Section 52. ​What constitutes a holder in due course.

CHAN WAN ​vs. ​TAN KIM and CHEN SO

FACTS:

This is a suit to collect eleven checks worth 4,290. The problem in this case is it involved no issue of
fact. So here’s how the events went:

● Kim and her husband drew from Equitable Banking Corp, checks payable to “cash or
bearer”. These checks were given to Chan Wan but when he tried to use it they were all
dishonored and returned to him unpaid due to insufficient funds.

● He instituted an action against Kim.

● At the hearing in Manila’s RTC, the plaintiff did not take the witness stand. His lawyer
testified only to identify the checks / the letter of demand.

● On the other hand, ​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"

● Court ruled in favor of Kim for two principal reasons:

(a) Chan Wan failed to prove he was a holder in due course

(b) The checks being crossed checks should have been deposited instead with the
bank mentioned in the crossing.

Issue:

The only issue is, therefore, the plaintiff's right to collect on the eleven commercial
documents.

Ruling:

● NIL regulates the issuance of negotiable checks and the rights and liabilities arising
therefrom, but it does not mention crossed checks. So the court had to apply some
provisions from the Bills of Exchange Act of England and the US

● Eight of the checks have non-negotiable -- China Banking corporation. ​These checks have,
therefore, been crossed specially to the China Banking Corporation, and should have been
presented for payment by China Banking, and not by Chan Wan​.
● Chan Wan did present them for payment himself — the Manila court said — t​here was no
proper presentment​, and the liability did not attach to the drawer.

● Nevertheless we find, on the backs of the checks, ​endorsements which apparently show they
had been deposited with the China Banking Corporation and were, by the latter, presented to
the drawee bank for collection. For instance, on the back of the check Exhibit A (same as in
Exh. B), this endorsement appears:

For deposit to the account of White House Shoe Supply with the China Banking
Corporation.

and then this:

Cleared through the clearing office of Central Bank of the Philippines. All prior
endorsements and/or lack of endorsements guaranteed. China Banking Corporation.

And on the back of Exh. G:

For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's
Shoe Company, ​followed by the endorsement of China Banking Corporation as in
Exhibits A and B.

All the crossed checks have the "clearance" endorsement of China Banking
Corporation.

● These circumstances would seem to show deposit of the checks with China Banking
Corporation and subsequent presentation by the latter through the clearing office; but as
drawee had no funds, they were unpaid and returned, some of them stamped "account
closed".
● How they reached his hands, plaintiff did not indicate. Most probably, as the trial court
surmised, — this is not a finding of fact — he got them ​after they had been thus ​returned,
because he presented them in court with such "account closed" stamps, without bothering to
explain. Naturally and rightly, the lower court held him not to be a holder in due course under
the circumstances, ​since he knew, upon taking them up, that the checks had already been
dishonored

● Yet it does not follow as a legal proposition, that simply because he was not a holder in due
course Chan Wan could not recover on the checks. 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.

If B purchases an overdue negotiable promissory note signed by A, he is ​not a holder

in due course; but he may recover from A,​8 if the latter has no valid excuse for
 refusing payment. ​The only disadvantage of holder who is not a holder in due course
is that the negotiable instrument is subject to defense as if it were non- negotiable.

● Now what defense did the defendant Tan Kim prove? The lower court's decision does not
mention any; evidently His Honor had in mind the defense pleaded in defendant's answer,
but though it unnecessary to specify, because the "crossing" and presentation incidents
sufficed to bar recovery, in his opinion.
1awphîl.nèt

● 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.

● 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 as against a holder
who is not a holder in due course. 10
​

● 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 returned, in the interest of justice,
to the court below for additional evidence, and such further proceedings as are not
inconsistent with this opinion. ​With the understanding that, as defendants did not appeal,
their counterclaim must be and is hereby definitely dismissed. So ordered.

BATAAN CIGAR AND CIGARETTE FACTORY, INC ​vs.​THE COURT OF APPEALS and STATE
INVESTMENT HOUSE, INC.

Facts:

● 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.,"
● CA affirmed the decision of the RTC in a 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.
● The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this
case.

● Bataan Cigar (involved in the manufacturing of cigarettes) engaged one of its supplies
George King to deliver 2,000 bales of tobacco leaf in October. In consideration, they issued
crossed checks post dated sometime in March. Checks were worth 820,000.

● They trusted that the supplier would deliver so they added 2,500 bales of tobacco leaves
even though he failed to deliver. Bataan Cigars issued crossed checks worth 1,100,000
payable sometime in September
● 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 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 P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by petitioner in favor of George King.

● George King failed to deliver the bales of tobacco leaf despite petitioner’s demand, so
Bataan Cigar issued a stop payment order on all checks payable to him, including some of
the checks he’d sold.

● State investment (the company George sold checks to) tried to collect from Bataan Cigars.
This led to the filing of the case.

RTC:

- Declare SIHI has holders in due course

- Non inclusion of George doesn’t matter because he’s not an indispensable party

CA​:

Affirmed the decision of the RTC

Issue:

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.

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

● 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.

● 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 s​ o that he must inquire if he has received the
check pursuant to that purpose, 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 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 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.

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

​ rred in the application of law, the instant petition is

WHEREFORE, finding that the court ​a quo e
hereby GRANTED.

STELCO MARKETING CORPORATION ​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, STELCO sold to RYL
Construction, steel bars 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.

● The invoices issued by STELCO stipulated the Ryl pay Cash on Delivery, but RYL made no
payments despite STELCO’s demands.

● On April 4, 1981, ​RYL gave to Armstrong, Industries (STELCO "sister corporation" ) a check
drawn against Metrobank in the amount of P126,129.86.

BUT

● 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.

○ Okay, so the reason the check was issued by Limson (the other company’s
president) was because he’s friends with the president of RYL who asked him for
financial assistance.
○ Lim (president of Steelwald) gave the check by way of accommodation, only as a
guaranty but not to pay for anything. Why the check was made out in the amount of
P126,129.86 is not explained.
● Anyway, the check was given by R.Y. Lim to Armstrong Industries, in payment of an
obligation. ​When the Armstrong Industries deposited the check at its bank, it was dishonored
because "drawn against insufficient funds." When so deposited, the check bore two
endorsements, that of "RYL Construction," followed by that of "Armstrong Industries."

● Armstrong Corp filed a case for BP. 22 against Lim and Atermio

● They were acquitted ​"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. 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.

11 MONTHS LATER

● Eleven months or so later — STELCO filed with the Regional Trial Court at Caloocan City a
civil complaint against 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 . . .

● 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.

STEELWELD’S PLEADING

● In 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
RTC

● The 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 . . .

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.

CA

● "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, 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 —

. . . 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.

No proof that STELCO is 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.

SUPREME COURT

● STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. Stating:

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 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.
● RTC is right that STELCO is still liable but it did not specify to whom

● STELCO claims to be a holder in due course BUT 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."

● 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 t​ he 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.

REASON THEY CANNOT BE A HOLDER FOR VALUE

 ● 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."

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.