Title
State Investment House vs. Intermediate Appellate Court
Case
G.R. No. 72764
Decision Date
Jul 13, 1989
A loan agreement led to dishonored checks issued by Anita Pena Chua, assigned to petitioner State Investment House, Inc. The Supreme Court ruled petitioner was not a holder in due course due to failure to inquire into the purpose of crossed checks, dismissing claims against private respondents.
state investment house
intermediate appellate court
fernan j
A

Case Summary (G.R. No. 72764)

Facts Giving Rise to the Dispute

Shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested a loan from private respondent Harris Chua. Harris Chua agreed to grant the loan, but required that New Sikatuna Wood Industries, Inc. would wait until December 1980 when he would have the funds.

Pursuant to this arrangement, private respondent-wife Anita Pena Chua issued three postdated crossed checks payable to New Sikatuna Wood Industries, Inc., all dated December 22, 1980: Check No. 589053 of China Banking Corporation for P98,750.00; Check No. 04045549 of International Corporate Bank for P102,313.00; and Check No. 036512 of Metropolitan Bank & Trust Co. for P98,387.00. The total amount of the three checks was P299,450.00.

Thereafter, New Sikatuna Wood Industries, Inc. entered into a deed of sale with petitioner State Investment House. Under that deed, in consideration of P1,047,402.91, New Sikatuna Wood Industries, Inc. assigned and discounted eleven postdated checks, including the three issued by Anita Pena Chua. When petitioner deposited the three checks, they were dishonored for “insufficient funds,” “stop payment,” and “account closed,” respectively.

Petitioner alleged that it made demands on private respondent Anita Pena Chua to make good the dishonored checks, but she failed and payment did not materialize. Petitioner therefore filed an action for collection against both spouses before the RTC.

RTC Proceedings and Judgment

In response, private respondents filed a third party complaint against New Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the event they were held liable to petitioner. New Sikatuna Wood Industries, Inc. failed to answer the third party complaint despite due service of summons, and was declared in default.

On April 30, 1984, the RTC rendered judgment in favor of petitioner. It ordered private respondents to pay jointly and severally: P229,450.00 plus interest at 12% per annum from February 24, 1981 until fully paid; P29,945.00 as attorney’s fees; and the costs of suit. On the third party complaint, the RTC ordered New Sikatuna Wood Industries, Inc. to pay third party plaintiffs the amounts the latter might pay to petitioner on account of the case.

Appellate Review and the Intermediate Appellate Court’s Disposition

Private respondents appealed to the Intermediate Appellate Court in AC-G.R. CV No. 04523. The appellate court reversed the RTC judgment and dismissed petitioner’s complaint with costs against petitioner.

The Intermediate Appellate Court anchored its reversal on a pivotal issue: whether petitioner was a holder in due course such that it could proceed against private respondents on the dishonored checks. It examined the statutory requirements under the Negotiable Instruments Law, particularly Sections 52(c) and 52(d) defining a holder in due course as one who takes the instrument “in good faith and for value,” and who had no notice of any defect in the title of the person negotiating the instrument at the time of negotiation.

The appellate court also considered the statutory presumption in Section 59 that every holder is deemed prima facie a holder in due course, while recognizing that the circumstances surrounding crossed checks must be treated as notice that imposes a duty of inquiry.

Holder in Due Course, Crossing, and Duty of Inquiry

The Court held that the Negotiable Instruments Law does not expressly mention “crossed checks.” Nonetheless, the appellate court relied on jurisprudence recognizing that the presence of two parallel lines on the upper left corner indicates that the check may only be deposited and may not be converted into cash. That feature, the appellate court reasoned, should put the payee on inquiry. Thus, the payee was obliged to ascertain the holder’s title or the nature of the possession. When the payee failed to do so, it was treated as lacking the legal absence of good faith, and the consensus of authority was that the holder is not a holder in good faith.

Applying these principles, petitioner maintained that when the checks were negotiated and endorsed to it by New Sikatuna Wood Industries, Inc., it had no knowledge of the transaction between New Sikatuna Wood Industries, Inc. and private respondents. The appellate court rejected that position and found that, under Ocampo v. Gatchalian, the effects of crossing include: the check may not be encashed but only deposited; the check may be negotiated only once to one who has a bank account; and the crossing serves as a warning to the holder that the check was issued for a definite purpose. Consequently, the holder must inquire whether it received the check pursuant to that purpose.

The appellate court concluded that petitioner’s rediscounting of the checks, while knowing they were crossed checks, showed a violation of the intention behind crossing. Petitioner’s failure to inquire from the holder, New Sikatuna Wood Industries, Inc., regarding the purpose for which the checks were crossed prevented it from being considered in good faith. The appellate court therefore ruled that petitioner was not a holder in due course.

Personal Defenses and Lack of Consideration

Because petitioner was not a holder in due course, the appellate court held that the checks were subject to personal defenses. It treated as a personal defense the asserted lack of consideration and the conditional character of the issuance of the postdated checks.

The appellate court emphasized that the checks were issued only as a loan to New Sikatuna Wood Industries, Inc., and only if and when deposits were made to back up the checks. The appellate court found that such deposits were not made. It reasoned that when deposits were not made on due date and the contemplated loan did not consummate, the checks were therefore issued without consideration, invoking Section 28 of the Negotiable Instruments Law.

The appellate court further stated that New Sikatuna Wood Industries, Inc. negotiated the checks in breach of faith in violation of Article 55 of the Negotiable Instruments Law, which it characterized as a personal defense available to the drawer.

Crossing, Presentment, and Effect on Liability

The appellate court also considered the mechanism by which crossed checks must be presented for payment. It discussed Section 541 of the Negotiable Instruments Law, which authorizes a maker or legal holder of a check to indicate that it be paid to a specified banker or institution by writing across the face the name of said banker or institution or only the words “and company.” The appellate court treated the usual practice as placing two parallel diagonal lines in the upper left portion of the check. It distinguished between special crossing and general crossing and noted that general or unmarked crossing still limits the drawee’s payment method.

It then tied crossing to the mode of presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment is sufficient only when made by the holder or an authorized person. The appellate court reasoned that the checks were crossed generally and made payable to New Sikatuna Wood Industries, Inc. That crossing, it said, indicated the drawer’s intention that the check be deposited only by the rightful payee named in the instrument. It then found that it was not the payee who presented the checks for payment and that therefore there was no proper presentment. On that basis, it held that liability did not attach to the drawer.

Thus, the appellate court stated that in the absence of due presentment, the drawer did not become liable. It consequently ruled that petitioner had no right of recourse against the drawer, private respondent-wife Anita Pena Chua, because petitioner was not the proper party authorized to make presentment.

Limitation of the Appellate Court’s Additional Reasoning and Final Affirmance

While the appellate court found that petitioner was not a holder in due course and that there was no due presentment sufficient to attach liability to the drawer, the decision still addressed the broader implication of these findings. It acknowledged that it does not legally follow, as an absolute proposition, that a holder who is not a holder in due course may never recover. It noted that the Negotiable Instruments Law does not categorically bar a non-holder in due course from recovering on the instrument in all cases. Instead, the disadvantage is that the instrument becomes subject to defenses that would have applied even if the instrument were non-negotiable.

However, the appellate court found that a good defense existed against petitioner in this case. It treated the checks’ issuance as conditional upon private respondents’ making a backup deposit on due date, and it found that the loan intended to be extended to New Sikatuna Wood Industries, Inc. did not materialize because the condition was not met. That non-consummation, the appellate court ruled, constituted a sufficient defense against petitioner, given petitioner’s status as not a holder in due course.

The Supreme Court, after review, affirmed the Intermediate Appellate Court’s dismissal of the complaint. The dispositive ruling was to affirm the appellate decision with costs against petitioner.

Legal Basis and Reasoning

The Supreme

...continue reading

Analyze Cases Smarter, Faster
Jur helps you analyze cases smarter to comprehend faster, building context before diving into full texts. AI-powered analysis, always verify critical details.

About Privacy Terms