G.R. No.

136202             January 25, 2007

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents

DECISION

AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals
in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with
damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before
Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by
substituting the name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar
Construction and Engineering Services. Private respondent Salazar prayed for the recovery of the
amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy
Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for
damages and attorney’s fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party
defendant and herein also a private respondent, demanded from the former payment of the amount
of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos
(P267,692.50) representing the aggregate value of three (3) checks, which were allegedly payable to
him, but which were deposited with the petitioner bank to private respondent Salazar’s account
(Account No. 0203-1187-67) without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48
of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67
where the checks were deposited, since this account was already closed by private respondent
Salazar or had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not
arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds
represented by the checks which were deposited and accepted for deposit, petitioner BPI decided to
debit the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50
was paid to Templonuevo by means of a cashier’s check. The difference between the value of the
checks (P267,692.50) and the amount actually debited from her account (P267,707.70) represented
bank charges in connection with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to
him of P267,692.50 and argued that said payment was to correct the malicious deposit made by
private respondent Salazar to her private account, and that petitioner bank’s negligence and
tolerance regarding the matter was violative of the primary and ordinary rules of banking. He likewise
contended that the debiting or taking of the reimbursed amount from the account of private
respondent Salazar by petitioner BPI was a matter exclusively between said parties and may be
pursuant to banking rules and regulations, but did not in any way affect him. The debiting from
another account of private respondent Salazar, considering that her other account was effectively
closed, was not his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private
respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as
follows:

1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the
said amount is fully paid;

2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;

4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney’s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise

DISMISSED for lack of factual basis.

SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent
Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement
thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that
the checks payable to JRT Construction and Trading5 actually belonged to Salazar and would be
deposited to her account, with petitioner acquiescing to the arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable
Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278
and 1290 of the Civil Code in favor of BPI.
III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts,
that the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a
separate and distinct personality.

IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations,
surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO
that checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account
and that BPI was privy to this agreement.

V.

The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises
or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing
was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court against
BPI and dismissing SALAZAR’s complaint.

VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-party
complaint of BPI.7

The issues center on the propriety of the deductions made by petitioner from private respondent
Salazar’s account. Stated otherwise, does a collecting bank, over the objections of its depositor,
have the authority to withdraw unilaterally from such depositor’s account the amount it had
previously paid upon certain unendorsed order instruments deposited by the depositor to another
account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the
possession of a person who is neither a payee nor the indorsee thereof, has been lawfully
transferred for value. Hence, the CA should not have presumed that Salazar was a
transferee for value within the contemplation of Section 49 of the Negotiable Instruments
Law,8 as the latter applies only to a holder defined under Section 191of the same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three
checks was lawful despite her allegations that these checks were deposited pursuant to a
prior internal arrangement with Templonuevo and that petitioner was privy to the
arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazar’s account, petitioner was merely rectifying the
 undue payment it made upon the checks and exercising its prerogative to alter or modify an
erroneous credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to the
personal account of Salazar because A.A. Salazar Construction and Engineering Services,
an unincorporated single proprietorship, had no separate and distinct personality from
Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have
dismissed petitioner’s third-party complaint against Templonuevo because the latter would
have the legal duty to return to petitioner the proceeds of the checks which he previously
received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The
CA’s conclusion that the deductions from the bank account of A.A. Salazar Construction and
Engineering Services were improper stemmed from its finding that there was no ineffective payment
to Salazar which would call for the exercise of petitioner’s right to set off against the former’s bank
deposits. This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced
during trial and upon the admissions and stipulations of fact made during the pre-trial, most
significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount
of P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount
of P55,180.00; and,

(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for
the amount of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the
order of JRT Construction and Trading, the name and style under which Templonuevo does
business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar
was able to deposit the checks in her personal savings account with petitioner and encash
the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a
span of eight months in 1990; and

(e) That Templonuevo only protested the purportedly unauthorized encashment of the
checks after the lapse of one year from the date of the last check.10
Petitioner concedes that when it credited the value of the checks to the account of private
respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon
by the designated payee. The CA, however, did not lend credence to this claim and concluded that
petitioner’s actions were deliberate, in view of its admission that the "mistake" was committed three
times on three separate occasions, indicating acquiescence to the internal arrangement between
Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed.
Three times she deposited them to her account and three times the amounts borne by these checks
were credited to the same. And in those separate occasions, the bank did not return the checks to
her so that she could have them indorsed. Neither did the bank question her as to why she was
depositing the checks to her account considering that she was not the payee thereof, thus allowing
us to come to the conclusion that defendant-appellant BPI was fully aware that the proceeds of the
three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely
that appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three
separate times nary any question. Banks are most finicky over accepting checks for deposit without
the corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for
deposit if the depositor is not one they know very well.11

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo
pursuant to an internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the three
questioned checks, it baffles us why it was only on August 31, 1991 or more than a year after the
third and last check was deposited that he demanded for the refund of the total amount of
P267,692.50.

A prudent man knowing that payment is due him would have demanded payment by his debtor from
the moment the same became due and demandable. More so if the sum involved runs in hundreds
of thousand of pesos. By and large, every person, at the very moment he learns that he was
deprived of a thing which rightfully belongs to him, would have created a big fuss. He would not have
waited for a year within which to do so. It is most inconceivable that Templonuevo did not do this.12

Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules
of Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the
CA affirms the factual findings of the trial court.14 Such questions on whether certain items of
evidence should be accorded probative value or weight, or rejected as feeble or spurious, or whether
or not the proofs on one side or the other are clear and convincing and adequate to establish a
proposition in issue, are questions of fact. The same holds true for questions on whether or not the
body of proofs presented by a party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party may be said to be strong, clear and convincing, or whether or not
inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said
proofs weight – all these are issues of fact which are not reviewable by the Court.15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion
is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made
is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when
the judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f)
when the CA, in making its findings, went beyond the issues of the case and the same are contrary
to the admissions of both appellant and appellee; g) when the findings of the CA are contrary to
those of the trial court; h) when the findings of fact are conclusions without citation of specific
evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed
absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a
prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of
the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on
the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable
Instruments Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or
indorsee delivers a negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the right to have the indorsement of
the transferor. But for the purpose of determining whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the indorsement is actually made. 17

It bears stressing that the above transaction is an equitable assignment and the transferee acquires
the instrument subject to defenses and equities available among prior parties. Thus, if the transferor
had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of
the transferor and also the right, as holder of the legal title, to maintain legal action against the
maker or acceptor or other party liable to the transferor. The underlying premise of this provision,
however, is that a valid transfer of ownership of the negotiable instrument in question has taken
place.

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they
are neither payees nor indorsees of such instruments. The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either the right of the
possessor to receive payment, or of the right of one who has made payment to be discharged from
liability. Thus, something more than mere possession by persons who are not payees or indorsers of
the instrument is necessary to authorize payment to them in the absence of any other facts from
which the authority to receive payment may be inferred.18

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar
based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding
reimbursement for the proceeds of the same. To the Court’s mind, however, such period of delay is
not of such unreasonable length as to estop Templonuevo from asserting ownership over the checks
especially considering that it was readily apparent on the face of the instruments19 that these were
crossed checks.

In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1)
that the check may not be encashed but only deposited in the bank; (2) that the check may be
negotiated only once - to one who has an account with a bank; and (3) that the act of crossing the
check serves as a warning to the holder that the check has been issued for a definite purpose so
that such holder must inquire if the check has been received pursuant to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s
possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s
favor as the designated payee therein was sufficiently overcome. This is consistent with the principle
that if instruments payable to named payees or to their order have not been indorsed in blank, only
such payees or their indorsees can be holders and entitled to receive payment in their own right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was
given for a sufficient consideration will not inure to the benefit of Salazar because the term "given"
does not pertain merely to a transfer of physical possession of the instrument. The phrase "given or
indorsed" in the context of a negotiable instrument refers to the manner in which such instrument
may be negotiated. Negotiable instruments are negotiated by "transfer to one person or another in
such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated
by delivery. If payable to order it is negotiated by the indorsement completed by delivery."22 The
present case involves checks payable to order. Not being a payee or indorsee of the checks,
private respondent Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument
without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to
prior holders to require possessors to prove without the aid of an initial presumption in their favor,
that they came into possession by virtue of a legitimate transaction with the last holder.23 Salazar
failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore
warranted under the circumstances despite the fact that Templonuevo may not have clearly
demonstrated that he never authorized Salazar to deposit the checks or to encash the same.
Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior
endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had
ascertained the genuineness of all prior endorsements. Having assumed the liability of a general
indorser, petitioner’s liability to the designated payee cannot be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the
value of the checks it previously credited in her favor. It is of no moment that the account debited by
petitioner was different from the original account to which the proceeds of the check were credited
because both admittedly belonged to Salazar, the former being the account of the sole
proprietorship which had no separate and distinct personality from her, and the latter being her
personal account.

The right of set-off was explained in Associated Bank v. Tan:24

A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals
on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a
dishonored check that has previously been credited has fairly been established by jurisprudence. To
begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the
requisites mentioned in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

 (4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely
different matter.25 As businesses affected with public interest, and because of the nature of their
functions, banks are under obligation to treat the accounts of their depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.26 In this regard, petitioner was clearly
remiss in its duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three times on three
separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the
value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner
recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same,
contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty
of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily engaged in
banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high
standard of conduct.27 The taking and collection of a check without the proper indorsement amount
to a conversion of the check by the bank.28

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of
the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the
name of the sole proprietorship of Salazar without even serving due notice upon her. This ran
contrary to petitioner’s assurances to private respondent Salazar that the account would remain
untouched, pending the resolution of the controversy between her and Templonuevo.29 In this
connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager
of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that her
account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48
will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in
an unexpected move, in less than two weeks (eleven days to be precise) from the time that letter
was written, [petitioner] bank issued a cashier’s check in the name of Julio R. Templonuevo of the
J.R.T. Construction and Trading for the sum of P267,692.50 (Exhibit "8") and debited said amount
from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen or controlled. Such a
move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless
disregard of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawn
against the account of A.A. Salazar Construction and Engineering Services prior to any notice of
deduction being served. The CA sustained private respondent Salazar’s claim of damages in this
regard:

The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of
A.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and
prejudice particularly when she had already issued checks drawn against the said account. As can
be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits
photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991
(Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private
respondent Salazar undue embarrassment and inflicting damage to her standing in the business
community. Under the circumstances, she was clearly not given the opportunity to protect her
interest when petitioner unilaterally withdrew the above amount from her account without informing
her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the
CA against petitioner. This whole incident would have been avoided had petitioner adhered to the
standard of diligence expected of one engaged in the banking business. A depositor has the right to
recover reasonable moral damages even if the bank’s negligence may not have been attended with
malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and
humiliation.31 Moral damages are not meant to enrich a complainant at the expense of defendant. It
is only intended to alleviate the moral suffering she has undergone. The award of exemplary
damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith
or gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages
are awarded. It is proper where depositors are compelled to litigate to protect their interest.32

WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and
Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241
are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of
Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to
respondent Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other
respects, the same are AFFIRMED.

No costs.

SO ORDERED.
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 Pangalañgan 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.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under
the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due
course. In support of the first contention, it is argued that defendant Gatchalian had no intention to
transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no
delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, delivery was conditional and the condition
was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues
that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to
plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a
prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the
payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is
not a holder in due course because it acquired the check with notice of defect in the title of the
holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts
there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the
holder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of
Facts). Plaintiff could have inquired why a person would use the check of another to pay his
own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant
Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth,
Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7,
Stipulation of Facts.)

The check could not have been intended to pay the hospital fees which amounted only to
P441.75. The check is in the amount of P600.00, which is in excess of the amount due
plaintiff. (Par. 10, Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10,
Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have
been more cautious and wary in accepting a piece of paper and disbursing cold cash.
 The check is payable to bearer. Hence, any person who holds it should have been subjected
to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM
THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-
appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance
with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a
holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this
issue Brannan holds that a payee may be a holder in due course and says that to this effect is the
greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common
law, is a question upon which the courts are in serious conflict. There can be no doubt that a
proper interpretation of the act read as a whole leads to the conclusion that a payee may be
a holder in due course under any circumstance in which he meets the requirements of Sec.
52.

The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder
who has taken the instrument under the following conditions: 1. That it is complete and
regular on its face. 2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact. 3. That he took it in good
faith and for value. 4. That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it
was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because
the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the
same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check
was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve
merely as evidence of good faith of defendants in their desire to purchase the car being sold to
them. Admitting that such was the intention of the drawer of the check when she delivered it to
Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the
check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to
Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to
his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the
plaintiff-appellee should be considered as having notice of the defect in the possession of the holder
Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question
presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due
course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs, such as the fact that appellants
had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could only be
deposited but may not be converted into cash — all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross
neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder of the check in good faith. To
such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was something wrong about his
assignor's acquisition of title, although he did not have notice of the particular wrong that was
committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that he should know the particulars or even the
nature of the fraud, since all that is required is knowledge of such facts that his action in
taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less
than five feet tall, immature in appearance and bearing on his face the stamp a degenerate,
to the defendants' clerk for sale. The boy stated that they belonged to his mother. The
defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could
recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive
 motives, but means bad faith in a commercial sense. The manner in which the defendants
conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they had no right to shut
their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp.
913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not
be allowed to recover the value of the check. Let us now examine the express provisions of the
Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52
(c) provides that a holder in due course is one who takes the instrument "in good faith and for value;"
Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52
(d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due
course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course
does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by
the appellants in their brief, like the fact that the drawer had no account with the payee; that the
holder did not show or tell the payee why he had the check in his possession and why he was using
it for the payment of his own personal account — show that holder's title was defective or suspicious,
to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason the
presumption that it is a holder in due course or that it acquired the instrument in good faith does not
exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case, instead
of the presumption that payee was a holder in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding
the suspicious circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following
disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this
country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule
was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper
must exercise reasonable prudence and caution, and that, if the circumstances were such as
ought to have excited the suspicion of a prudent and careful man, and he made no inquiry,
he did not stand in the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule in the law of
negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English
court abandoned its former position and adopted the rule that nothing short of actual bad
faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser
and let in defenses existing between prior parties, that no circumstances of suspicion merely,
or want of proper caution in the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to establish bad faith or fraud.
 Some of the American courts adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32
Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that
announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those
cited above. Stated briefly, one line of cases including our own had adopted the test of the
reasonably prudent man and the other that of actual good faith. It would seem that it was the
intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the
latter test. That such is the view generally accepted by the courts appears from a recent
review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law,
187-201. To effectuate the general purpose of the act to make uniform the Negotiable
Instruments Law of those states which should enact it, we are constrained to hold (contrary
to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves
prevent a recovery, but are to be considered merely as evidence bearing on the question of
bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform
acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to
prove himself a holder in due course to be entitled to recover, he is required to establish the
conditions entitling him to standing as such, including good faith in taking the instrument. It
devolves upon him to disclose the facts and circumstances attending the transfer, from which
good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty
devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The
stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion
that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a
holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed,
and the defendants are absolved from the complaint. With costs against plaintiff-appellee.
G.R. No. 76788               January 22, 1990

JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R.
CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the
decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection
suit between the same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner)
bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20
as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance &
Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice,
certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle
figured in an accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money
against petitioner before the Regional Trial Court of San Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14%
from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as
attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant.  1

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle
to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved
from the obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of
which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as against

the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with
his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the
pleadings, or in the course of the trial or other proceedings, do not require proof and cannot
be contradicted unless previously shown to have been made through palpable mistake (Sec.
2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24
SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness and due
execution of the instrument shall be deemed admitted unless the adverse party, under oath,
specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8,
Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's motor
vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95
for 36 months. Considering that the defendant was able to pay twice (as admitted by the
plaintiff, defendant's account became delinquent only beginning May, 1980) or in the total
sum of P3,229.90, she is therefore liable to pay the remaining balance of P54,908.30 at
l4% per annum from October 2, 1980 until full payment.

WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering
the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2,
1980 until full payment. The decision is AFFIRMED in all other respects. With costs to
defendant.  2

Petitioner's motion for reconsideration was denied; hence, the present recourse.

In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad
faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and
which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to
private respondent who should instead proceed against VMS.  3

Petitioner argues that in the light of the provision of the law on sales by description   which she
4

alleges is applicable here, no contract ever existed between her and VMS and therefore none had
been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to
the case before it can be made to answer for damages because VMS was earlier sued by her for
"breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court
originally ordered petitioner to pay the remaining balance of the motor vehicle installments in the
amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00
as shown in the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision
is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal
by VMS, docketed as AC-G.R. No. 02922.  5

Private respondent in its comment, prays for the dismissal of the petition and counters that the
issues raised and the allegations adduced therein are a mere rehash of those presented and already
passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be
invoked as an authority as the same is still pending determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a negotiable instrument
which will bar completely all the available defenses of the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which she never
denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as petitioner
would have it appear, where the assignee merely steps into the shoes of, is open to all defenses
available against and can enforce payment only to the same extent as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance
Corp.,   this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable
6

instrument.

Among others, the instrument in order to be considered negotiable must contain the so-called "words
of negotiability — i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the
latter. Such being the situation in the above-cited case, it was held that therein private respondent is
not a holder in due course but a mere assignee against whom all defenses available to the assignor
may be raised.  7

In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's
claim against petitioner is a promissory note which bears all the earmarks of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)
 P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for
______ months due and payable on the ______ day of each month starting _____198__
thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be
added on each unpaid installment from maturity hereof until fully paid.

x x x           x x x          x x x

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager  8

A careful study of the questioned promissory note shows that it is a negotiable instrument, having
complied with the requisites under the law as follows: [a] it is in writing and signed by the maker
Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is
payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;"
[d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named
or indicated with certainty.  9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation   and it is an indorsement of the entire instrument. 
10 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due course,
having taken the instrument under the following conditions: [a] it is complete and regular upon its
face; [b] it became the holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS
Corporation. 12

Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among themselves, and may enforce payment of
the instrument for the full amount thereof.   This being so, petitioner cannot set up against
13

respondent the defense of nullity of the contract of sale between her and VMS.

Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that
there was in fact deception made upon her in that the vehicle she purchased was different from that
actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS
was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach of
contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate
incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is
concerned since it is not a party in this case. To even discuss the issue as to whether or not
the Violago Motor Sales Corporation is liable in the transaction in question would amount, to
denial of due process, hence, improper and unconstitutional. She should have impleaded
Violago Motor Sales. 14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against
petitioner.
G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES,
INC., respondent.

NARVASA, c.J.:

Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel
bars.   On seven (7) different occasions in September and October, 1980, it sold to RYL
1

Construction, Inc. quantities of steels bars of various sizes and rolls of G.I. wire. These bars and wire
were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for
the purchases was P126,859.61.

Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD" (cash on
delivery), the latter made no payments for the construction materials thus ordered and delivered
despite insistent demands for payment by the former.

On April 4, 1981, RYL gave to Armstrong, Industries — described by STELCO as its "sister
corporation" and "manufacturing arm"   — a check drawn against Metrobank in the amount of
2

P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of
another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael
Limson, and its Vice-President, Artemio Torres.

The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL.
Romeo Lim had asked Limson, for financial assistance, and the latter had agreed to give Lim a
check only by way of accommodation, "only as guaranty but not to pay for anything."   Why the
3

check was made out in the amount of P126,129.86 is not explained. Anyway, the check was actually
issued in said amount of P126, 129.86, and as already stated, was given by R.Y. Lim to Armstrong
Industries,   in payment of an obligation. When the latter deposited the check at its bank, it was
4

dishonored because "drawn against insufficient funds."   When so deposited, the check bore two(2)
5

endorsements, that of "RYL Construction," followed by that of "Armstrong Industries."

 
6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong
Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional
Trial Court of Manila with a violation of Batas Pambansa Bilang 22.   They were acquitted in a
7

decision rendered on June 28, 1984 "on the ground that the check in question was not issued by the
drawer "to apply on account for value," it being merely for accommodation purposes. 8 The judgment
however conditioned the acquittal with the following pronouncement:

This is not however to release Steelweld Corporation from its liability under Sec. 29
of the Negotiable Instruments Law for having issued it for the accommodation of
Romeo Lim.

Eleven months or so later — and some four (4) years after issuance of the check in question — in
May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a civil complaint   against 9

both RYL and STEELWELD for the recovery of the valued of the steel bars and wire sold to and
delivered to RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from
August 20, 1980 . . . (and) 25% of the total amount sought to be recovered as and by way of
attorney's fees . . . ."   Among the allegations of its complaint was that Metrobank Check No. 765380
10

above mentioned had been given to it in payment of RYL's indebtedness, duly indorsed by R.Y.
Lim.   A preliminary attachment was issued by the trial court on the basis of the averments of the
11

complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD.

RYL could no longer be located and could not be served with

summons.   It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985.   In
12 13

said pleading, it specifically denied the facts alleged in the complaint, the truth, according to
Steelweld, being basically that —

1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing
of any kind" with STELCO, the transactions described in the complaint having been solely and
exclusively between the plaintiff and RYL Construction;

2) the check in question was "only given to a certain R. Lim to be used as collateral for another
obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the check for another
purpose. . . .;

3) nevertheless, the check "is wholly inoperative since . . . Steelweld

. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention
also the fact that the said plaintiff failed to comply with the requirements of the law to hold the said
defendant (STEELWELD) liable
. . ."

Trial ensued upon these issues, after which judgment was rendered on June 26, 1986.   The 14

judgment sentenced "the defendant Steelweld Corporation to pay to . . . (Stelco Marketing

Corporation) the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case
was instituted until fully paid, plus another sum equivalent to 25% of the total amount due as and for
attorney's fees . . .   That disposition was justified in the judgment as follows:
15 16

There is no question, then, that as far as any commercial transaction is concerned

between plaintiff and defendant Steelweld no such transaction ever occurred.
Ordinarily, under civil law rules, there having been no transaction between them
involving the purchase of certain merchandise there would be no privity of contract
between them, and plaintiff will have no right to sue the defendant for payment of
said merchandise for the simple reason that the defendant did not order them, such
less receive them.
 But we have here a case where the defendant Steelweld thru its President Peter
Rafael Limson admitted to have issued a check payable to cash in favor of his friend
Romeo Lim who was the President of RYL Construction by way of accommodation.
Under the Negotiable Instruments Law an accommodation party is liable.

Sec. 29. Liability of an accommodation party. — An accommodation

party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value notwithstanding such
holder at the time of taking the instrument knew him to be only an
accommodation party.

From this adverse judgment STEELWELD appealed to the Court of Appeals   and there succeeded
17

in reversing the judgment. By Decision promulgated on May 29, 1990,   the Court of
18

Appeals   ordered "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee,
19

STELCO) to pay appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the
suit . . . (being) a baseless one that dragged appellant in court and caused it to incur attorney's fees
and expense of litigation.

STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated
November 13, 1990.   The Court stressed that —
20

. . . as far as Steelweld is concerned, there was no commercial transaction between

said appellant and appellee. Moreover, there is no evidence that appellee Stelco
Marketing became a holder for value. Nowhere in the check itself does the name of
Stelco Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's
complaint is for the collection of the unpaid accounts for delivery of steels bars and
construction materials. It having been established that appellee had no commercial
transaction with appellant Stelco, appellee had no cause of action against said
appellant.

STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it
seeks to make the following points in connection with its plea for the overthrow of the Appellate
Tribunal's aforesaid decision, viz.:

1) said decision is "not in accord with law and jurisprudence;"

2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"

3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the
same free from personal or equitable defense;" and

4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as against a
holder in due course."

The points are not well taken.

The crucial question is whether or not STELCO ever became a holder in due course of Check No.
765380, a bearer instrument, within the contemplation of the Negotiable Instruments Law. It never
did.
STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in
Criminal Case No. 66571,   that the acquittal of the two (2) accused (Limson and Torres) did not
21

operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable
Instruments Law for having issued . . . (the check) for the accommodation of Romeo Lim." The cited
provision reads as follows:

Sec. 29. Liability of accommodation party. — An accommodation party is one who

has singed the instrument as maker, drawer, acceptor, or indorser, without receiving
valued therefor, and for the purpose of lending his name to some other person. Such
a person is liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an accommodation
party.

It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not
specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is
that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to
STELCO.

"A holder in due course," says the law,   "is a holder who has taken the instrument
22

under the following conditions:

(a) That 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 persons negotiating it.

To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e.,

lack of notice of any infirmity in the instruments or defect in title of the persons negotiating it, has no
application. This is because Section 29 of the law above quoted preserves the right of recourse of a
"holder for value" against the accommodation party notwithstanding that "such holder, at the time of
taking the instrument, knew him to be only an accommodation
party." 
23

Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No.
765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could
not have presented, marked and introduced (said check) in evidence . . . before the court a quo."
"Besides," it adds, the check in question was presented by STELCO to the drawee bank for payment
through Armstrong Industries, the manufacturing arm of STELCO and its sister company."  24

The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever
dated back to nay time before the instrument's presentment and dishonor. There is no evidence
whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of
an obligation or as security for an obligation, or for any other purpose before it was presented for
payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is
normally conclusive on this Court, is that STELCO never became a holder for value and that
"(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or
depositor thereof." 
25

What the record shows is that: (1) the STEELWELD company check in question was given by its
president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for
another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to
Armstrong in payment of obligation; (4) Armstrong deposited the check to its account, after indorsing
it; (5) the check was dishonored. The record does not show any intervention or participation by
STELCO in any manner of form whatsoever in these transactions, or any communication of any sort
between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any
time before the dishonor of the check.

The record does show that after the check had been deposited and dishonored, STELCO came into
possession of it in some way, and was able, several years after the dishonor of the check, to give it
in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and
Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after
presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a
holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or
drawer and indorsers.

It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for
value. It does not meet two of the essential requisites prescribed by the statute. It did not become
"the holder of it before it was overdue, and without notice that it had been previously dishonored,"
and it did not take the check "in good faith and for value." 
26

Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the
check accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On
the contrary, the indications are that Armstrong was really the intended payee of the check and was
the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who
instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully.

The petitioner has failed to show any sufficient cause for modification or reversal of the challenged
judgment of the Court of Appeals which, on the contrary, appears to be entirely in accord with the
facts and the applicable law.

WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No.
13418 is AFFIRMED in toto. Costs against petitioner.
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.,"  affirming the decision of the Regional Trial Court  in a
1 2

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  bearing an amount of P164,000.00, post dated
5

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,  both in the amount of
6

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   wherein we made a discourse on the
7

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.   There are a variety of checks, the more popular of which are the memorandum check,
8

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   of the Code of Commerce refers to such instruments.
9

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.   This is specially true in England where the Negotiable
10

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.

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,   and as such the consensus of authority
13

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.   Hence, respondent can collect from the immediate indorser, in this case, George
14

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.

G.R. No. 109491      February 28, 2001

ATRIUM MANAGEMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE
LEON, JR., AND HI-CEMENT CORPORATION, respondents.

----------------------------------------

G.R. No. 121794      February 28, 2001

LOURDES M. DE LEON, petitioner,
vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.

PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling that
Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and
Co. and discounted to Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an
action for collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-
Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer, and
the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee.
E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management
Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored
all four checks for the common reason "payment stopped". Atrium, thus, instituted this action after its
demand for payment of the value of the checks was denied.3

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de
Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay
petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value of the
four checks, plus interest and attorney's fees.4

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and
dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was
not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the
subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts;
and (3) The subject checks were not issued for valuable consideration.5

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981,
Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four
RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium
agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the
checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement.
Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-
Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in
favor of E.T. Henry in payment for petroleum products.6

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a
secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the
four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of
Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject
checks would secure as collateral.7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive
portion of which reads:

"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause
of action by preponderance of evidence, judgment is hereby rendered ordering all the
defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the
amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the
filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00)
PESOS as and for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed.

SO ORDERED."8

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-
Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an
ordinary holder, not a holder in due course of the rediscounted checks.10

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not
authorize the issuance of the checks, it could still be held liable for the checks. And assuming that
the checks were issued with its authorization, the same was without any consideration, which is a
defense against a holder in due course and that the liability shall be borne alone by E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial
court, the dispositive portion of which reads:

"Judgement is hereby rendered:

(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and
Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest
at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for attorney's
fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and
for attorney's fees.

With cost in this instance against the appellee Atrium Management Corporation and
appellant Lourdes Victoria M. de Leon.

So ordered."12

Hence, the recourse to this Court.13

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and
ordering it to pay P20,000.00 as attorney's fees.14

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-
Cement checks issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as
signatory of the checks was personally liable for the value of the checks, which were
declared to be issued without consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees
and costs.15

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record
reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T.
Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T.
Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry
if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes
and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in
need of financial assistance. The Court finds that there was no sufficient evidence to show that such
is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks
for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank
to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well within
the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the
corporation, hence, not an ultra vires act.

"An ultra vires act is one committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law"16 The
term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated."17

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were
personally liable for the checks issued as corporate officers and authorized signatories of the check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:

"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;

"2. He consents to the issuance of watered down stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;

"3. He agrees to hold himself personally and solidarily liable with the corporation; or

"4. He is made, by a specific provision of law, to personally answer for his corporate action."18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-
Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed
the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the
rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks
were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What
is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued
to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence
resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. 1âwphi1.nêt

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The
Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
 "A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it."

In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's
account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit
only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder
in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not a
holder in due course for having taken the instruments in question with notice that the same was for
deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on
the instrument. The Negotiable Instruments Law does not provide that a holder not in due course
can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable.20 One such defense is absence or failure of
consideration.21

We need not rule on the other issues raised, as they merely follow as a consequence of the
foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of
Appeals in CA-G. R. CV No. 26686 are hereby AFFIRMED in toto.

No costs.
G.R. No. 138074               August 15, 2003

CELY YANG, Petitioner,
vs.
HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and
FERNANDO DAVID, Respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the decision of the Court of Appeals, dated March 25, 1999, in CA-G.R.
1 

CV No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC)
of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 5479 and 5492. The trial court
2  3 

dismissed the complaint against herein respondents Far East Bank & Trust Company (FEBTC),
Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB)
and ruled in favor of respondent Fernando David as to the proceeds of the two cashier’s checks,
including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral
damages of ₱100,000.00 and attorney’s fees also in the amount of ₱100,000.00.

The facts of this case are not disputed, to wit:

On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani
entered into an agreement whereby the latter was to give Yang a PCIB manager’s check in the
amount of ₱4.2 million in exchange for two (2) of Yang’s manager’s checks, each in the amount of
₱2.087 million, both payable to the order of private respondent Fernando David. Yang and
Chandiramani agreed that the difference of ₱26,000.00 in the exchange would be their profit to be
divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft
in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which
Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang
Seng Bank Ltd. of Hong Kong.

Accordingly, on December 22, 1987, Yang procured the following:

a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00, dated
December 22, 1987, payable to the order of Fernando David;

b) FEBTC Cashier’s Check No. 287078, in the amount of ₱2,087,000.00, dated December
22, 1987, likewise payable to the order of Fernando David; and

c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of
US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 4195-
01165-2.

At about one o’clock in the afternoon of the same day, Yang gave the aforementioned cashier’s
checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by
Liong’s messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank,
Ayala Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s checks and
dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB manager’s check in the
sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.

Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashier’s checks
and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the
dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed
Yang, and the loss was then reported to the police.

It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able
to get hold of said instruments, without delivering the exchange consideration consisting of the PCIB
manager’s check and the Hang Seng Bank dollar draft.

At three o’clock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet
in Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078,
dated December 22, 1987, in the sum of ₱2.087 million; and (b) Equitable Cashier’s Check No.
CCPS 14-009467, dated December 22, 1987, also in the amount of ₱2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings
account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU
Account No. 124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro
Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987,
drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 4195-
01165-2 on the same date.

Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed
to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC
subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the
holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint for injunction and damages
4 

against Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the
Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The
Complaint was subsequently amended to include a prayer for Equitable to return to Yang the
amount of P2.087 million, with interest thereon until fully paid.
5

On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ
of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay
City, docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that
defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No.
4771, with interest at 18% annually until fully paid.
6

On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary
injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil
Case No. 5492 also.

Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions were
denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.

As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were
consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings
had to be suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the
money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was
also agreed by the parties to limit the issues at the trial to the following:

1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking
Corporation (EBC) Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00
dated December 22, 1987, and Far East Bank and Trust Company (FEBTC) Cashier’s
Check No. 287078 in the sum of ₱2,087,000.00 dated December 22, 1987, together with the
earnings derived therefrom pendente lite?

2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the
encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest
thereon despite the stop payment order of Cely Yang? 7

On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit:

WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the
plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashier’s checks,
together with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant
Fernando David moral damages in the amount of ₱100,000.00; attorney’s fees in the amount of
₱100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company
(FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation
(EBC) is dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file
against defendant Prem Chandiramani for reimbursement of the amounts received by him from
defendant Fernando David.
SO ORDERED. 8

In finding for David, the trial court ratiocinated:

The evidence shows that defendant David was a holder in due course for the reason that the
cashier’s checks were complete on their face when they were negotiated to him. They were not yet
overdue when he became the holder thereof and he had no notice that said checks were previously
dishonored; he took the cashier’s checks in good faith and for value. He parted some $200,000.00
for the two (2) cashier’s checks which were given to defendant Chandiramani; he had also no notice
of any infirmity in the cashier’s checks or defect in the title of the drawer. As a matter of fact, he
asked the manager of the China Banking Corporation to inquire as to the genuineness of the
cashier’s checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that
defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC
cashier’s check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25).
The apparent reason for lifting the stop payment order was because of the fact that FEBTC realized
that the checks were not actually lost but indeed reached the payee defendant David. 9

Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its
Order of September 20, 1995.

In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals,
docketed as CA-G.R. CV No. 52398.

On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and
hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five
Thousand Pesos (₱25,000.00).

SO ORDERED. 10

In affirming the trial court’s judgment with respect to herein respondent David, the appellate court
found that:

In this case, defendant-appellee had taken the necessary precautions to verify, through his bank,
China Banking Corporation, the genuineness of whether (sic) the cashier’s checks he received from
Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendant-
appellee had no notice of what had transpired earlier between the plaintiff-appellant and
Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he
had (sic) a transaction. Further on, David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to David, was acting as Yang’s agent.

David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in
the instrument(s) and defect of title of the holder. To mandate that each holder inquire about every
aspect on how the instrument came about will unduly impede commercial transactions,
Although negotiable instruments do not constitute legal tender, they often take the place of
money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient to
establish that they connived with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory. 11

The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found the action filed by
Yang against said bank to be "clearly unfounded and baseless." Since PCIB was compelled to
litigate to protect itself, then it was entitled under Article 2208 of the Civil Code to attorney’s fees
12 

and litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:

a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY

PETITIONER;

b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND

FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS
TO SWINDLE PETITIONER;

c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR

JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED

TO DAMAGES AND ATTORNEY’S FEES. 13

At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil
Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited
to reviewing questions of law, questions of fact are not entertained absent a showing that the factual
findings complained of are totally devoid of support in the record or are glaringly erroneous. Given
14 

the facts in the instant case, despite petitioner’s formulation, we find that the following are the
pertinent issues to be resolved:

a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a
holder in due course; and

b) Whether the appellate court committed a reversible error in awarding damages and
attorney’s fees to David and PCIB.

On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder
in due course of the checks in question. While it is true that he was named the payee thereof, David
failed to inquire from Chandiramani about how the latter acquired possession of said checks. Given
his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the title of
Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were
crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v.
Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the
checks were issued for a definite purpose and accordingly, made inquiries to determine if he
received the checks pursuant to that purpose. His failure to do so negates the finding in the
proceedings below that he was a holder in due course.

Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any
consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when he
received the checks, he verified their genuineness with his bank, and only after said verification did
he deposit them. David stresses that he had no notice of previous dishonor or any infirmity that
would have aroused his suspicions, the instruments being complete and regular upon their face.
David stresses that the checks in question were cashier’s checks. From the very nature of cashier’s
checks, it is highly unlikely that he would have suspected that something was amiss. David also
stresses negotiable instruments are presumed to have been issued for valuable consideration, and
he who alleges otherwise must controvert the presumption with sufficient evidence. The petitioner
failed to discharge this burden, according to David. He points out that the checks were delivered to
him as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should
be deemed to be their holder in due course.

We shall now resolve the first issue.

Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this
presumption arises only in favor of a person who is a holder as defined in Section 191 of the
Negotiable Instruments Law, meaning a "payee or indorsee of a bill or note, who is in possession of
15 

it, or the bearer thereof."

In the present case, it is not disputed that David was the payee of the checks in question. The weight
of authority sustains the view that a payee may be a holder in due course. Hence, the presumption
16 

that he is a prima facie holder in due course applies in his favor. However, said presumption may be
rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 52 of the Negotiable Instruments Law. All the
17 

requisites provided for in Section 52 must concur in David’s case, otherwise he cannot be deemed a
holder in due course.

We find that the petitioner’s challenge to David’s status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David tendered any valuable consideration for the
disputed checks; and (2) David’s failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in David’s intentional ignorance tantamount to bad faith. In
sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this
score are less than meritorious and far from persuasive.

First, with respect to consideration, Section 24 of the Negotiable Instruments Law creates a
18 

presumption that every party to an instrument acquired the same for a consideration or for
19 

value. Thus, the law itself creates a presumption in David’s favor that he gave valuable
20 

consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove
that David got hold of the checks absent said consideration. In other words, the petitioner must
present convincing evidence to overthrow the presumption. Our scrutiny of the records, however,
shows that the petitioner failed to discharge her burden of proof. The petitioner’s averment that
David did not give valuable consideration when he took possession of the checks is unsupported,
devoid of any concrete proof to sustain it. Note that both the trial court and the appellate court found
that David did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as
consideration for the said instruments. Factual findings of the Court of Appeals are conclusive on the
parties and not reviewable by this Court; they carry great weight when the factual findings of the trial
court are affirmed by the appellate court.21

Second, petitioner fails to point any circumstance which should have put David on inquiry as to the
why and wherefore of the possession of the checks by Chandiramani. David was not privy to the
transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate
dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David
took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing
wrong with said checks. At that time, David was not aware of any "stop payment" order. Under these
circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the
latter’s title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him
guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was
something amiss about Chandiramani’s acquisition or possession of the checks. David did not close
his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani
upon the petitioner, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith. 22

Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below,
petitioner now claims that David should have been put on alert as the instruments in question were
crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David
should at least have inquired as to whether he was acquiring said checks for the purpose for which
they were issued, according to petitioner’s submission.

Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case
are not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and
sold at a discount by the payee, while in the instant case, the payee did not negotiate further the
checks in question but promptly deposited them in his bank account.

The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce makes reference to such instruments. Nonetheless, this Court has taken judicial
23 

cognizance of the practice that a check with two parallel lines in the upper left hand corner means
that it could only be deposited and not converted into cash. The effects of crossing a check, thus,
24 

relates to the mode of payment, meaning that the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by
the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the
cross checks and paying cash for them, despite the warning of the crossing, the subsequent holder
could not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan
Cigar reiterates that in De Ocampo & Co. v. Gatchalian. 25

The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here,
there is no dispute that the crossed checks were delivered and duly deposited by David, the payee
named therein, in his bank account. In other words, the purpose behind the crossing of the checks
was satisfied by the payee.

Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are
not entitled to damages, attorney’s fees, and costs of suit as both acted in bad faith towards her, as
shown by her version of the facts which gave rise to the instant case.

Respondent David counters that he was maliciously and unceremoniously dragged into this suit for
reasons which have nothing to do with him at all, but which arose from petitioner’s failure to receive
her share of the profit promised her by Chandiramani.  Moreover, in filing this suit which has lasted
1âwphi1

for over a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to
which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his
rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing
as a person of good repute in the business community of Pampanga. David thus contends that it is
but proper that moral damages, attorney’s fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the
appellate court that it was needlessly dragged into this case. Hence, no error was committed by the
appellate court in declaring PCIB entitled to attorney’s fees as it was compelled to litigate to protect
itself.

We have thoroughly perused the records of this case and find no reason to disagree with the finding
of the trial court, as affirmed by the appellate court, that:

[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the plaintiff
and defendant Chandiramani. 26

A careful reading of the findings of facts made by both the trial court and appellate court clearly
shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong
tree. It is apparent from the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner
incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse
should have been against him and not against David. By needlessly dragging David into this case all
because he and Chandiramani knew each other, the petitioner not only unduly delayed David from
obtaining the value of the checks, but also caused him anxiety and injured his business reputation
while waiting for its outcome. Recall that under Article 2217 of the Civil Code, moral damages
27 

include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social
humiliation, and similar injury. Hence, we find the award of moral damages to be in order.

The appellate court likewise found that like David, PCIB was dragged into this case on unfounded
and baseless grounds. Both were thus compelled to litigate to protect their interests, which makes
an award of attorney’s fees justified under Article 2208 (2) of the Civil Code. Hence, we rule that the
28 

award of attorney’s fees to David and PCIB was proper.

WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
 G.R. No. 219037, October 19, 2016

RCBC SAVINGS BANK, Petitioner, v. NOEL M. ODRADA, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari1 assailing the 26 March 2014
Decision2 and the 18 June 2015 Resolution3 of the Court of Appeals in CA-G.R. CV No.
94890.

The Facts

In April 2002, respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi

Montero (Montero) to Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand
Pesos (P1,510,000). Of the total consideration, Six Hundred Ten Thousand Pesos
(P610,000) was initially paid by Lim and the balance of Nine Hundred Thousand Pesos
(P900,000) was financed by petitioner RCBC Savings Bank (RCBC) through a car loan
obtained by Lim.4 As a requisite for the approval of the loan, RCBC required Lim to
submit the original copies of the Certificate of Registration (CR) and Official Receipt
(OR) in his name. Unable to produce the Montero's OR and CR, Lim requested RCBC to
execute a letter addressed to Odrada informing the latter that his application for a car
loan had been approved.

On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to
Odrada upon submission of the OR and CR. Following the letter and initial down
payment, Odrada executed a Deed of Absolute Sale on 9 April 2002 in favor of Lim and
the latter took possession of the Montero.5chanrobleslaw

When RCBC received the documents, RCBC issued two manager's checks dated 12 April
2002 payable to Odrada for Nine Hundred Thousand Pesos (P900,000) and Thirteen
Thousand Five Hundred Pesos (P13,500).6 After the issuance of the manager's checks
and their turnover to Odrada but prior to the checks' presentation, Lim notified Odrada
in a letter dated 15 April 2002 that there was an issue regarding the roadworthiness of
the Montero. The letter states:
chanRoblesvirtualLawlibrary

April 15, 2002

Mr. Noel M. Odrada

C/o Kotse Pilipinas
Fronting Ultra, Pasig City

Thru: Shan Mendez;.

Dear Mr. Odrada,

Please be inform[ed] that I am going to cancel or exchange the (1) one unit Montero
that you sold to me thru Mr. Shan Mendez because it did not match your
representations the way Mr. Shan Mendez explained to me like: ChanRoblesVirtualawlibrary

1. You told me that the said vehicle has not experience [d] collision. However, it is
hidden, when you open its engine cover there is a trace of a head-on collision. The
condenser is smashed,; the fender support is not align[ed], both bumper supports]
connecting [the] chassis were crippled and welded, the hood support was repaired, etc.

2. The 4-wheel drive shift is not functioning. When Mr. Mendez was asked about it, he
said it would not function until you can reach the speed of 30 miles.

3. During Mr. Mendez['s] representation, he said the odometer has still an original
mileage data but found tampered.

4. You represented the vehicle as model 1998 however; it is indicated in the front left
A-pillar inscribed at the identification plate [as] model 1997.
Therefore, please show your sincerity by personally inspecting the said vehicle at RCBC,
Pacific Bldg. Pearl Drive, Ortigas Center, Pasig City. Let us meet at the said bank at
10:00 A.M., April 17, 2002.

Meanwhile, kindly hold or do not encash the manager's check[s] issued to you by RCBC
until you have clarified and satisfied my complaints.

Sincerely yours,

Teodoro L. Lim

Cc: Dario E. Santiago, RCBC loan

Legal7
Odrada did not go to the slated meeting and instead deposited the manager's checks
with International Exchange Bank (Ibank) on 16 April 2002 and redeposited them on 19
April 2002 but the checks were dishonored both times apparently upon Lim's instruction
to RCBC.8 Consequently, Odrada filed a collection suit9 against Lim and RCBC in the
Regional Trial Court of Makati.10 chanrobleslaw

In his Answer,11 Lim alleged that the cancellation of the loan was at his instance, upon
discovery of the misrepresentations by Odrada about the Montero's roadworthiness. Lim
claimed that the cancellation was not done ex parte but through a letter12 dated 15
April 2002.13 He further alleged that the letter was delivered to Odrada prior to the
presentation of the manager's checks to RCBC.14 chanrobleslaw

On the other hand, RCBC contended that the manager's checks were dishonored
because Lim had cancelled the loan. RCBC claimed that the cancellation of the loan was
prior to the presentation of the manager's checks. Moreover, RCBC alleged that despite
notice of the defective condition of the Montero, which constituted a failure of
consideration, Odrada still proceeded with presenting the manager's checks.

It was later disclosed during trial that RCBC also sent a formal notice of cancellation of
the loan on 18 April 2002 to both Odrada and Lim.15 chanrobleslaw

The Regional Trial Court's Ruling

In its Decision16 dated 1 October 2009, the trial court ruled in favor of Odrada. The trial
court held that Odrada was the proper party to ask for rescission.17 The lower court
reasoned that the right of rescission is implied in reciprocal obligations where one party
fails to perform what is incumbent upon him when the other is willing and ready to
comply. The trial court ruled that it was not proper for Lim to exercise the right of
rescission since Odrada had already complied with the contract of sale by delivering the
Montero while Lim remained delinquent in payment.18 Since Lim was not ready, willing,
and able to comply with the contract of sale, he was not the proper party entitled to
rescind the contract.

The trial court ruled that the defective condition of the Montero was not a supervening
event that would justify the dishonor of the manager's checks. The trial court reasoned
that a manager's check is equivalent to cash and is really the bank's own check. It may
be treated as a promissory note with the bank as maker. Hence, the check becomes the
primary obligation of the bank which issued it and constitutes a written promise to pay
on demand.19 Being the party primarily liable, the trial court ruled that RCBC was liable
to Odrada for the value of the manager's checks.

Finally, the trial court found that Odrada suffered sleepless nights, humiliation, and was
constrained to hire the services of a lawyer meriting the award of damages.20 chanrobleslaw

The dispositive portion of the Decision reads:

chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered: ChanRoblesVirtualawlibrary

(a) Directing defendant RCBC to pay plaintiff the amount of Php 913,500.00
representing the cash equivalent of the two (2) manager's checks, plus 12% interest
from the date of filing of the case until fully paid;
(b) Directing defendants to solidarity pay moral damages in the amount of Php
500,000.00 and exemplary damages in the amount of Php 500,000.00;

(c) Directing defendants to solidarity pay attorney's fees in the amount of Php
300,000.00.
Finally, granting the cross-claim of defendant RCBC, Teodoro L. Lim is hereby directed
to indemnify RCBC Savings Bank for the amount adjudged for it to pay plaintiff.

SO ORDERED.21

RCBC and Lim appealed from the trial court's decision.

The Court of Appeals' Ruling

In its assailed 26 March 2014 Decision, the Court of Appeals dismissed the appeal and
affirmed the trial court's 1 October 2009 Decision.

The Court of Appeals ruled that the two manager's checks, which were complete and
regular, reached the hands of Lim who deposited the same in his bank account with
Ibank. RCBC knew that the amount reflected on the manager's checks represented
Lim's payment for the remaining balance of the Montero's purchase price. The appellate
court held that when RCBC issued the manager's checks in favor of Odrada, RCBC
admitted the existence of the payee and his then capacity to endorse, and undertook
that on due presentment the checks which were negotiable instruments would be
accepted or paid, or both according to its tenor.22 The appellate court held that the
effective delivery of the checks to Odrada made RCBC liable for the checks.23 chanrobleslaw

On RCBC's defense of want of consideration, the Court of Appeals affirmed the finding
of the trial court that Odrada was a holder in due course. The appellate court ruled that
the defense of want of consideration is not available against a holder in due course.24 chanrobleslaw

Lastly, the Court of Appeals found that the award of moral and exemplary damages and
attorney's fees was excessive. Hence, modification was proper.

The dispositive portion of the Decision reads:

chanRoblesvirtualLawlibrary

WHEREFORE, the impugned Decision of the court a quo in Civil Case No. 02-453 is
hereby AFFIRMED with MODIFICATION insofar as the reduction of awards for moral,
exemplary damages and attorney's fees to P50,000.00, P20,000.00, and P20,000.00
respectively.

SO ORDERED.25 cralawred

RCBC and Lim filed a motion for reconsideration26 on 28 April 2014. In its 18 June 2015
Resolution, the Court of Appeals denied the motion for lack of merit.27 chanrobleslaw

RCBC alone28 filed this petition before the Court. Thus, the decision of the Court of
Appeals became final and executory as to Lim.
 The Issues

RCBC presented the following, issues in this petition:

chanRoblesvirtualLawlibrary

A. The court a quo gravely erred in finding that as between Odrada as seller and Lim as
buyer of the vehicle, only the former has the right to rescind the contract of sale finding
failure to perform an obligation under the contract of sale on the part of the latter only
despite the contested roadworthiness of the vehicle, subject matter of the sale.
1. Whether or not the court a quo erred in holding that Lim cannot cancel the auto loan
despite the failure in consideration due to the contested roadworthiness of the vehicle
delivered by Odrada to him.29
B. The court a quo gravely erred when it found that Odrada is a holder in due course of
the manager's checks in question despite being informed of the cancellation of the auto
loan by the borrower, Lim.
1. Whether or not Lim can validly countermand the manager's checks in the hands of a
holder who does not hold the same in due course.30

Odrada failed to file a comment31 within the period prescribed by this Court.32 chanrobleslaw

The Ruling of this Court

We grant the petition.

Under the law on sales, a contract of sale is perfected the moment there is a meeting of
the minds upon the thing which is the object of the contract and upon the price which is
the consideration. From that moment, the parties may reciprocally demand
performance.33 Performance may be done through delivery, actual or constructive.
Through delivery, ownership is transferred to the vendee.34 However, the obligations
between the parties do not cease upon delivery of the subject matter. The vendor and
vendee remain concurrently bound by specific obligations. The vendor, in particular, is
responsible for an implied warranty against hidden defects.

Article 1547 of the Civil Code states: "In a contract of sale, unless a contrary intention
appears, there is an implied warranty that the thing shall be free from any hidden faults
or defects."35 Article 1566 of the Civil Code provides that "the vendor is responsible to
the vendee for any hidden faults or defects in the thing sold, even though he was not
aware thereof."36 As a consequence, the law fixes the liability of the vendor for hidden
defects whether known or unknown to him at the time of the sale.

The law defines a hidden defect as one which would render the thing sold unfit for the
use for which it is intended, or would diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have acquired it or would have
given a lower price for it.37 chanrobleslaw

In this case, Odrada and Lim entered into a contract of sale of the Montero. Following
the initial downpayment and execution of the deed of sale, the Montero was delivered
by Odrada to Lim and the latter took possession of the Montero. Notably, under the
law, Odrada's warranties against hidden defects continued even after the Montero's
delivery. Consequently, a misrepresentation as to the Montero's roadworthiness
constitutes a breach of warranty against hidden defects.
In Supercars Management & Development Corporation v. Flores,38 we held that a
breach of warranty against hidden defects occurred when the vehicle, after it was
delivered to respondent, malfunctioned despite repairs by petitioner.39 In the present
case, when Lim acquired possession, he discovered that the Montero was not
roadworthy. The engine was misaligned, the automatic transmission was
malfunctioning, and the brake rotor disks needed refacing.40 However, during the
proceedings in the trial court, Lim's testimony was stricken off the record because he
failed to appear during cross-examination.41 In effect, Lim was not able to present clear
preponderant evidence of the Montero's defective condition.

RCBC May Refuse to Pay Manager's Checks

We address the legal question of whether or not the drawee bank of a manager's check
has the option of refusing payment by interposing a personal defense of the purchaser
of the manager's check who delivered the check to a third party.

In resolving this legal question, this Court will examine the nature of a manager's check
and its relation to personal defenses under the Negotiable Instruments Law.42 chanrobleslaw

Jurisprudence defines a manager's check as a check drawn by the bank's manager upon
the bank itself and accepted in advance by the bank by the act of its issuance.43 It is
really the bank's own check and may be treated as a promissory note with the bank as
its maker.44 Consequently, upon its purchase, the check becomes the primary obligation
of the bank and constitutes its written promise to pay the holder upon demand.45 It is
similar to a cashier's check46 both as to effect and use in that the bank represents that
the check is drawn against sufficient funds.47
chanrobleslaw

As a general rule, the drawee bank is not liable until it accepts.48 Prior to a bill's
acceptance, no contractual relation exists between the holder49 and the drawee.
Acceptance, therefore, creates a privity of contract between the holder and the drawee
so much so that the latter, once it accepts, becomes the party primarily liable on the
instrument.50 Accordingly, acceptance is the act which triggers the operation of the
liabilities of the drawee (acceptor) under Section 6251of the Negotiable Instruments
Law. Thus, once he accepts, the drawee admits the following: (a) existence of the
drawer; (b) genuineness of the drawer's signature; (c) capacity and authority of the
drawer to draw the instrument; and (d) existence of the payee and his then capacity to
endorse.

As can be gleaned in a long line of cases decided by this Court, a manager's check is
accepted by the bank upon its issuance. As compared to an ordinary bill of exchange
where acceptance occurs after the bill is presented to the drawee, the distinct feature of
a manager's check is that it is accepted in advance. Notably, the mere issuance of a
manager's check creates a privity of contract between the holder and the drawee bank,
the latter primarily binding itself to pay according to the tenor of its acceptance.

The drawee bank, as a result, has the unconditional obligation to pay a manager's
check to a holder in due course irrespective of any available personal defenses.
However, while this Court has consistently held that a manager's check is automatically
accepted, a holder other than a holder in due course is still subject to defenses.
In International Corporate Bank v. Spouses Gueco,52 which involves a delivered
manager's check, the Court still considered whether the check had become stale:
chanRoblesvirtualLawlibrary

It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined. In the case at bar,
there is no doubt that the petitioner bank held on the check and refused to encash the
same because of the controversy surrounding the signing of the joint motion to dismiss.
We see no bad faith or negligence in this position taken by the bank.53

In International Corporate Bank, this Court considered whether the holder presented

the manager's check within a reasonable time after its issuance - a circumstance
required for holding the instrument in due course.54 chanrobleslaw

Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development

Corporation,55 the Court observed that the mere issuance of a manager's check does
not ipso facto  work as an automatic transfer of funds to the account of the payee.56 In
order for the holder to acquire title to the instrument, there still must have been
effective delivery. Accordingly, the Court, taking exception to the manager's check
automatic transfer of funds to the payee, declared that: "the doctrine that the deposit
represented by a manager's check automatically passes to the payee is inapplicable,
because the instrument - although accepted in advance remains undelivered."57 This
Court ruled that the holder did not acquire the instrument in due course since title had
not passed for lack of delivery.58
chanrobleslaw

We now address the main legal question: if the holder of a manager's check is not a
holder in due course, can the drawee bank interpose a personal defense of the
purchaser?

Our rulings in Mesina v. Intermediate Appellate Court59 and United Coconut Planters

Bank v. Intermediate Appellate Court60 shed light on the matter.

In Mesina, Jose Go purchased a manager's check from Associated Bank. As he left the
bank, Go inadvertently left the check on top of the desk of the bank manager. The bank
manager entrusted the check for safekeeping to another bank official who at the time
was attending to a customer named Alexander Lim.61 After the bank official answered
the telephone and returned from the men's room, the manager's check could no longer
be found. After learning that his manager's check was missing, Go immediately
returned to the bank to give a stop payment order on the check. A third party named
Marcelo Mesina deposited the manager's check with Prudential Bank but the drawee
bank sent back the manager's check to the collecting bank with the words "payment
stopped." When asked how he obtained the manager's check, Mesina claimed it was
paid to him by Lim in a "certain transaction."62chanrobleslaw

While this Court acknowledged the general causes and effects of a manager's check, it
noted that other factors were needed to be considered, namely the manner by which
Mesina acquired the instrument. This Court declared:
chanRoblesvirtualLawlibrary

Petitioner's allegations hold no water. Theories and examples advanced by petitioner on

causes and effects of a cashier's check such as (1) it cannot be countermanded in the
hands of a holder in due course and (2) a cashier's check is a bill of exchange drawn by
the bank against itself - are general principles which cannot be aptly applied to the case
at bar, without considering other things. Petitioner failed to substantiate his claim that
he is a holder in due course and for consideration or value as shown by the established
facts of the case. Admittedly, petitioner became the holder of the cashier's check as
endorsed by Alexander Lim who stole the check. He refused to say how and why it was
passed to him. He had therefore notice of the defect of his title over the check from the
start.63

Ultimately, the notice of defect affected Mesina's claim as a holder of the manager's
check. This Court ruled that the issuing bank could validly refuse payment
because Mesina was not a holder in due course. Unequivocally, the Court
declared: "the holder of a cashier's check who is not a holder in due course
cannot enforce such check against the issuing bank which dishonors the
same."64 chanrobleslaw

In the same manner, in United Coconut Planters Bank  (UCPB),65 this Court ruled that
the drawee bank was legally justified in refusing to pay the holder of a manager's check
who did not hold the check in due course. In UCPB, Altiura Investors, Inc. purchased a
manager's check from UCPB, which then issued a manager's check in the amount of
Four Hundred Ninety Four Thousand Pesos (P494,000) to Makati Bel-Air Developers,
Inc. The manager's check represented the payment of Altiura Investors, Inc. for a
condominium unit it purchased from Makati Bel-Air Developers, Inc. Subsequently,
Altiura Investors, Inc. instructed UCPB to hold payment due to material
misrepresentations by Makati Bel-Air Developers, Inc. regarding the condominium
unit.66 Pending negotiations; and while the stop payment order was in effect, Makati
Bel-Air Developers, Inc. insisted that UCPB pay the value of the manager's check. UCPB
refused to pay and filed an interpleader to allow Altiura Investors, Inc. and Makati Bel-
Air Developers, Inc. to litigate their respective claims. Makati Bel-Air Developers, Inc.
also filed a counterclaim against UCPB in the amount of Five Million Pesos (P5,000,000)
based on UCPB's violation of its warranty on its manager's check.67 chanrobleslaw

In upholding UCPB's refusal to pay the value of the manager's check, this Court
reasoned that Makati Bel-Air Developers, Inc.'s title to the instrument became defective
when there arose a partial failure of consideration.68 We held that UCPB could validly
invoke a personal defense of the purchaser against Makati Bel-Air Developers, Inc.
because the latter was not a holder in due course of the manager's check:
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There are other considerations supporting the conclusion reached by this Court that
respondent appellate court had committed reversible error. Makati Bel-Air was a party
to the contract of sale of an office condominium unit to Altiura, for the payment of
which the manager's check was issued. Accordingly, Makati Bel-Air was fully aware, at
the time it had received the manager's check, that there was, or had arisen, at least
partial failure of consideration since it was unable to comply with its obligation to
deliver office space amounting to 165 square meters to Altiura. Makati Bel-Air was also
aware that petitioner Bank had been informed by Altiura of the claimed defect in Makati
Bel-Air's title to the manager's check or its right to the proceeds thereof. Vis-a-vis both
Altiura and petitioner Bank, Makati Bel-Air was not a holder in due course of the
manager's check.69
The foregoing rulings clearly establish that the drawee bank of a manager's check may
interpose personal defenses of the purchaser of the manager's check if the holder is not
a holder in due course. In short, the purchaser of a manager's check may validly
countermand payment to a holder who is not a holder in due course. Accordingly, the
drawee bank may refuse to pay the manager's check by interposing a personal defense
of the purchaser. Hence, the resolution of the present case requires a determination of
the status of Odrada as holder of the manager's checks.

In this case, the Court of Appeals gravely erred when it considered Odrada as a holder
in due course. Section 52 of the Negotiable Instruments Law defines a holder in due
course as one who has taken the instrument under the following conditions:
chanRoblesvirtualLawlibrary

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. (Emphasis supplied)

To be a holder in due course, the law requires that a party must have acquired the
instrument in good faith and  for value.

Good faith means that the person taking the instrument has acted with due honesty
with regard to the rights of the parties liable on the instrument and that at the time
he,took the instrument, the holder has no knowledge of any defect or infirmity of the
instrument.70 To constitute notice of an infirmity in the instrument or defect in the title
of the person negotiating the same, the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or knowledge of such facts that his action in
taking the instrument would amount to bad faith.71 chanrobleslaw

Value, on the other hand, is defined as any consideration sufficient to support a simple
contract.72 chanrobleslaw

In the present case, Odrada attempted to deposit the manager's checks on 16 April
2002, a day after Lim had informed him that there was a serious problem with the
Montero. Instead of addressing the issue, Odrada decided to deposit the manager's
checks. Odrada's actions do not amount to good faith. Clearly, Odrada failed to make
an inquiry even when the circumstances strongly indicated that there arose, at the very
least, a partial failure of consideration due to the hidden defects of the Montero.
Odrada's action in depositing the manager's checks despite knowledge of the Montero's
defects amounted to bad faith. Moreover, when Odrada redeposited the manager's
checks on 19 April 2002, he was already formally notified by RCBC the previous day of
the cancellation of Lim's auto loan transaction. Following UCPB,73 RCBC may refuse
payment by interposing a personal defense of Lim - that the title of Odrada had become
defective when there arose a partial failure or lack of consideration.74
chanrobleslaw
RCBC acted in good faith in following the instructions of Lim. The records show that Lim
notified RCBC of the defective condition of the Montero before Odrada presented the
manager's checks.75 Lim informed RCBC of the hidden defects of the Montero including
a misaligned engine, smashed condenser, crippled bumper support, and defective
transmission. RCBC also received a formal notice of cancellation of the auto loan from
Lim and this prompted RCBC to cancel the manager's checks since the auto loan was
the consideration for issuing the manager's checks. RCBC acted in good faith in
stopping the payment of the manager's checks.

Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder
other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable, x x x." Since Odrada was not a holder in due
course, the instrument becomes subject to personal defenses under the Negotiable
Instruments Law. Hence, RCBC may legally act on a countermand by Lim, the
purchaser of the manager's checks.

Lastly, since Lim's testimony involving the Montero's hidden defects was stricken off the
record by the trial court, Lim failed to prove the existence of the hidden defects and
thus Lim remains liable to Odrada for the purchase price of the Montero. Lim's failure to
file an appeal from the decision of the Court of Appeals made the decision of the
appellate court final and executory as to Lim. RCBC cannot be made liable because it
acted in good faith in carrying out the stop payment order of Lim who presented to
RCBC the complaint letter to Odrada when Lim issued the stop payment order.

WHEREFORE, we GRANT the petition. We REVERSE and SET ASIDE the 26 March

2014 Decision and the 18 June 2015 Resolution of the Court of Appeals in CA-G.R. CV
No. 94890 only insofar as RCBC Savings Bank is concerned.

SO ORDERED.
G.R. No. 187769               June 4, 2014

ALVIN PATRIMONIO, Petitioner,
vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari  under Rule 45 of the Revised Rules of Court is the
1

decision  dated September 24, 2008 and the resolution  dated April 30, 2009 of the Court of Appeals
2 3

(CA) in CA-G.R. CV No. 82301. The appellate court affirmed the decision of the Regional Trial Court
(RTC) of Quezon City, Branch 77, dismissing the complaint for declaration of nullity of loan filed by
petitioner Alvin Patrimonio and ordering him to pay respondent Octavio Marasigan III (Marasigan)
the sum of ₱200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture
under the name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-
concerts and shows related to basketball. Petitioner was already then a decorated professional
basketball player while Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for the expenses
of Slam Dunk. Although signed, these checks had no payee’s name, date or amount. The blank
checks were entrusted to Gutierrez with the specific instruction not to fill them out without previous
notification to and approval by the petitioner. According to petitioner, the arrangement was made so
that he could verify the validity of the payment and make the proper arrangements to fund the
account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan
(the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse
that the petitioner needed the money for the construction of his house. In addition to the payment of
the principal, Gutierrez assured Marasigan that he would be paid an interest of 5% per month from
March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez,
Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994.
Gutierrez simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed
with Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank portions filled out with
the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "₱200,000.00". The
upper right portion of the check corresponding to the date was also filled out with the words "May 23,
1994" but the petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT
CLOSED." It was later revealed that petitioner’s account with the bank had been closed since May
28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to
the petitioner asking for the payment of ₱200,000.00, but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner, docketed as
Criminal Case No. 42816.

On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for
Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent
Marasigan. He completely denied authorizing the loan or the check’s negotiation, and asserted that
he was not privy to the parties’ loan agreement.

Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22,
1997,Gutierrez was declared in default.

The Ruling of the RTC

The RTC ruled on February 3,2003 in favor of Marasigan.  It found that the petitioner, in issuing the
4

pre-signed blank checks, had the intention of issuing a negotiable instrument, albeit with specific
instructions to Gutierrez not to negotiate or issue the check without his approval. While under
Section 14 of the Negotiable Instruments Law Gutierrez had the prima facie authority to complete
the checks by filling up the blanks therein, the RTC ruled that he deliberately violated petitioner’s
specific instructions and took advantage of the trust reposed in him by the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the
petitioner’s complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan
the face value of the check with a right to claim reimbursement from Gutierrez.
The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a
holder in due course. He contended that when Marasigan received the check, he knew that the
same was without a date, and hence, incomplete. He also alleged that the loan was actually
between Marasigan and Gutierrez with his check being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual
findings. After careful analysis, the CA agreed with the petitioner that Marasigan is not a holder in
due course as he did not receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the
petitioner’s authority. It held that the loan may not be nullified since it is grounded on an obligation
arising from law and ruled that the petitioner is still liable to pay Marasigan the sum of ₱200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the
present petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition

The petitioner argues that: (1) there was no loan between him and Marasigan since he never
authorized the borrowing of money nor the check’s negotiation to the latter; (2) under Article 1878 of
the Civil Code, a special power of attorney is necessary for an individual to make a loan or borrow
money in behalf of another; (3) the loan transaction was between Gutierrez and Marasigan, with his
check being used only as a security; (4) the check had not been completely and strictly filled out in
accordance with his authority since the condition that the subject check can only be used provided
there is prior approval from him, was not complied with; (5) even if the check was strictly filled up as
instructed by the petitioner, Marasigan is still not entitled to claim the check’s value as he was not a
holder in due course; and (6) by reason of the bad faith in the dealings between the respondents, he
is entitled to claim for damages.

The Issues

Reduced to its basics, the case presents to us the following issues:

1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent

Marasigan to petitioner, through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the ₱200,000.00
loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly under the
authority given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main
point of inquiry of whether the contract of loan may be nullified, hinges on the very existence of the
contract of loan – a question that, as presented, is essentially, one of fact. Whether the petitioner
authorized the borrowing; whether Gutierrez completely filled out the subject check strictly under the
petitioner’s authority; and whether Marasigan is a holder in due course are also questions of fact,
that, as a general rule, are beyond the scope of a Rule 45 petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for
review under Rule 45 is limited only to questions of law, is not an absolute rule that admits of no
exceptions. One notable exception is when the findings off act of both the trial court and the CA are
conflicting, making their review necessary.  In the present case, the tribunals below arrived at two
5

conflicting factual findings, albeit with the same conclusion, i.e., dismissal of the complaint for nullity
of the loan. Accordingly, we will examine the parties’ evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the
borrowing of money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly
requires a written authority when the loan is contracted through an agent. The petitioner contends
that absent such authority in writing, he should not be held liable for the face value of the check
because he was not a party or privy to the agreement.

Contracts of Agency May be Oral Unless The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds
himself to render some service or to do something in representation or on behalf of another, with the
consent or authority of the latter." Agency may be express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to repudiate the agency, knowing that another person
is acting on his behalf without authority.

As a general rule, a contract of agency may be oral.  However, it must be written when the law
6

requires a specific form, for example, in a sale of a piece of land or any interest therein through an
agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an
agent can loan or borrow money in behalf of the principal, to wit:

Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation
of the things which are under administration. (emphasis supplied)

Article 1878 does not state that the authority be in writing. As long as the mandate is express, such
authority may be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et
al.,  that the requirement under Article 1878 of the Civil Code refers to the nature of the authorization
7

and not to its form. Be that as it may, the authority must be duly established by competent and
convincing evidence other than the self serving assertion of the party claiming that such authority
was verbally given, thus:
The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special
authority in Rule 138 of the Rules of Court refer to the nature of the authorization and not its form.
The requirements are met if there is a clear mandate from the principal specifically authorizing the
performance of the act. As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680)
stated that such a mandate may be either oral or written, the one vital thing being that it shall be
express. And more recently, We stated that, if the special authority is not written, then it must be duly
established by evidence:

x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority.
And while the same does not state that the special authority be in writing the Court has every reason
to expect that, if not in writing, the same be duly established by evidence other than the self-serving
assertion of counsel himself that such authority was verbally given him.(Home Insurance Company
vs. United States lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210;
225). (emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified for
Being Void; Petitioner is Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf
of the petitioner.  Records do not show that the petitioner executed any special power of attorney
1âwphi1

(SPA) in favor of Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized
Gutierrez (or anyone for that matter), whether verbally or in writing, to borrow money in his behalf,
nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing authorizing
him to borrow using your money?

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105) 8

xxxx

Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and releasing
them to Gutierrez suffice to establish that the petitioner had authorized Gutierrez to fill them out and
contract the loan in his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the
petitioner. As held in Yasuma v. Heirs of De Villa,  involving a loan contracted by de Villa secured by
9

real estate mortgages in the name of East Cordillera Mining Corporation, in the absence of an SPA
conferring authority on de Villa, there is no basis to hold the corporation liable, to wit:

The power to borrow money is one of those cases where corporate officers as agents of the
corporation need a special power of attorney. In the case at bar, no special power of attorney
conferring authority on de Villa was ever presented. x x x There was no showing that respondent
corporation ever authorized de Villa to obtain the loans on its behalf.

xxxx
Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the
corporation liable since there was no authority, express, implied or apparent, given to de Villa to
borrow money from petitioner. Neither was there any subsequent ratification of his act.

xxxx

The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his
death). (citations omitted; emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado,  where this court held:
10

Petitioner submits that his following testimony suffices to establish that respondent had authorized
Lilian to obtain a loan from him.

xxxx

Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of
respondent or of his wife. While petitioner claims that Lilian was authorized by respondent, the
statement of account marked as Exhibit "A" states that the amount was received by Lilian "in behalf
of Mrs. Annie Mercado.

It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she
was acting for and in behalf of respondent. She thus bound herself in her personal capacity and not
as an agent of respondent or anyone for that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not enough merely that the agent
was in fact authorized to make the mortgage, if he has not acted in the name of the principal. x x x
(emphasis supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of
the petitioner, the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the
petitioner is not bound by the parties’ loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally
sufficient because the authority to enter into a loan can never be presumed. The contract of agency
and the special fiduciary relationship inherent in this contract must exist as a matter of fact. The
person alleging it has the burden of proof to show, not only the fact of agency, but also its nature and
extent.  As we held in People v. Yabut:
11 12

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in
Caloocan City cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of
the checks to the complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not
take delivery of the checks as holder, i.e., as "payee" or "indorsee." And there appears to beno
contract of agency between Yambao and Andan so as to bind the latter for the acts of the former.
Alicia P. Andan declared in that sworn testimony before the investigating fiscal that Yambao is but
her "messenger" or "part-time employee." There was no special fiduciary relationship that permeated
their dealings. For a contract of agency to exist, the consent of both parties is essential, the principal
consents that the other party, the agent, shall act on his behalf, and the agent consents so to act. It
must exist as a fact. The law makes no presumption thereof. The person alleging it has the burden
of proof to show, not only the fact of its existence, but also its nature and extent. This is more
imperative when it is considered that the transaction dealt with involves checks, which are not legal
tender, and the creditor may validly refuse the same as payment of obligation.(at p. 630). (emphasis
supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of
the SPA in favor of the latter and without verifying from the petitioner whether he had authorized the
borrowing of money or release of the check. He was thus bound by the risk accompanying his trust
on the mere assurances of Gutierrez.

No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent
Was Not Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any
other contract, is subject to the rules governing the requisites and validity of contracts in
general.  Article 1318 of the Civil Code  enumerates the essential requisites for a valid contract,
13 14

namely:

1. consent of the contracting parties;

2. object certain which is the subject matter of the contract; and

3. cause of the obligation which is established.

In this case, the petitioner denied liability on the ground that the contract lacked the essential
element of consent. We agree with the petitioner. As we explained above, Gutierrez did not have the
petitioner’s written/verbal authority to enter into a contract of loan. While there may be a meeting of
the minds between Gutierrez and Marasigan, such agreement cannot bind the petitioner whose
consent was not obtained and who was not privy to the loan agreement. Hence, only Gutierrez is
bound by the contract of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the
hands of Marasigan. This act, however, does not constitute sufficient authority to borrow money in
his behalf and neither should it be construed as petitioner’s grant of consent to the parties’ loan
agreement. Without any evidence to prove Gutierrez’ authority, the petitioner’s signature in the
check cannot be taken, even remotely, as sufficient authorization, much less, consent to the contract
of loan. Without the consent given by one party in a purported contract, such contract could not have
been perfected; there simply was no contract to speak of. 15

With the loan issue out of the way, we now proceed to determine whether the petitioner can be
made liable under the check he signed.

II. Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable
Instruments Law (NIL) which states:

Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person making the signature in order that
the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it
up as such for any amount. In order, however, that any such instrument when completed may be
enforced against any person who became a party thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or
drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a
negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely
requires that the instrument be in the possession of a person other than the drawer or maker and
from such possession, together with the fact that the instrument is wanting in a material particular,
the law presumes agency to fill up the blanks. 16

In order however that one who is not a holder in due course can enforce the instrument against a
party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled
strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If
it was proven that the instrument had not been filled up strictly in accordance with the authority given
and within a reasonable time, the maker can set this up as a personal defense and avoid liability.
However, if the holder is a holder in due course, there is a conclusive presumption that authority to
fill it up had been given and that the same was not in excess of authority. 17

In the present case, the petitioner contends that there is no legal basis to hold him liable both under
the contract and loan and under the check because: first, the subject check was not completely filled
out strictly under the authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines 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.(emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good
faith and for value." It also provides in Section 52(d) that in order that one may be a holder in due
course, it is necessary 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.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which
could beset up against a prior holder of the instrument.  It means that he does not have any
18
knowledge of fact which would render it dishonest for him to take a negotiable paper. The absence
of the defense, when the instrument was taken, is the essential element of good faith. 19

As held in De Ocampo v. Gatchalian: 20

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.

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.

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. (emphasis supplied).

In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract
of loan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in
bad faith. The following exchange is significant on this point:

WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?

A: Since I celebrated my birthday in that place where Nap and I live together with the other crew,
there were several visitors that included Danny Espiritu. So a week after my birthday, Bong
Marasigan called me up again and he was fuming mad. Nagmumura na siya. Hinahanap niya si…
hinahanap niya si Nap, dahil pinagtataguan na siya at sinabi na niya na kailangan I-settle na niya
yung utang ni Nap, dahil…

xxxx

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang
tsekeng tumalbog… (He told me that we have to fix it up before it…) mauwi pa kung saan…

xxxx

Q: What was your reply, if any?

A: I actually asked him. Kanino ba ang tseke na sinasabi mo?

(Whose check is it that you are referring to or talking about?)

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

A: I told him do you know that it is not really Alvin who borrowed money from you or what you want
to appear…

xxxx

Q: What was his reply?

A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.(T.S.N.,
Ambet Nabus, July 27, 2000; pp.65-71; emphasis supplied) 21

Since he knew that the underlying obligation was not actually for the petitioner, the rule that a
possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly noted
by the CA, his inaction and failure to verify, despite knowledge of that the petitioner was not a party
to the loan, may be construed as gross negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already
totally barred from recovery. The NIL does not provide that a holder who is not a holder in due
course may not in any case recover on the instrument.  The only disadvantage of a holder who is
22

not in due course is that the negotiable instrument is subject to defenses as if it were non-
negotiable.  Among such defenses is the filling up blank not within the authority.
23

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the
authority he gave. He points to his instruction not to use the check without his prior approval and
argues that the check was filled up in violation of said instruction.

Check Was Not Completed Strictly Under The Authority Given by The Petitioner

Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the
blanks and use the check.  To repeat, petitioner gave Gutierrez pre-signed checks to be used in
1âwphi1

their business provided that he could only use them upon his approval. His instruction could not be
any clearer as Gutierrez’ authority was limited to the use of the checks for the operation of their
business, and on the condition that the petitioner’s prior approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie
authority does not extend to its use (i.e., subsequent transfer or negotiation)once the check is
completed. In other words, only the authority to complete the check is presumed. Further, the law
used the term "prima facie" to underscore the fact that the authority which the law accords to a
holder is a presumption juris tantumonly; hence, subject to subject to contrary proof. Thus, evidence
that there was no authority or that the authority granted has been exceeded may be presented by
the maker in order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the
petitioner to fill up the blank or to use the check. In his testimony, petitioner asserted that he never
authorized nor approved the filling up of the blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23,
1994?
WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000 only xx
in this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999). 24

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded
the authority when he used the check to pay the loan he supposedly contracted for the construction
of petitioner's house. This is a clear violation of the petitioner's instruction to use the checks for the
expenses of Slam Dunk. It cannot therefore be validly concluded that the check was completed
strictly in accordance with the authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the
personal defense that the blanks were not filled up in accordance with the authority he gave.
Consequently, Marasigan has no right to enforce payment against the petitioner and the latter
cannot be obliged to pay the face value of the check.

WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the petitioner
Alvin Patrimonio's petition for review on certiorari. The appealed Decision dated September 24, 2008
and the Resolution dated April 30, 2009 of the Court of Appeals are consequently ANNULLED AND
SET ASIDE. Costs against the respondents.