G.R. No. L-15380 - Chan Wan vs. Tan Kim

Case Summary (G.R. No. L-15380)

Procedural Posture

Plaintiff sued to collect on eleven checks totaling P4,290.00 after the checks were dishonored for insufficient funds or causes attributable to the drawer. At trial the plaintiff did not testify; his counsel identified the checks and demand letters. Defendants testified, asserting that the checks had been issued as receipts for transactions with third parties (Pinong and Muy). The trial court declined to order payment on two principal grounds: (a) plaintiff failed to prove he was a holder in due course; and (b) the checks were crossed and should have been presented for deposit to the bank named in the crossing rather than presented for payment by the plaintiff. Defendants’ counterclaim was dismissed by the trial court and they did not appeal that dismissal. The sole issue on appeal was the plaintiff’s right to collect on the eleven instruments.

Facts Material to Decision

The checks were drawn by defendant Tan Kim on Equitable Banking Corporation and were payable to “cash or bearer.”
Eight of the checks bore two parallel transverse lines with the words “non-negotiable China Banking Corporation” between them, creating a special crossing to China Banking Corporation.
Endorsements on the backs of several checks indicated deposit to accounts with China Banking Corporation and clearance through the clearing office of the Central Bank of the Philippines; some returned checks bore stamps such as “account closed.”
Plaintiff presented the checks for payment himself to the drawee bank and later produced them in court with return stamps; he did not explain how he came to possess the returned instruments.
Defendant Tan Kim testified (without contradiction) that the checks had been issued to Pinong and Muy as receipts or in payment for shoes, and suggested a defense related to nonperformance by those parties.

Legal Issues Framed

Whether the plaintiff is a holder in due course and thus entitled to recover from the drawer despite dishonor.
Whether the special crossing to China Banking Corporation and the manner of presentment affect the drawer’s liability.
Whether any defenses available to the drawer, proven at trial, bar recovery by a holder who is not a holder in due course.
Whether the case required remand for additional evidence.

Governing Legal Principles Applied

Crossed checks and special crossings: The Code of Commerce (Art. 541) allows the drawer or holder to indicate that a check be paid to a certain banker by writing the banker’s name across the face. English Bills of Exchange Act provisions defining general and special crossings and the consequences of improper payment were applied by analogy where the Negotiable Instruments Law is silent. A check crossed specially to a banker should be deposited with that banker and presented through the proper channels; improper presentment can preclude the drawer’s liability.
Presentment and drawer’s engagement: Under the Negotiable Instruments Law, the drawer engages that on due presentment the check will be paid, and if dishonored he will pay the holder. Absent due presentment, the drawer’s obligation is not triggered. (Secs. 61 and 196 as cited.)
Holder versus holder in due course: Possession of a bearer check makes one a holder, but not necessarily a holder in due course. A holder who is not a holder in due course can still recover unless a valid defense is shown that defeats the instrument as between the original parties; the negotiable instrument is, however, subject to defenses available as if it were non-negotiable. (Secs. 51, 52(b), 58 as cited.)
Defenses such as lack of consideration: Lack of consideration (e.g., if the underlying transaction failed and checks were issued as payment for undelivered goods) is a recognized defense against a holder who is not a holder in due course. (Sec. 28 as cited.)

Analysis of Crossing and Presentment

The eight checks bearing the name of China Banking Corporation between two transverse lines were crossed specially to that banker; as a result, the practice and the law require that they be deposited with China Banking for collection and presented for payment by that bank or through clearing channels, not presented directly by an individual holder to the drawee for payment. The trial court’s conclusion that presentment by the plaintiff himself was not a proper presentment is legally sound because a special crossing directs collection to the named banker, and improper presentment deprives the drawer of the risk of nonpayment that arises only upon proper presentment. The drawer’s obligation to pay arises only upon due presentment; therefore, in the absence of such proper presentment by the bank named in the crossing, the drawer does not become liable.

Endorsements, Prior Dishonor, and Holder Status

Although endorsements on the backs of the checks indicated deposit and clearing by China Banking Corporation—suggesting that China Banking may have presented the checks through clearing and that they were returned unpaid—plaintiff produced the checks in court bearing return stamps (e.g., “account closed”) but did not explain how he acquired them after dishonor. Under the Negotiable Instruments Law, a person who acquires an instrument after it has been dishonored or with knowledge of prior dishonor generally cannot be a holder in due course. The trial court properly found that plaintiff failed to prove holder-in-due-course status, given his possession of already-dishonored instruments and lack of satisfactory explanation.

Defendant’s Proven Defenses and Burden of Proof

Being a holder who was not a holder in due course, plaintiff is subject to defenses available against the instrument. Defendant Tan Kim testified that the checks had been issued as receipts or in payment for shoes not delivered (or that third parties had promised to pay the checks). If established, such facts would constitute lack of consideration or failure of consideration and would be a valid defense against a non-holder-in-due-course. The trial record, however, lacked sufficient detailed evidence on these matters. The trial court did not spell out specific defenses proved by defendant, relying instead on the cr

Case Syllabus (G.R. No. L-15380)

Case Citation and Nature of the Action

109 Phil. 706 [G.R. No. L-15380. September 30, 1960].
Civil action: suit to collect eleven checks totalling P4,290.00.
The appeal involves no issue of fact; the case was decided on legal questions based on the record.

Parties and Roles

Plaintiff and Appellant: Chan Wan.
Defendants and Appellees: Tan Kim and Chen So (the other defendant is her husband).
Drawee Bank named on the checks: Equitable Banking Corporation.
A third bank appearing in the record: China Banking Corporation (appears in crossings and endorsements).

Material Facts

Eleven checks, payable to "cash or bearer," drawn by defendant Tan Kim upon the Equitable Banking Corporation, were presented for payment by plaintiff Chan Wan and were all dishonored and returned unpaid due to insufficient funds and/or causes attributable to the drawer.
The checks in evidence are marked Exhibits A to K.
The plaintiff did not testify at trial; the plaintiff’s attorney testified only to identify the checks (Exhibits A–K) and demand letters upon defendants.
Defendant Tan Kim declared, without contradiction, that the checks had been issued to two persons named Pinong and Muy for some shoes the former had promised to make and "were intended as mere receipts."
Defendants asserted a counterclaim at trial; the trial court dismissed the counterclaim for failure of proof; the defendants did not appeal that dismissal.

Trial Court Ruling and Principal Reasons for Dismissal

The trial court declined to order payment on the checks for two principal reasons:
- (a) Plaintiff failed to prove he was a holder in due course.
- (b) The checks, being crossed checks, should not have been presented to the drawee for "payment," but should have been deposited instead with the bank named in the crossing.
The trial court held that because Chan Wan presented the crossed checks personally to the drawee bank rather than through the bank named in the crossing, there was no proper presentment and the drawer’s liability did not attach.

Documentary Details Concerning Crossing and Endorsements

Eight of the checks bear across their face two parallel transverse lines between which the words are written: "non-negotiableChina Banking Corporation." These checks have therefore been crossed specially to the China Banking Corporation.
The opinion notes that the crossed checks should have been presented for payment by China Banking Corporation and not by Chan Wan.
On the backs of several checks are endorsements indicating deposit and clearing through China Banking Corporation and the clearing office. Examples include:
- On the back of Exhibit A (same as Exhibit B): "For deposit to the account of White House Shoe Supply with the China Banking Corporation." Followed by: "Cleared through the clearing office Central Bank of the Philippines. All prior endorsements and/or lack of endorsements guaranteed. China Banking Corporation."
- On the back of Exhibit G: "For deposit to the credit of our account. Viuda e Hijos de Chua Chiang Pio People's Shoe Company" followed by the endorsement of China Banking Corporation as in Exhibits A and B.
Many of the checks were returned stamped "account closed" and other return stamps indicating unpaid status.

Presentment, Holder in Due Course, and Drawer’s Liability

The court recalled the principle that the drawer, by drawing the check, engaged that "on due presentment, the check would be paid, and that if it be dishonored * * * he will pay the amount thereof to the holder."
Because of the lack of due presentment (i.e., not presented by the bank to which the checks were specially crossed), the drawee did not become liable under the trial court’s reasoning, and the Appellate Court agreed that in the absence of due presentment the drawer did not become liable.
The court observed, however, that endorsements on the backs of the checks apparently show deposit with China Banking Corporation and subsequent presentation by that bank through the clearing office, though the exact manner in which the checks "reached [plaintiff's] hands" after return was not explained by plaintiff.

Plaintiff’s Status as Holder and Effect of Dishonor Known to Plaintiff

The lower court held Chan Wan not to be a holder in due course because, upon taking them up, he knew the checks had already been dishonored.
The Court noted that Chan Wan was a holder (he had possession of bearer checks), but not a holder in due course as defined by the Negotiable Instruments Law (Sec. 52(b) cited in the opinion).
The fact that the plaintiff was not a holder in due course did not, as a legal proposition, preclude recovery: the Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not in any case recover on the instrument.
Example stated in the opinion: if B purchases an overdue neg