NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
1. De Ocampo & Co v. Gatchalian 3(Perral)
Nov, 30, 1961 |Labarador, J.:. | Holder in Due Course: Cross check
PETITIONER: Vicente R. de Ocampo & Co.
RESPONDENTS: Anita Gatchalian, et al.
SUMMARY: Manuel Gonzales represented himself that he was duly authorized by
the owner in the sale of a car allegedly owned by de Ocampo and registered under
the name of Ocampo clinic. When Gatchalian expressed to Gonzales that she was
willing to buy the said car and asked him to deliver the car with the certificate of
registration, the latter requested that Gatchalian should first issue a check as a mere
evidence to the owner that Gatchailian was indeed willing to buy the car. Upon this
request, Gatchalian issued a check (crossed check) payable to the owner on the
understanding that the check was to be shown only to the latter as evidence of
Gatchalian’s good faith to purchase the car. Gonzales instead paid the check to De
Ocampo for the hospital bill of Gonzales’ wife in the formers clinic and was even
given P158.25 as the difference of the face value of the check and Gonzales’
indebtedness. The issue in this case is whether de ocampo be considered a holder in
due course and hence recover from Gatchalian?
The ruling of the lower court in favor of de Ocampo was reversed by the SC
elucidating that Although de Ocampo was not aware if the circumstances under
which the check was delivered to Gonzales by Gatchalian, de Oacmpo was guilty of
gross neglect amounting to legal absence of good faith since the surrounding
circumstances ( that Gatchalian had n obligation with him, that the amount of the
check did not correspond exactly to Gonzales’ obligation to him and the check being
a crossed check)should have put de Ocampo on inquiry.
DOCTRINE: If the holder had actual knowledge of suspicious
circumstances, coupled with the means of readily informing himself
of the facts and he willfully abstained
from making inquiries, his intentional ignorance may amount to bad faith.
FACTS:
23. Sept 8, 1953: defendant Anita Gatchalian who was 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 a certain Fajardo, the latter being personally
known the defendant Gatchalian.
24. Gonzales represented to defendant Gatchalain 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 unknown to de Ocampo (plaintiff)
25. Defendant Gatchalian, finding the price of the car to her satisfaction, requested
Gonzales to bring the car the day following together with the certificate of registration,
that on this request of defendant Gatchalian, Gonzales advised her that the owner of
the car will not be willing to give the certificate of registration unless there is a
showing that the party interested in the purchase of said car is ready and willing to
make such purchase and that for this purpose, Gonzales requested defendant
Gatchalian to give him a check which will be shown to the owner as evidence of
buyer’s good faith in the intention to purchase the said car, the said check to be for
safekeeping only of Gonzales and to be returned the next day when Gonzales will
bring the car and certificate to defendant. Relying on this representation, defendant
Gatchalian drew and issued a check.
26. On the failure of Gonzales to appear the next day, and on his failure to bring the
car, its registration and to return the check, the defendant issued a “stop payment
order” on the check with the drawee bank.
27. Meanwhile, Gonzales, having received the check from defendant under the
representations and conditions, delivered the same to Ocampo clinic, in payment of the
fees and expenses arising from the hospitalization of his wife.
28. PlaintiffdeOcampoacceptedsuchcheckanddeliveredtoGonzalesP158.25 as the
difference of the amount of the check and his indebtedness to him.
29. That the acts of plaintiff de Ocampo of acceptance of the check and application of
its proceeds were made without previous inquiry from defendants.
30. An action was filed by plaintiff de Ocampo with the CFI to recover the said
proceeds of the check from defendant Gatchalian. Lower court ruled in favor of
plaintiff sentencing defendants to pay the sum of P600 with legal interest, hence this
appeal.
ISSUE/s:
1
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
1. W/N de Ocampo be considered a holder in due course and hence recover from
Gatchalian? NO, he was guilty of gross negligence.
RULING: The Decision Appealed from is hereby, reversed, and the defendants are
absolved from the complaint.
RATIO:
27. Section 52 of NIL provides that: “A holder in due course is a holder which
has taken the instrument under the ff. conditions:
1. That it is complete and regular upon 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
32. NILprovidesinsection52©thataholderinduecourseisonewhotakesthe
instrument in good faith and for value, sect 59: that every holder is deemed
prima facie to be a holder in due course and 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 of the title of the person
negotiating it.
33. In this case, the rule that there is a presumption of a holder to be a holder in
due course is not applicable because there was a defect in the title of the
holder (Gonzales), because the instrument is not payable to him or to bearer.
Plus the suspicious circumstances of the said issuance of the check narrated
above. 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 into
inquiry as to the title of the holder who negotiated the check.

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.”
28. Plaintiff de Ocampo was not aware of the circumstances under which the
check was delivered to Gonzales, but SC agrees with the defendant
Gatchalian that the circumstances indicated 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 Gonzales to
Dr. de Ocampo; and that the check had 2 parallel means that the check
could only be deposited but cannot be converted into cash—all theses
should have put the plaintiff to inquiry as to the possession of Gonzales .
29. Itwasplaintiff’sdutytotoascertainfromtheholderGonzaleswhatthenature of the
latter’s title and possession is. Having failed in this respect, SC declares that
plaintiff de Ocampo is guilty of gross neglect, amounting to legal absence
of good faith, and it may not be considered as a holder of the check in
good faith.
30. Paika v Perry: 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... it being
sufficient to show that the defendant had notice that there was something
wrong about his assignor’s acquisition of title (although not the particular
wrong).
31. Ozark Motor v Horton: it is sufficient that the buyer if the note has a
knowledge that the note was in some way tainted with fraud.

2
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
2. CONSOLIDATED PLYWOOD INDUSTRIES VS IFC LEASING &
ACCEPTANCE CORP. (Cristelle)
April 30, 1987 | Gutierrez, JR. J. | Sec. 52, 56 and 58.
PETITIONER: Consolidated Plywood Industries Inc (Maker of Promissory note)
RESPONDENTS: IFC leasing and acceptance corporation (assignee of Pns &
current holder.
Other parties: Atlantic Gulf & Pacific Company of Manila, through its sister
company and marketing arm, Industrial Products Marketing (the "seller-assignor")
SUMMARY: Plywood bought two tractors from Atlantic Gulf (Payee of PN,
assigned it to IFC – not a party to the suit) on installment evidenced by 2 promissory
notes with chattel mortgage for the balance. Atlantic Gulf then assigned its rights
and interest to the note in IFC Leasing’s (financing company) favor by means of a
deed of assignment. However, the tractors broke down after 14 days BEFORE the
warranty expired. Atlantic did not honor the warranty and Consolidated Plywood
rescinded the contract of purchase and demanded a refund. Atlantic Gulf made no
move to refund Consolidated Plywood. Plywood didn’t pay PNs so IFC Leasing
then filed suit to recover the amount of the promissory note. RTC and CA ruled for
IFC. Is the promissory note a negotiable instrument? No. The promissory note
isn’t payable to order or bearer. A negotiable instrument must contain the
words of negotiability such as ‘order’ or ‘bearer.’ Without the words ‘or order’
or ‘to the order of’ then the instrument is payable only to that person and no
one else, therefore non-negotiable. Any subsequent holder of the note will only
step into the shoes of the person designated in the instrument and will be open to all
the defenses available against the latter. He doesn’t enjoy the benefits of being a
holder in due course of a negotiable instrument. Other issues – There was a breach
in warranty so there was a failure of consideration between plywood and Atlantic.
DOCTRINE: Even if the note was negotiable, IFC is not a holder in due course as
it appears that it was aware of the transaction between plywood and Atlantic from
the beginning, his knowledge made him a holder in BAD FAITH.
FACTS:
1. Consolidated Plywood Industries (Plywood) is engaged in the logging
business. It needed 2 units of tractors for his project.
2. Atlantic gulf (Atlantic) through its sister company engaged in the selling of
tractors and they offered 2 used tractors to Plywood.
3. Site inspections were done to make sure that these tractors were fit for the
job. Then it was sold with a 90-day warranty for performance and parts
replacement.
4. Plywood paid using installments and made a down payment of 210,000. The
deed of sale was accompanied by 2 PNS and a chattel mortgage.
5. Atlantic executed a deed of assignment (transferred rights of 2 PNS & chattel
mortgage) in favor of IFC leasing corp.
6. After 14 days 1 tractor broke down, 9 days after the other one broke down.
Atlantic tried to fix it but it was still broken.
7. Plywood will delay its payment until Atlantic fulfills its obligation under the
warranty.
8. Atlantic didn’t respond and IFC eventually filed a suit to recover the amounts
of the PNS from Plywood.
9. RTC ruled for IFC and CA affirmed that even though there was a breach of
warranty this shouldn’t affect IFC, as it was not a party to that agreement.
IFC is a holder in due course and the instrument is a negotiable one.
ISSUES:
1. whether or not the promissory note in question is a negotiable instrument so
as to bar completely all the available defenses of the petitioner against the
respondent-assignee? No, it is not a negotiable instrument so Plywood doesn’t
have to pay.
2. What if it was a negotiable instrument, is plywood liable? No, because IFC is
in bad faith.
RULING: Both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such ruling would result in unjust
enrichment on the part of both the seller-assignor and respondent assignee at the
expense of the petitioner-corporation which rightfully rescinded an inequitable
contract. Since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil suit and litigate its claims against the seller-assignor
(Industrial products marketing) in the rather unlikely possibility that it so desires.
RATIO:
Main issue: The PN is not a negotiable instrument.
1. A non-negotiable promissory note was issued: “FOR VALUE RECEIVED, I/we
jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum
of ONE MILLION NINETY-THREE THOUSAND SEVEN HUNDRED EIGHTY-NINE
PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be
3
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter
until fully paid.
2. Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be payable to order or
bearer," it cannot be denied that the promissory note in question is not a
negotiable instrument.
3. "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'.
These words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater risk
under a negotiable instrument than under a non-negotiable one.
4. "When instrument is payable to order. — "SEC. 8. WHEN PAYABLE
TO ORDER. — The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. "These
are the only two ways by which an instrument may be made payable to order.
What if the Promissory note is a negotiable instrument, IFC is still not a holder in
due course because he is in bad faith. (Related to our topic)
The evidence presented in the instant case shows that prior to the sale on installment of
the tractors, there was an arrangement between the seller assignor, Industrial Products
Marketing, and the respondent whereby the latter would pay the seller-assignor the
entire purchase price and the seller assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer, herein
petitioner Consolidated Plywood Industries, Inc.
The documents evidencing the sale on installment of the tractors were all
executed on the same day by and among the buyer (Plywood); the seller-assignor
(Industrial Products Marketing); and the assignee- financing company, which is
the respondent IFC.
Therefore, the respondent had actual knowledge of the fact that the seller-
assignor's right to collect the purchase price was not unconditional, and that it
was subject to the condition that the tractors sold were not defective.
The respondent knew that when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and cannot recover the
purchase price from the petitioners. The respondent’s actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad faith, is not
a holder in due course. As such, the respondent is subject to all defenses which the
petitioners may raise against the seller- assignor.
Respondent failed to present any evidence to prove that it had no knowledge of any
fact, which would justify its act of taking the promissory note as not amounting to bad
faith.
"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE: A holder in
due course is a holder who has taken the instrument under the following
conditions:"(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.
7. "SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. — 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 amounts to bad faith."
8. Even assuming that the subject promissory note is negotiable, the respondent, a
financing company which actively participated in the sale on installment of the subject
2 tractors, cannot be regarded as a holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this case are subject to all
defenses that the petitioners have against the seller-assignor, Industrial Products
Marketing. For Section 58 of the Negotiable Instruments Law provides that "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.
(Not related to our topic) Warranty issue: Is Atlantic liable? Yes
Atlantic breached its 90-day warranty. Plywood is a victim and under the civil code
Atlantic is liable. General rule - This liability extends to the corporation to whom it
assigned its rights and interests unless the assignee is a holder in due course of the
promissory note in question.
4
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)

3. CHAN WAN v. TAN KIM (Casey)

2. At the hearing of the case, Chan Wan did not take the witness stand and his
attorney testified only to identify the 11 checks (Exhibits A-K) plus the letters
of demand upon Tan Kim and Chen So
Sept. 30, 1960 |Bengzon, J. | Recovery by holder not in due course subject to defenses 3. For Tan Kim, he declared that the checks had been issued to 2 persons named
Pinong and Muy for shoes which Pinong promised to make and “were
intended as mere receipts.”
PETITIONER: Chan Wan RESPONDENTS: Tan Kim and Chen So 4. The court declined to order payment for 2 reasons:

SUMMARY: This involves a suit to collect 11 checks totaling P4,290 (checks 1. Chan Wan failed to prove that he was a holder in due course
payable to “cash or bearer”) drawn by Tan Kim and Chen So upon the Equitable 2. The checks, being crossed checks, should not have been deposited
Banking Corp. Such checks were presented for payment by Chan Wan to the drawee
bank, but they were all dishonored for insufficiency of funds and/or causes with the bank mentioned in the crossing.
attributable to the drawer.” The issue in this case is whether Chan Wan has a right to
collect on the 11 checks.
5. Defendants Kim and So asserted a counterclaim; the court dismissed it for
failure of proof and they did not appeal from such dismissal (of counterclaim)
The Supreme Court held that the case be remanded to the lower court for further
details (marami raw kulang sa relevant info to solve the case). But with regard to the
checks, it was said that the checks were deposited with China Banking Corporation
and then sent to Central Bank for clearance but was dishonored. How the checks
reached Chan Wan – he did not indicate how (assumed he got it after it was returned ISSUES:
from being dishonored). But it could be concluded that Chan Wan is not a holder in
due course because of the fact that when he took the checks, he already knew that it 1. WoN the plaintiff Chan Wan has the right to collect on the 11 commercial
was dishonored. Yet, it does not mean he can’t recover from those checks, subject to documents(checks) – remanded to trial court because of lack of details
defenses by drawer (Tan Kim) as if the negotiable instrument is non-negotiable.
(essentially mas may laban si drawer kay holder not in due course) RULING: Considering the deficiency of important details on which a fair
adjudication of the parties' right depends, we think the record should be and is hereby
DOCTRINE: If a holder of a negotiable instrument is proven to be a holder not in returned, in the interest of justice, to the court below for additional evidence, and
due course, it does not necessarily follow that he cannot recover from that such further proceedings as are not inconsistent with this opinion. With the
instrument simply because he isn’t one. He can, but the disadvantage is that the understanding that, as defendants did not appeal, their counterclaim must be and is
negotiable instrument held by him will be subject to defenses as if it were a non- hereby definitely dismissed.
negotiable instrument.
RATIO:
FACTS:
1. Negotiable Instruments Law (NIL) regulates the issuance of negotiable
checks and the rights and liabilities arising therefrom but it does not mention
1. The case involves a suit to collect 11 checks totaling P4,290.00 where such
“crossed checks.”
checks payable to “cash or bearer” and drawn by defendant Tan Kim (Chen
2. Art. 541 of the Code of Commerce refers to such instruments as well as the
So is her husband) upon the Equitable Banking Corp., were presented for
Bills of Exchange Act of England (1882).
payment by petitioner Chan Wan to the drawee bank, but they were all
3. PNB v. Zulueta: applied some provisions of Bills of Exchange Act because
dishonored for “insufficiency of funds and/or causes attributable to the
the NIL, originating from England and codified in the US, permits resort to it
drawer”
(Bills of Exchange Act) in matters not covered by NIL and local legislation.

5
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
4. 8 checks in question here bear across their face two parallel transverse
lines between which words are written: “non-negotiable – China Banking
Corporation.” (CBC)
1. This means the checks have been crossed specially to the CBC
and not by Chan Wan.
2. Inasmuch as Chan Wan was the one who actually presented them for
payment, there was no proper presentment, and liability did not
attach to the drawer.
5. In drawing the check, the drawer 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.”
a. But because of the absence of due presentment (because no proper
presentment by Chan Wan), the drawer (Tan Kim and Chen So) did not
become liable.
6. However, on the backs of the checks, there are endorsements which show that they
had been deposited with CBC and were presented to the drawee bank for collection.
For instance, endorsement appears:
1. (Exhibit A and B) “For deposit to the account of White House Shoe Supply
with the China Banking Corporation.
Cleared through the clearing office of Central Bank of the Philippines. All
prior endorsements and/or lack of endorsements guaranteed. China Banking
Corporation.”
2. (Exhibit G, on the back of it) “For deposit to the credit of our account.
Viuda e Hijos de Chua Chiong Pio. People’s Shoe Company.” (and it is
followed by the endorsement seen in Exh. A and B)
*all the crossed checks have the “clearance” endorsement of China
Banking Corporation*
7. The circumstances seem to show deposit of the checks with CBC and
subsequent presentation by them through the clearing office (Central
Bank) but as drawee had no funds, they were unpaid and returned with some
stamped with “account closed.” How it reached Chan Wan’s hands, he did
not indicate.
a. trial court assumed he got them after they had been returned, because he
presented them in court with the “account closed” already stamped without
even explaining.
8. Naturally, the trial court held Chan Wan not to be a holder in due course
because upon taking the checks up, he already knew that the checks were
dishonored.
9. (IMPT) But, it does not follow that he could not recover on the checks
simply because he was not a holder in due course. (nothing indicated in NIL
that holder not in due course could not recover in any case)
1. Ex. If B buys an overdue negotiable promissory note signed by A, he
is not a holder in due course, but he may recover from A, if A has no
valid excuse for refusing payment.
2. (IMPT) Disadvantage of holder not in due course: negotiable
instrument is subject to defense as if it were non-negotiable.
10. Trial court has no mention on what was proved by the defense of Tan Kim
1. Tan Kim admitted on cross-examination either that the checks had
been issued as evidence of debts to Pinong and Muy, and/or that they
had been issued in payment of shoes which Pinong had promised to
make for her.
2. Implies that Pinong had to make the shoes, Tan Kim asserted that
Pinong had “promised to pay the checks for me.” Yet the idea was
not complete (because she was just answering cross-questions, her
main testimony having referred merely to the counter-claim)
11. Needless to say, if it were true that the checks had been issued in payment for
shoes that were never made and delivered, Tan Kim would have a good
defense because the holder is not a holder in due course.
6
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
4. STATE INVESTMENT HOUSE v IAC (Clark)
July 13, 1989 | Fernan, C. J. | Crossed Checks
PETITIONER: State Investment House
RESPONDENTS: Intermediate Appellate Court, Anita Pena Chua, and Harris
Chua
SUMMARY: New Sikatuna Wood Industries, Inc. (New Sikatuna) requested for a
loan from Harris Chua. Harris agreed to grant the same subject to the condition that
New Sikatuna should wait until December 1980 when Harris would have the
money. Anita Pena Chua, wife of Harris, issued three crossed checks payable to
New Sikatuna all postdated December 22, 1980 amounting to P299,450. New
Sikatuna entered into agreement with State Investment House whereby under a deed
of sale, New Sikatuna assigned and discounted with Harris eleven postdated checks
including the three postdated checks issued by Anita to New Sikatuna. When the
three checks issued by Anita were deposited by State Investment House, these were
dishonored. New Sikatuna claims that despite demands on Anita to make good said
checks, Anita failed to pay the same. Hence State Investment House filed an action
for collection in the RTC. RTC ruled against spouses Chua. IAC reversed the
decision. The issue is WoN State Investment House is a holder in due course as to
entitle it to proceed against respondents for the amount stated in the dishonored
checks. The SC held that SIH is not a holder in due course hence not entitled to
proceed against Anita Chua for the amount stated in the dishonoured checks. State
Investment House rediscounted the check knowing that it was a crossed check he
was knowingly violating the avowed intention of crossing the check. His failure to
inquire from the holder, New Sikatuna Wood Industries, Inc., the purpose for which
the three checks were cross despite the warning of the crossing, prevents him from
being considered in good faith and thus he is not a holder in due course.
DOCTRINE: Crossed checks are checks where the practice that a check with two
parallel lines in the upper left hand corner means that it could only be deposited and
may not be converted into cash. the effects of crossing a check are: (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) 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 he must inquire if he has received the check pursuant to that purpose; otherwise
he is not a holder in due course.
FACTS:
1. Before September 5, 1980, New Sikatuna Wood Industries, Inc. (New
Sikatuna) requested for a loan from Harris Chua (Harris). Harris agreed to
grant the same subject to the condition that New Sikatuna should wait until
December 1980 when Harris would have the money. In view of this agreement,
Anita Pena Chua (Anita), wife of Harris, issued three crossed checks payable
to New Sikatuna all postdated December 22, 1980 as follows: China Banking
Corporation, P98,750; International Corporate Bank, P102,313; Metropolitan
Bank & Trust Co, P98,387. The total value of the three checks amounted to
P299,450.
2. New Sikatuna entered into agreement with State Investment House whereby
for and inconsideration of the sum of P1,047,402.91 under a deed of sale, New
Sikatuna assigned and discounted with Harris eleven postdated checks
including the three postdated checks issued by Anita to New Sikatuna.
3. When the three checks issued by Anita were deposited by State Investment
House, these were dishonored by reason of insufficient funds, stop payment,
and account closed. New Sikatuna claims that despite demands on Anita to
make good said checks, Anita failed to pay the same. Hence, State Investment
House filed an action for collection before the RTC.
4. Spouses Chua filed a third party complaint against New Sikatuna for
reimbursement and indemnification in the event that they be held liable to
State Investment House. For failure of New Sikatuna to answer, latter was
declared in default.
5. RTC rendered judgment against spouses Chua.
6. The IAC reversed the decision. Hence this petition.
ISSUE:
1. WoN State Investment House is a holder in due course as to entitle it to proceed
against respondents for the amount stated in the dishonored checks – NO
RULING: WHEREFORE, the decision appealed from is hereby AFFIRMED with
costs against petitioner.
RATIO:
1. The Negotiable Instruments Law regulating the issuance of negotiable checks does
not mention “crossed checks.” But this Court has taken 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 may not be converted into cash.
7
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
2. Such circumstance should put the payee on inquiry and upon him devolves the duty
to ascertain the holder's title to the check or the nature of his possession. Failing in this
respect, the payee is declared guilty of gross negligence amounting to legal absence of
good faith and as such the consensus of authority is to the effect that the holder of the
check is not a holder in good faith.
3. State Investment House submits that at the time of the negotiation and endorsement
of the checks in question by New Sikatuna Wood Industries, it had no knowledge of
the transaction and/or arrangement made between New Sikatuna and spouses Chua.
4. In Ocampo v Gatchalian, it was held that the effects of crossing a check are:
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. The act of crossing the check serves a 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
5. The CA correctly ruled when it said that when State Investment House rediscounted
the check knowing that it was a crossed check he was knowingly violating the avowed
intention of crossing the check.
6. His failure to inquire from the holder, New Sikatuna Wood Industries, Inc., the
purpose for which the three checks were cross despite the warning of the crossing,
prevents him from being considered in good faith and thus he is not a holder in due
course. Being not a holder in due course, State Investment House is subject to personal
defenses, such as lack of consideration between Spouses Chua and New Sikatuna
Wood Industries.
7. Note that under the facts the checks were postdated and issued only as a loan to
New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the
checks. Such deposits were not made, hence no loan was made, hence the three checks
are without consideration.
8. New Sikatuna Wood Industries negotiated the three checks in breach of faith in
violation of Article 55, Negotiable Instruments Law, which is a personal defense
available to the drawer of the check.
9. The effect of crossing a check relates to the mode of its presentment for payment.
The three subject 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.
10. Apparently, it was not the payee (New Sikatuna) who presented the same for
payment and therefore, there was no proper presentment, and the liability did not
attach to the drawer (Anita). Thus, in the absence of due presentment, the drawer did
not become liable. Consequently, no right of recourse is available to State Investment
House against the drawer of the subject checks, Anita, considering that State
Investment House is not the proper party authorized to make presentment of the checks
in question.
11. However, 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 for in the
case at bar, State Investment House may recover from the New Sikatuna Wood
Industries, Inc. if the latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable.
5. BATAAN CIGAR v. CA (MICA)
March 3, 1994 | Nocon, J. | Holder in Due Course
PETITIONER: Bataan Cigar and Cigarette Factory, Inc. RESPONDENTS: The
Court of Appeals and State Investment House, Inc.
SUMMARY: BCCFI, a corporation involved in the manufacturing of cigarettes,
engaged one of its suppliers, King Tim Pua Geroge, to deliver 2000 bales of tobacco
leaves. BCCFI issued a crossed check post dated sometime in March. Despite the
failure to fulfill the earlier agreement, BCCFI relied on the representation of George
King that he can deliver an additional 2,500 bales of tobacco leaves. BCCFI issued
another 2 post dated crossed checks payable on Sept. 1979. All three checks were
sold to SIHI, private respondent in this case. Since George King failed to fulfill his
obligation again, BCCFI ordered stop payment. SIHI tried to collect from George
King but to no avail so he collected from BCCFI in this case, naming BCCFI as the
only party defendant. Trial Court said that SIHI can collect being a holder in due
course and non-inclusion of King Tim Pua George as party defendant is immaterial.
The issue in this case is whether or not SIHI, a second indorser, a holder of crossed
checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The
Court held that SIHI is not a holder in due course. Because according to Sec. 52 of
8
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
NIL, the holder must inquire if the indorser has indeed received the check pursuant 2,500 bales of tobacco leaves, depite the supplier’s failure to deliver in
to its purpose. In the case at bar, BCCFI has a right to stop payment. So, BCCFI’s accordance with their earlier agreement
defense reaches SIHI. 34. BCCFI issued another postdated crossed checks worth P1,100,000 payable
sometime in Sept. 1979
DOCTRINE: 35. During this time, George King was simultaneously dealing with private
(Sec. 52) Requisites to be a Holder in Due Course: a holder who has taken the respondent SIHI
instrument under the following conditions: (a) that it is complete and regular upon its 36. July 19, 1978 – he sold at a discount check bearing an amount of P164,000
face; (b) that he became the holder of it before it was overdue, and without notice that postdated Mar. 31, 1979 drawn by BCCFI, naming George King as payee to
it had been previously dishonored; (c) that he took it in good faith and for value; (d) SIHI
that at the time it was not negotiated to him he had no notice of any infirmity in the 37. Dec. 19 and 26, 1978 – he again sold to respondent 2 checks both in the
instrument or defect in the title of the person negotiating it amount of P100,000, post dated Sept. 15 and 30, 1979 respectively, drawn by
(Sec. 59) Every holder is deemed prima facie a holder in due course. However, when petitioner in favor of George King
it is shown that the title was defective, the burden is on the holder to prove that he or 38. So George King failed to deliver the bales and BCCFI issued on Mar. 30,
some person under whom he claims, acquired the title as holder in due course 1979 a stop payment order on all checks payable to George King for the first
check – defined by law as a bill of exchange drawn on a bank payable on demand check then the 2 other checks
crossed check – one where two parallel lines are drawn across its face or across a 39. Since SIHI’s efforts to collect from BCCFI failed, it instituted the present
corner thereof. May be crossed generally or specially. It is crossed specially when the case, naming only BCCFI as defendant
name of a particular banker or a company is written between the parallel lines drawn. 40. TC:SIHIhasavalidclaimbeingaholderinduecourseandnon-inclusionof King
Generally if only the words “and company” are written or nothing is written between Tim Pua George as party defendant is immaterial since he, as payee, is not an
the lines. It may be issued so that presement can be made only by a bank. indispensable party
Negotiability is not affected by its being crossed. Effects of crossing a check: (a) may
not be encashed but only deposited in the bank; (b) the check may be negotiated only ISSUE/s:
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 3. WON SIHI, a second indorser, a holder of crossed checks, is a holder in due course,
so that he must inquire if he has received the check pursuant to that purpose, to be able to collect from the drawer, BCCFI - No
otherwise, he is not a holder in due course it is then settled that crossing of checks
should put the holder on inquiry and upon him devolves the duty to ascertain the RULING: Petition is granted. The decision of the RTC as affirmed by the CA is
indorser’s title to the check or the nature of his possession. Failing in this respect, the reversed
holder is declared guilty of gross negligence amounting to legal absence of good faith
Drawer is not obliged to pay checks. Holder can still collect from immediate indorser.
RATIO:
FACTS:
34. Sec. 52 of NIL: A holder in due course is a holder who has taken the
31. Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in
instrument under the following conditions:
the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua
George (George King) to deliver 2000 bales of tobacco leaf starting Oct. 1978
32. July 13, 1978 – In consideration thereof, BCCFI issued crossed checks post 1. That it is complete and regular upon its face
dated sometime in March 1979 in the total amount of P820,000 2. That he became the holder of it before it was overdue, and wihout
33. Relying on the supplier’s representation that he would complete delivery
within 3 months from Dec. 5, 1978, BCCFI agreed to purchase additional notice that it had been previously dishonored, if such was the fact;

9
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
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
35. Sec. 59: 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
36. Check – defined by law as a bill of exchange drawn on a bank payable on
demand
37. Crossed check – one where two parallel lines are drawn across its face or
across a corner thereof. It may be crossed generally or specially
38. It is crossed specially when the name of a particular banker or a company is
written between the parallel lines drawn.
39. Generally if only the words “and company” are written or nothing is written
between the lines. It may be issued so that presement can be made only by a
bank.
40. NIL does not mention “crossed checks” but Art. 541 of the Code of
Commerce refers to such instrument
41. Negotiability is not affected by its being crossed. 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
corssed, by the bank mentioned between the parallel lines
42. In the Philippines, 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
43. To preserve the credit worthiness of checks, jurisprudence pronounced the
effects of crossing a check:
(a) 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
44. This was adopted in SIHI v. IAC: “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 SIHI considering
that petitioner is not the proper party authorized to make presentment of the checks in
question.”
45. 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.
46. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith (contrary to Sec. 52)
47. Holder of the check is not a holder in due course
48. BCCFI’s defense in stopping payment is as good to SIHI as it is good to
George King. Because the checks were issued with the intention that George King
would supply BCCFI with the bales of tobacco leaf. There being a failure of
consideration, SIHI is not a holder in due course. BCCFI cannot be obliged to pay
the checks.
49. 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 immiate indorser.
10
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
6. DINO vs. JUDAL-LOOT
April 19, 2010 | Carpio, J. | Holder in Due Course; Crossed Check
PETITIONER: Robert Dino
RESPONDENTS: Maria Luisa Judal-Loot, with her husband Vicente Loot
SUMMARY: A syndicate induced Dino to lend them P3M to be secured by a real
estate mortgage. Dino issued 3 checks. One of these checks was worth P1M. When
Dino discovered that he was deceived, he advised Metrobank to stop payment of
checks. The other 2 checks were already encashed but the check worth P1M (CHECK)
was ordered stopped. Lobitana, the payee of the check, negotiated the instrument to
Loot. The issue is whether spouses Loot are holders in due course of the CHECK as to
entitle them to collect the face value of the check from Dino. The Court held that they
are not holders in due course. The check was crossed. Therefore the Loot’s had the
duty to ascertain the indorser’s, in this case Lobitana’s, title to the check or the nature
of her possession. This they failed to do. However, the fact that the Loot’s are not
holders in due course does not automatically mean that they cannot recover on the
check. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. Among such
defenses is the absence or failure of consideration. Spouses Loot can recover from the
indorser, Lobitana.
DOCTRINE: In the case of a crossed check, as in this case, the following principles
must additionally be considered: A crossed check
(a) may not be encashed but only deposited in the bank;
(b) may be negotiated only once — to one who has an account with a bank; and (c)
warns the holder that it has been issued for a definite purpose so that the holder thereof
must inquire if he has received the check pursuant to that purpose; otherwise, he is not
a holder in due course. 
 as such, could not recover any liability on the check from petitioner. The act
FACTS:
41. SometimeinDecember1992,asyndicate,approachedDinoandinducedhim to
lend the group P3M to be secured by a real estate mortgage on the properties.
They offered to execute a Deed of Absolute Sale covering the properties,
instead of the usual mortgage contract. Petitioner issued three Metrobank
checks totaling P3M, one of which is a CHECK in the amount of P1M
payable to Vivencia Ompok Consing and/or Fe Lobitana.
42. Subsequently, Dino discovered that the documents covered rights over
government properties. Realizing he had been deceived, petitioner advised
Metrobank to stop payment of the checks. However, only the check worth
1M (CHECK) was ordered stopped. The other two checks were already
encashed by the payees.
43. Lobitana negotiated the CHECK to spouses Loot in exchange for cash in
funded. However, when respondents deposited the check with Metrobank, it
was dishonored by the drawee bank for reason “Payment Stopped”
44. Contention of Spouses Loot: They are holders in due course for value of
CHECK and that they had no prior information concerning the transaction
between defendants. Trial Court ruled in their favor and declared them due
course holders, which was affirmed by the CA.
45. The CA pointed out that Dino’s own admission that the Loot’s were never
parties to the transaction among petitioner, Lobitana, Concordio Toring,
Cecillia Villacarios, and Consing, proved their lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it.
ISSUE/s:
WoN spouses Looy are holders in due course of the CHECK as to entitle them to
collect the face value of the check from Dino – NO
RULING: WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August
2005 Decision and 30 November 2005 Resolution of the Court of Appeals in CA- G.R.
CV No. 57994.
RATIO:
50. Dino maintained that the Loot’s are not holders in due course of CHECK, and
of crossing a check serves as a warning to the holder that the check has been
issued for a definite purpose so that the holder thereof must inquire if he has
received the check pursuant to that purpose; otherwise, he is not a holder in
due course.
51. Section 52 of NIL states:
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 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
11
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
no notice of any infirmity in the instrument or defect in the title of the person payment on his behalf x x x As to who the holder or authorized person will be
negotiating it. depends on the instructions stated on the face of the check.
52. In this case of a crossed check, as in this case, the following principles must
additionally be considered:
7. GREEN v. LOPEZ (PAT)
A crossed check (a) may not be encashed but only deposited in the bank; (b)
may be negotiated only once — to one who has an account with a bank; and January 2, 1917 | Carson, J. | Rights of Purchaser
(c) warns the holder that it has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant to that Plaintiff-appellees: B.A. Green, et. al.
purpose; otherwise, he is not a holder in due course. Based on the foregoing,
the Loot’s had the duty to ascertain the indorser’s, in this Lobitana’s, title
Defendants-appellants: M. Lopez, et. al.
to the check or the nature of her possession. This they failed to do. the subject
check was presented and admitted as evidence during the trial and
respondents did not and in fact cannot deny that it is a crossed check. Summary: Lopez issued a negotiable note in favor of a payee. Green purchased the
note from the payee and such was indorsed to them. When Green wanted to collect,
Lopez didn’t want to pay on the ground that Green was not a bona fide holder since
54. Loot’s verification from Metrobank on the funding of the check does not
they inquired of the equitable defenses regarding the note and that he told Green’s
amount to determination of Lobitana’s title to the check. Failing in this
agent that they repudiated obligations to meet the note. Green counters by saying
respect, the Loot’s are guilty of gross negligence. Hence, they are not
that he did send an agent to inquire but the inquiry was with regard to the validity
deemed holders in due course of CHECK.
and genuineness of the note and that the agent told him that Lopez, et. al. said that
55. However, the fact that the Loot’s are not holders in due course does not
the note was good and that it would be paid at maturity. Lower court ruled in favor
automatically mean that they cannot recover on the check. The only
of Green, hence this petition. The issue in this case is whether or not Lopez can
disadvantage of a holder who is not in due course is that the negotiable
refuse payment on the note. The SC ruled that he can’t. The evidence does not
instrument is subject to defenses as if it were non-negotiable. Among such
sustain the finding that Green had knowledge of the equitable defenses when they
defenses is the absence or failure of consideration.
purchased the note. The only evidence that Lopez presented was his testimony.
56. Petitioner issued CHECK supposedly for a loan in favor of Consing’s group,
Further, the SC ruled that where the negotiable paper has been put in circulation,
who turned out to be a syndicate defrauding gullible individuals. Since there
and there is no infirmity or defense between the antecedent parties, a purchaser of
is in fact no valid loan to speak of, there is no consideration for the
such security is entitled to recover, as against the maker, the whole amount,
issuance of the check. Consequently, Dino cannot be obliged to pay the face
irrespective of what he may have paid for. And that equitable defenses can’t defeat
value of the check. However, the Loot’s can collect from the immediate
the right of the holders of a negotiable note by indorsement and for valuable
indorser, in this case Lobitana.
consideration absent a finding that they acquired the note in bad faith or with the
57. Under usual practice, crossing a check is done by placing two parallel lines
knowledge of the equitable defenses.
diagonally on the left top portion of the check. The crossing may be special
wherein between the two parallel lines is written the name of a bank or a
business institution, in which case the drawee should pay only with the Doctrine: Where the negotiable paper has been put in circulation, and there is no
intervention of that bank or company, or crossing may be general wherein defense between the antecedent parties, a purchaser of such instrument as security is
between two parallel diagonal lines are written the words “and Co.” or none entitled to recover as against the maker, the whole amount regardless of what he may
at all as in the case at bar, in which case the drawee should not encash the have paid for. And that equitable defenses can’t defeat the right of the holders of a
same but merely accept the same for deposit. The effect therefore of crossing negotiable note by indorsement and for valuable consideration absent a finding that
a check relates to the mode of its presentment for payment. Under Section 72 they acquired the note in bad faith or with the knowledge of the equitable defenses.
of the Negotiable Instruments Law, presentment for payment to be sufficient
must be made (a) by the holder, or by some person authorized to receive FACTS:

12
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
1. Lopez issued a negotiable note in favor of a payee.
2. Green purchased the note with a declaration of subsidiary liability
from the payee and such was indorsed to them.
3. Lopez refuses payment on the note on the ground that Green is not a
bona fide holder because they had knowledge of the existence of certain
equitable defenses which makers were entitled to set up as against the payee
before Green acquired it.
4. He further claims that an employee of Green made inquiries as regards the
validity and genuineness of the note, and that he explained the nature of the
equitable defenses, and repudiated obligations to meet the note.
5. Green claims that before purchasing the note, he sent an employee to call
upon the makers to inquire whether it was a good note which would be paid at
maturity and that when the employee returned, he told Green that it was good
note executed by them and that it would be paid at maturity.
6. Lower court held in favor of Green, hence, this petition.
Issue/s: WON Lopez can refuse payment on the note. – NO.
Held: The judgment entered in the court below should be AFFIRMED, with the costs
of this instance against the appellants.
Ratio: On whether Lopez can refuse payment
 Evidence does not sustain an affirmative finding that Green had knowledge
of the equitable defenses when they purchased the note.
 One of the purchasers was a broker and the other a lawyer, and it would
require stronger evidence that these men were imprudent as to discount
negotiable paper in the ordinary course of business after having
received the existence of equitable defenses.
 They also took precaution before purchasing the note by sending
someone to verify the validity.
 Testimony of Lopez is wholly false or that he failed to make himself
understood resulting to the event that knowledge of the existence of
equitable defenses was not known to Green.
 Where the negotiable paper has been put in circulation, and there is no
infirmity or defense between the antecedent parties, a purchaser of such
security is entitled to recover, as against the maker, the whole amount,
irrespective of what he may have paid for.
 Equitable defenses of this nature can in no event defeat the right of the
holders of a negotiable note by indorsement and for valuable
consideration, until and unless knowledge of the existence of such
equitable defenses were known to them, or until it appears that the
holders had such knowledge of the existence of defects in the instrument
as to charge them with bad faith in acquiring it under all the attendant
circumstances.
8. Violago v. BA Finance Corporation (Ella)
July 21, 2008 | Velasco, Jr., J. | Holder in due course
PETITIONER: Spouses Pedro & Florencia Violago RESPONDENTS: BA Finance
Corp. & Avelino Violago
SUMMARY: Avelino Violago, President of Violago Motor Sales Corp. (VMSC),
and cousin to Pedro Violago, offered to sell a car to the latter because he needed to
sell a vehicle to increase VMSC’s sales quota, and that the spouses would just have to
pay a down payment of P60,500 while the balance will be financed by BA Finance.
Eventually, spouses Violago were persuaded and they agreed to purchase a Toyota
Cressida Model 1983 from VMSC. So the spouses Violago signed a promissory note
to the order of VMSC. VMSC then issued a slaes invoice in favor of the spouses with
a detailed description of said car. The spouses executed a chattel mortgage over the
car in favor of VMSC as security. VMSC, through Avelino, endorsed said promissory
note to BA Finance without recourse. VMSC executed a Deed of Assignment under
the promissory note and chattel mortgage in favor of BA Finance. Hwoever, the
spouses were unaware that the said car had already been sold before to Esmeraldo
Violago (another cousin of Avelino) and registed it in Esmeraldo’s name. This
explains why, despite demands from the spouses and Avelino’s reassurances, there
was no delivery of the vehicle. Since there was no delivery of the car, Pedro did not
pay any monthly amortization to BA Finance. So BA finance filed a complaint against
the spouses. The spouses said that they never received the vehicle from VMSC, the
vehicle was previously been sold to Esmeraldo, and that BA Finance was not a holder
in due course under the Negotiable Instruments Law. Meanwhile, Esmeraldo sold the
car to Jose Olvido who executed a chattel mortgage over it in favor of Generoso
13
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
Lopes as security for a loan covered by a promissory note. This note was later
endorsed to the Cebu branch of BA Finance.
The SC said that BA Finance is a holder in due course because 1) the promissory note
is a negotiable instrument having all the requisites as provided for by law, and 2) BA
Finance meets all the requisites of a holder in due course as provided for by law. First,
the note is complete & regular. Second, the note was endorsed by VMSC in favor of
BA Finance. Third, BA Finance, when it accepted the note, acted in good faith, and
for value. Fourth, BA Finance was never informed (before and at the time the note
was endorsed to it) that the vehicle sold to the spouses had already been previously
sold to Esmeraldo. Although Olvido mortgaged said car to Lope who assigned his
rights to BA Finance (Cebu branch), it only happened much later than the date when
VMSC assigned its rights over the mortgage by the spouses to BA Finance. Since BA
Finance is a holder in due course, the spouses cannot raise the defense of non-delivery
of the object and nullity of the sale against the corporation.
DOCTRINE: The law presumes that a holder of a negotiable instrument is a holder
thereof in due course. In the hands of one other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. A
holder in due course, however, holds the instrument free from any defect of title of
prior parties and from defenses available to prior parties among themselves, and may
enforce payment of the instrument for the full amount thereof.
FACTS:
1. In 1983, Avelino Violago, President of Violago Motor Sales Corporation
(VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latters
wife, Florencia. Avelino explained that he needed to sell a vehicle to increase
the sales quota of VMSC, and that the spouses would just have to pay a down
payment of PhP 60,500 while the balance would be financed by respondent
BA Finance.
2. The spouses would pay the monthly installments to BA Finance while
Avelino would take care of the documentation and approval of financing of
the car. Under these terms, the spouses then agreed to purchase a Toyota
Cressida Model 1983 from VMSC.
3. On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of
VMSC the amount of PhP 209,601 in 36 monthly installments of PhP
5,822.25 a month, the first installment to be due and payable on September
16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit
Transportation which showed the net purchase price of the vehicle, down
payment, balance, and finance charges.
4. VMSC then issued a sales invoice in favor of the spouses with a detailed
description of the Toyota Cressida car. In turn, the spouses executed a chattel
mortgage over the car in favor of VMSC as security for the amount of PhP
209,601.
5. VMSC, through Avelino, endorsed the promissory note to BA
Financewithoutrecourse.After receiving the amount of PhP 209,601, VMSC
executed a Deed of Assignment of its rights and interests under the
promissory note and chattel mortgage in favor of BA Finance. Meanwhile,
the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.
6. However, the spouses were unaware that the same car had already been sold
in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in
Esmeraldos name by the LTO-San Rafael Branch. Despite the spouses
demand for the car and Avelinos repeated assurances, there was no delivery
of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any
monthly amortization to BA Finance.
7. On March 1, 1984, BA Finance filed with the RTC a complaint for the
delivery of the vehicle in favor of BA Finance or, if delivery cannot be
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per
month.
8. In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was
then issued Certificate of Registration. On May 8, 1987, Jose executed a
Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for
a loan covered by a promissory note in the amount of PhP 260,664. This
promissory note was later endorsed to BA Finance, Cebu City branch.
9. On January 28, 1992, the spouses filed their Answer before the RTC, alleging
the following: they never received the vehicle from VMSC; the vehicle was
previously sold to Esmeraldo; BA Finance was not a holder in due course
under Section 59 of the Negotiable Instruments Law (NIL); and the recourse
of BA Finance should be against VMSC.
ISSUE/s:
4. WON the promissory note is a negotiable instrument = YES
5. WON BA Finance Corp. is a holder in due course = YES
RULING: WHEREFORE, the CAs August 20, 2002 Decision and May 15, 2003
Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed
without prejudice the third party complaint of petitioners-spouses Pedro and Florencia
14
NEGO Week 4 Digests – Rights of the holder (Sec 51 – 59)
Violago against respondent Avelino Violago. The March 5, 1994 Decision of the RTC 9. VMSC is a family-owned corporation of which Avelino was president.
is REINSTATED and AFFIRMED. Costs against Avelino Violago. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that
was previously sold to Avelino’s other cousin. The fact that Avelino and
RATIO: Pedro are cousins, and that Avelino claimed to have a need to increase the
sales quota, was likely among the factors which motivated the spouses to buy
the car.
1. The promissory note is a negotiable instrument having all the requisites as
provided for by law. 1) It is in writing, signed by the Violago spouses. 2) It 10. Avelino, knowing fully well that the vehicle was already sold, and with abuse
has an unconditional promise to pay a certain amount i.e. P209,601 on of his relationship with the spouses, still proceeded with the sale and collected
specific dates in the future w/c could be determined from the terms of the the down payment from petitioners.
note. 3) It is made payable to the order of VMSC, and names the drawees
with certainty. 4) The indorsement by VMSC to BA Finane appears to be 11. The trial court found that the vehicle was not delivered to the spouses.
valid and regular. Avelino clearly defrauded petitioners. His actions were the proximate cause
2. BA Finance is a holder in due course. of petitioner’s loss. He cannot now hide behind the separate corporate
personality of VMSC to escape from liability for the amount adjudged by the
trial court in favor of petitioners.
1. On its face, the note is complete & regular.
2. The note was endorsed by VMSC in favor of BA Finance.
3. BA Finance, when it accepted the note, acted in good faith, and for value.
4. BA Finance was never informed (before and at the time the note was
endorsed to it) that the vehicle sold to the spouses had already been
previously sold to Esmeraldo. Although Olvido mortgaged said car to
Lope who assigned his rights to BA Finance (Cebu branch), it only
happened much later than the date when VMSC assigned its rights over
the mortgage by the spouses to BA Finance.

3. In the hands of one other than a holder in due course, a negotiable instrument
is subject to the same defenses as if it were non-negotiable.
4. A holder in due course, however, holds the instrument free from any defect of
title of prior parties and from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof.
5. Since BA Finance is a holder in due course, petitioners cannot raise the
defense of non-delivery of the object and nullity of the sale against the
corporation.
6. The NIL considers every negotiable instrument prima facie to have been
issued for a valuable consideration.
7. A party holding an instrument may enforce payment of the instrument for the
full amount thereof. As such, the maker cannot set up the defense of nullity of
the contract of sale. Thus, petitioners are liable to respondent corporation for
the payment of the amount stated in the instrument.

8. Piercing-of-the-corporate-veil doctrine APPLIES IN THIS CASE.

15