs. Court of appeals, et al., 15 the Court ruled that Act No.
3135, as amended, does not require personal notice on the
mortgagor, quoting the requirement on notice in such cases
as follows:
Section 3. Notice shall be given by posting notices of sale for
not less than twenty days in at least three public places of the
municipality where the property is situated, and if such
property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in
the municipality or city.
There is no showing that the foregoing requirement on notice
was not complied with in the foreclosure sale complained of .
The respondent court, therefore, erred in annulling the
mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or
the payment of the value thereof Indubitably, whether or not
private respondents herein benefited from the loan, the
mortgage and the extrajudicial foreclosure proceedings were
valid.
WHEREFORE, judgment is hereby rendered REVERSING the
decision of the respondent Court of Appeals and
REINSTATING the decision of the court a quo in Civil Case No.
Q-9418 thereof. SO ORDERED.
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST
COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN
ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for
petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson
for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for
respondent Golden Savings & Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a
simple question of negligence. The facts, pruned of all
non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial
bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association
was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents
as its principal officers.
In January 1979, a certain Eduardo Gomez opened an
account with Golden Savings and deposited over a
period of two months 38 treasury warrants with a total
value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by
its Auditor. Six of these were directly payable to
Gomez while the others appeared to have been
indorsed by their respective payees, followed by
Gomez as second indorser.1
On various dates between June 25 and July 16, 1979,
all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and
deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were
then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to
the Bureau of Treasury for special clearing.2
More than two weeks after the deposits, Gloria Castillo
went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told
to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also
as an accommodation for a "valued client," the
petitioner says it finally decided to allow Golden
7
Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the
amount of P508,000.00, the second on July 13, 1979,
in the amount of P310,000.00, and the third on July
16, 1979, in the amount of P150,000.00. The total
withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez
to make withdrawals from his own account, eventually
collecting the total amount of P1,167,500.00 from the
proceeds of the apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings
that 32 of the warrants had been dishonored by the
Bureau of Treasury on July 19, 1979, and demanded
the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its
account.
The demand was rejected. Metrobank then sued
Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor
of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of
appeal. On November 4, 1986, the lower court
modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against
the plaintiff;
2. Dissolving and lifting the writ of attachment
of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of
debiting Savings Account No. 2498 of the sum
of P1,754,089.00 and to reinstate and credit to
such account such amount existing before the
debit was made including the amount of
P812,033.37 in favor of defendant Golden
Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings
and Loan Association, Inc. to withdraw the
amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant
Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the
amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant
Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the
amount of P100,000.00.
 SO ORDERED.
On appeal to the respondent court,6 the decision was
affirmed, prompting Metrobank to file this petition for
review on the following grounds:
1. Respondent Court of Appeals erred in
disregarding and failing to apply the clear
contractual terms and conditions on the
deposit slips allowing Metrobank to charge
back any amount erroneously credited.
(a) Metrobank's right to charge back is
not limited to instances where the
checks or treasury warrants are forged
or unauthorized.
(b) Until such time as Metrobank is
actually paid, its obligation is that of a
mere collecting agent which cannot be
held liable for its failure to collect on
the warrants.
2. Under the lower court's decision, affirmed
by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not
finding that as between Metrobank and Golden
Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in
holding that the treasury warrants involved in
this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to
the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it
was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such
assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason
not to allow the withdrawal. Indeed, Golden Savings
might even have incurred liability for its refusal to
return the money that to all appearances belonged to
the depositor, who could therefore withdraw it any
time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury
warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld
from Gomez until Metrobank allowed Golden Savings
8
itself to withdraw them from its own deposit.7 It was
only when Metrobank gave the go-signal that Gomez
was finally allowed by Golden Savings to withdraw
them from his own account.
The argument of Metrobank that Golden Savings
should have exercised more care in checking the
personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury
warrants were subject to clearing, pending which the
depositor could not withdraw its proceeds. There was
no question of Gomez's identity or of the genuineness
of his signature as checked by Golden Savings. In fact,
the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted
with due care and diligence and cannot be faulted for
the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary
carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was
1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it
would not have lost a single centavo by waiting. Yet,
despite the lack of such clearance — and
notwithstanding that it had not received a single
centavo from the proceeds of the treasury warrants, as
it now repeatedly stresses — it allowed Golden Savings
to withdraw — not once, not twice, but thrice — from
the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent
inquiries of Gloria Castillo about the clearance and it
also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply
because of "the lapse of one week."8 For a bank with
its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank
would invoke the conditions printed on the dorsal side
of the deposit slips through which the treasury
warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit,
the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility
beyond care in selecting correspondents, and
until such time as actual payment shall have
come into possession of this bank, the right is
reserved to charge back to the depositor's
account any amount previously credited,
whether or not such item is returned. This also
applies to checks drawn on local banks and
bankers and their branches as well as on this
 bank, which are unpaid due to insufficiency of
funds, forgery, unauthorized overdraft or any
other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly
show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back to
the depositor's account any amount previously
credited, whether or not such item is returned. This
also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft
of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations
and became binding on Golden Savings when Gloria
Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the
conditions, considering that they have apparently been
imposed by the bank unilaterally, without the consent
of the depositor. Indeed, it could be argued that the
depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set
forth in the given permit at the back of the deposit
slip. We do not have to rule on this matter at this time.
At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still
not validly disclaim responsibility thereunder in the
light of the circumstances of this case.
In stressing that it was acting only as a collecting
agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary,
Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only
for fraud, but also for negligence, which shall
be judged 'with more or less rigor by the
courts, according to whether the agency was
or was not for a compensation.
The negligence of Metrobank has been sufficiently
established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it
was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists
(although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only
once or even twice but three times. The total
withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only
added to its belief that the treasury warrants had
indeed been cleared.
Metrobank's argument that it may recover the disputed
amount if the warrants are not paid for any reason is
not acceptable. Any reason does not mean no reason
at all. Otherwise, there would have been no need at all
9
for Golden Savings to deposit the treasury warrants
with it for clearance. There would have been no need
for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a
condition, if interpreted in the way the petitioner
suggests, is not binding for being arbitrary and
unconscionable. And it becomes more so in the case at
bar when it is considered that the supposed dishonor
of the warrants was not communicated to Golden
Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's
earlier negligence in giving express or at least implied
clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not
all. On top of this, the supposed reason for the
dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer
corporation, has not been established.9 This was the
finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v.
IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing
evidence. This was not done in the present
case.
A no less important consideration is the circumstance
that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face
is the word "non-negotiable." Moreover, and this is of
equal significance, it is indicated that they are payable
from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments
Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. —
An instrument to be negotiable must conform
to the following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed
or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
 Sec. 3. When promise is unconditional. — An
unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with —
(a) An indication of a particular fund out of
which reimbursement is to be made or a
particular account to be debited with the
amount; or
(b) A statement of the transaction which gives
rise to the instrument judgment.
But an order or promise to pay out of a
particular fund is not unconditional.
Savings never represented that the warrants were
negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of forgery
was proved in that case but not in the case before us.
Finally, the Court found the Jai Alai Corporation
negligent in accepting the checks without question
from one Antonio Ramirez notwithstanding that the
payee was the Inter-Island Gas Services, Inc. and it
did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct.
However, we will have to amend it insofar as it directs
the petitioner to credit Golden Savings with the full
amount of the treasury checks deposited to its
account.

The indication of Fund 501 as the source of the

The total value of the 32 treasury warrants dishonored
payment to be made on the treasury warrants makes
was P1,754,089.00, from which Gomez was allowed to
the order or promise to pay "not unconditional" and
withdraw P1,167,500.00 before Golden Savings was
the warrants themselves non-negotiable. There should
notified of the dishonor. The amount he has withdrawn
be no question that the exception on Section 3 of the
must be charged not to Golden Savings but to
Negotiable Instruments Law is applicable in the case at
Metrobank, which must bear the consequences of its
bar. This conclusion conforms to Abubakar vs. Auditor
own negligence. But the balance of P586,589.00
General11 where the Court held:
should be debited to Golden Savings, as obviously
Gomez can no longer be permitted to withdraw this
The petitioner argues that he is a holder in amount from his deposit because of the dishonor of
good faith and for value of a negotiable the warrants. Gomez has in fact disappeared. To also
instrument and is entitled to the rights and credit the balance to Golden Savings would unduly
privileges of a holder in due course, free from enrich it at the expense of Metrobank, let alone the
defenses. But this treasury warrant is not fact that it has already been informed of the dishonor
within the scope of the negotiable instrument of the treasury warrants.
law. For one thing, the document bearing on
its face the words "payable from the
WHEREFORE, the challenged decision is AFFIRMED,
appropriation for food administration, is
with the modification that Paragraph 3 of the
actually an Order for payment out of "a
dispositive portion of the judgment of the lower court
particular fund," and is not unconditional and
shall be reworded as follows:
does not fulfill one of the essential
requirements of a negotiable instrument (Sec.
3 last sentence and section [1(b)] of the 3. Debiting Savings Account No. 2498 in the
Negotiable Instruments Law). sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan
Association, Inc. to withdraw the amount
Metrobank cannot contend that by indorsing the
outstanding thereon, if any, after the debit.
warrants in general, Golden Savings assumed that
they were "genuine and in all respects what they
purport to be," in accordance with Section 66 of the SO ORDERED.
Negotiable Instruments Law. The simple reason is that
this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by
Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit
them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped
on the back of the warrants: "All prior indorsement
and/or lack of endorsements guaranteed, Metropolitan
Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation

v. Bank of the Philippine Islands,12 but we feel this
case is inapplicable to the present
controversy.1âwphi1 That case involved checks
whereas this case involves treasury warrants. Golden
10
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-
appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-
appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Antonio G. Ibarra and
Attorney Concepcion Torrijos-Agapinan for defendants-
appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance
of Manila dismissing the complaint filed by the
Philippine Education Co., Inc. against Mauricio A.
Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to
purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller
had made out money ordersnumbered 124685,
124687-124695, Montinola offered to pay for them
with a private checks were not generally accepted in
payment of money orders, the teller advised him to
see the Chief of the Money Order Division, but instead
of doing so, Montinola managed to leave building with
his own check and the ten(10) money orders without
the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of
the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the
following day notice was likewise served upon all
banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three
days later.
On April 23, 1958 one of the above-mentioned money
orders numbered 124688 was received by appellant as
part of its sales receipts. The following day it deposited
the same with the Bank of America, and one day
thereafter the latter cleared it with the Bureau of Posts
and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano,
Chief of the Money Order Division of the Manila Post
Office, acting for and in behalf of his co-appellee,
Postmaster Enrico Palomar, notified the Bank of
America that money order No. 124688 attached to his
letter had been found to have been irregularly issued
and that, in view thereof, the amount it represented
11
had been deducted from the bank's clearing account.
For its part, on August 2 of the same year, the Bank of
America debited appellant's account with the same
amount and gave it advice thereof by means of a debit
memo.
On October 12, 1961 appellant requested the
Postmaster General to reconsider the action taken by
his office deducting the sum of P200.00 from the
clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent
request that the matter be referred to the Secretary of
Justice for advice. Thereafter, appellant elevated the
matter to the Secretary of Public Works and
Communications, but the latter sustained the actions
taken by the postal officers.
In connection with the events set forth above,
Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after
trial he was acquitted on the ground of reasonable
doubt.
On January 8, 1962 appellant filed an action against
appellees in the Municipal Court of Manila praying for
judgment as follows:
WHEREFORE, plaintiff prays that after
hearing defendants be ordered:
(a) To countermand the notice given to
the Bank of America on September 27,
1961, deducting from the said Bank's
clearing account the sum of P200.00
represented by postal money order No.
124688, or in the alternative indemnify
the plaintiff in the same amount with
interest at 8-½% per annum from
September 27, 1961, which is the rate
of interest being paid by plaintiff on its
overdraft account;
(b) To pay to the plaintiff out of their
own personal funds, jointly and
severally, actual and moral damages in
the amount of P1,000.00 or in such
amount as will be proved and/or
determined by this Honorable Court:
exemplary damages in the amount of
P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other and
further relief as may be deemed just
and equitable.
On November 17, 1962, after the parties had
submitted the stipulation of facts reproduced at pages
12 to 15 of the Record on Appeal, the above-named
court rendered judgment as follows:
 WHEREFORE, judgment is hereby
rendered, ordering the defendants to
countermand the notice given to the
Bank of America on September 27,
1961, deducting from said Bank's
clearing account the sum of P200.00
representing the amount of postal
money order No. 124688, or in the
alternative, to indemnify the plaintiff in
the said sum of P200.00 with interest
thereon at the rate of 8-½% per
annum from September 27, 1961 until
fully paid; without any pronouncement
as to cost and attorney's fees.
The case was appealed to the Court of First Instance of
Manila where, after the parties had resubmitted the
same stipulation of facts, the appealed decision
dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error
discussed in appellant's brief are related to the other
and will therefore be discussed jointly. They raise this
main issue: that the postal money order in question is
a negotiable instrument; that its nature as such is not
in anyway affected by the letter dated October 26,
1948 signed by the Director of Posts and addressed to
all banks with a clearing account with the Post Office,
and that money orders, once issued, create a
contractual relationship of debtor and creditor,
respectively, between the government, on the one
hand, and the remitters payees or endorses, on the
other.
It is not disputed that our postal statutes were
patterned after statutes in force in the United States.
For this reason, ours are generally construed in
accordance with the construction given in the United
States to their own postal statutes, in the absence of
any special reason justifying a departure from this
policy or practice. The weight of authority in the United
States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs.
Stock Drawers National Bank, 30 Fed. 912), the reason
behind this rule being that, in establishing and
operating a postal money order system, the
government is not engaging in commercial
transactions but merely exercises a governmental
power for the public benefit.
It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws
and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and
regulations usually provide for not more than one
endorsement; payment of money orders may be
withheld under a variety of circumstances (49 C.J.
1153).
Of particular application to the postal money order in
question are the conditions laid down in the letter of
12
the Director of Posts of October 26, 1948 (Exhibit 3) to
the Bank of America for the redemption of postal
money orders received by it from its depositors.
Among others, the condition is imposed that "in cases
of adverse claim, the money order or money orders
involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct
the value thereof from any amount due you if such
step is deemed necessary." The conditions thus
imposed in order to enable the bank to continue
enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The
latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving
advice that the amount represented by the money
order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any
protest against such action.
Moreover, not being a party to the understanding
existing between the postal officers, on the one hand,
and the Bank of America, on the other, appellant has
no right to assail the terms and conditions thereof on
the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued
by a Department Head in accordance with Sec. 79 (B)
of the Revised Administrative Code. In reality,
however, said legal provision does not apply to the
letter in question because it does not provide for a
department regulation but merely sets down certain
conditions upon the privilege granted to the Bank of
Amrica to accept and pay postal money orders
presented for payment at the Manila Post Office. Such
being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of
the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to
resolve the issues raised in the third and fourth
assignments of error.
WHEREFORE, the appealed decision being in
accordance with law, the same is hereby affirmed with
costs.
G.R. No. 93048 March 3, 1994 check TCBT 551826. Subsequently, stop payment was
also ordered on checks TCBT Nos. 608967 & 608968
BATAAN CIGAR AND CIGARETTE FACTORY, on September 14 & 28, 1979, respectively, due to
INC., petitioner, George King's failure to deliver the tobacco leaves.
vs.
THE COURT OF APPEALS and STATE INVESTMENT Efforts of SIHI to collect from BCCFI having failed, it
HOUSE, INC., respondents. instituted the present case, naming only BCCFI as
party defendant. The trial court pronounced SIHI as
Teresita Gandiongco Oledan for petitioner. 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,
Acaban & Sabado for private respondent.
since he, as payee, is not an indispensable party.

NOCON, J.:
The main issue then is whether SIHI, a second
indorser, a holder of crossed checks, is a holder in due
For our review is the decision of the Court of Appeals course, to be able to collect from the drawer, BCCFI.
in the case entitled "State Investment House, Inc. v.
Bataan Cigar & Cigarette Factory Inc.,"1 affirming the
The Negotiable Instruments Law states what
decision of the Regional Trial Court2 in a complaint filed
constitutes a holder in due course, thus:
by the State Investment House, Inc. (hereinafter
referred to as SIHI) for collection on three unpaid
checks issued by Bataan Cigar & Cigarette Factory, Sec. 52 — A holder in due course is a holder who has
Inc. (hereinafter referred to as BCCFI). The foregoing taken the instrument under the following conditions:
decisions unanimously ruled in favor of SIHI, the
private respondent in this case. (a) That it is complete and regular upon its face;

Emanating from the records are the following facts. (b) That he became the holder of it before it was
Petitioner, Bataan Cigar & Cigarette Factory, Inc. overdue, and without notice that it had been
(BCCFI), a corporation involved in the manufacturing previously dishonored, if such was the fact;
of cigarettes, engaged one of its suppliers, King Tim
Pua George (herein after referred to as George King), (c) That he took it in good faith and for value;
to deliver 2,000 bales of tobacco leaf starting October
1978. In consideration thereof, BCCFI, on July 13,
(d) That at the time it was negotiated to him he had
1978 issued crossed checks post dated sometime in
no notice of any infirmity in the instrument or defect in
March 1979 in the total amount of P820,000.00.3
the title of the person negotiating it.

Relying on the supplier's representation that he would

Section 59 of the NIL further states that every holder
complete delivery within three months from December
is deemed prima facie a holder in due course.
5, 1978, petitioner agreed to purchase additional
However, when it is shown that the title of any person
2,500 bales of tobacco leaves, despite the supplier's
who has negotiated the instrument was defective, the
failure to deliver in accordance with their earlier
burden is on the holder to prove that he or some
agreement. Again petitioner issued post dated crossed
person under whom he claims, acquired the title as
checks in the total amount of P1,100,000.00, payable
holder in due course.
sometime in September 1979.4

The facts in this present case are on all fours to the

During these times, George King was simultaneously
case of State Investment House, Inc. (the very
dealing with private respondent SIHI. On July 19,
respondent in this case) v. Intermediate Appellate
1978, he sold at a discount check TCBT
Court 7 wherein we made a discourse on the effects of
5518265 bearing an amount of P164,000.00, post
crossing of checks.
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 As preliminary, a check is defined by law as a bill of
Nos. 608967 & 608968,6 both in the amount of exchange drawn on a bank payable on
P100,000.00, post dated September 15 & 30, 1979 demand. 8 There are a variety of checks, the more
respectively, drawn by petitioner in favor of George popular of which are the memorandum check, cashier's
King. 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
In as much as George King failed to deliver the bales
generally or specially.
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 A check is crossed specially when the name of a
particular banker or a company is written between the
13
parallel lines drawn. It is crossed generally when only
the words "and company" are written or nothing is
written at all between the parallel lines. It may be
issued so that the presentment can be made only by a
bank. Veritably the Negotiable Instruments Law (NIL)
does not mention "crossed checks," although Article
541 9 of the Code of Commerce refers to such
instruments.
According to commentators, the negotiability of a
check is not affected by its being crossed, whether
specially or generally. It may legally be negotiated
from one person to another as long as the one who
encashes the check with the drawee bank is another
bank, or if it is specially crossed, by the bank
mentioned between the parallel lines. 10This is specially
true in England where the Negotiable Instrument Law
originated.
In the Philippine business setting, however, we used to
be beset with bouncing checks, forging of checks, and
so forth that banks have become quite guarded in
encashing checks, particularly those which name a
specific payee. Unless one is a valued client, a bank
will not even accept second indorsements on checks.
In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a check
should have the following effects: (a) the check
may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once — to one
who has an account with a bank; (c) and the act of
crossing the check serves as warning to the holder that
the check has been issued for a definite purpose so
that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder
in due course. 11
The foregoing was adopted in the case of SIHI v.
IAC, supra. In that case, New Sikatuna Wood
Industries, Inc. also sold at a discount to SIHI three
post dated crossed checks, issued by Anita Peña Chua
naming as payee New Sikatuna Wood Industries, Inc.
Ruling that SIHI was not a holder in due course, we
then said:
The three checks in the case at bar had been crossed
generally and issued payable to New Sikatuna Wood
Industries, Inc. which could only mean that the drawer
had intended the same for deposit only by the rightful
person, i.e. the payee named therein. Apparently, it
was not the payee who presented the same for
payment and therefore, there was no proper
presentment, and the liability did not attach to the
drawer. Thus, in the absence of due presentment, the
drawer did not become liable. Consequently, no right
of recourse is available to petitioner (SIHI) against the
drawer of the subject checks, private respondent wife
(Anita), considering that petitioner is not the proper
party authorized to make presentment of the checks in
question.
14
xxx xxx xxx
That the subject checks had been issued subject to the
condition that private respondents (Anita and her
husband) on due date would make the back up deposit
for said checks but which condition apparently was not
made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to
New Sikatuna Wood Industries, Inc., constitutes a
good defense against petitioner who is not a holder in
due course. 12
It is then settled that crossing of checks should put the
holder on inquiry and upon him devolves the duty to
ascertain the indorser's title to the check or the nature
of his possession. Failing in this respect, the holder is
declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, 13 and as such the
consensus of authority is to the effect that the holder
of the check is not a holder in due course.
In the present case, BCCFI's defense in stopping
payment is as good to SIHI as it is to George King.
Because, really, the checks were issued with the
intention that George King would supply BCCFI with
the bales of tobacco leaf. There being failure of
consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the
checks.
The foregoing does not mean, however, that
respondent could not recover from the checks. The
only disadvantage of a holder who is not a holder in
due course is that the instrument is subject to
defenses as if it were
non-negotiable. 14 Hence, respondent can collect from
the immediate indorser, in this case, George King.
WHEREFORE, finding that the court a quo erred in the
application of law, the instant petition is hereby
GRANTED. The decision of the Regional Trial Court as
affirmed by the Court of Appeals is hereby REVERSED.
Cost against private respondent.
SO ORDERED.