Haystack: State Investment House vs. IAC (GR 72764, 13 July 1989)

State Investment House vs. IAC
[G.R. No. 72764. July 13, 1989.]
Third Division, Fernan (J): 3 concurring, 1 on leave

Facts: Shortly before 5 September 1980, New Sikatuna Wood Industries, Inc. requested for a loan from Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait until December 1980 when he would have the money. In view of this agreement, Chua’s wife, Anita Peña Chua issued 3 crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated 22 December 1980 (China Banking Corporation, Check 589053 for P98,750; International Corporate Bank, Check 04045549 for P102,313; and Metropolitan Bank & Trust Co., Check 036512 for P 98,387; totaling P299,450.) Subsequently, New Sikatuna Wood Industries entered into an agreement with State Investment House Inc. (SIHI) whereby for and in consideration of the sum of P1,047,402.91 under a deed of sale, the former assigned and discounted with SIHI 11 postdated checks including the 3 postdated checks issued by Anita Peña Chua to New Sikatuna Wood Industries. When the 3 checks issued by Peña Chua were allegedly deposited by SIHI, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively.

SIHI claims that despite demands on Peña Chua to make good said checks, the latter failed to pay the same necessitating the former to file an action for collection against the latter and her husband Harris Chua before the Regional Trial Court of Manila (Branch XXXVII, Civil Case 82-10547). The spouses filed a third party complaint against New Sikatuna Wood Industries for reimbursement and indemnification in the event that they be held liable to SIHI. For failure of New Sikatuna Wood Industries to answer the third party complaint despite due service of summons, the latter was declared in default. On 30 April 1984, the lower court rendered judgment against the spouses, ordering them to pay jointly and severally to SIHI P229,450.00 with interest at the rate of 12% per annum from 24 February 1981 until fully paid; P29,945.00 as and for attorney's fees; and the costs of suit. As to the third party complaint, the Court ordered New Sikatuna Wood Industries is ordered to pay the spouses all amounts the latter may pay to SIHI on account of the case.

On appeal by the spouses in AC-GR CV 04523, the Intermediate Appellate Court (now Court of Appeals) reversed the lower court's judgment in the assailed decision. SIHI filed the petition for review.

The Supreme Court affirmed the decision appealed from, with costs against SIHI.

1. Holder in Due Course defined; Section 52 (c) and (d), Section 59 NIL
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is necessary that "at the time the instrument was negotiated to him he had no notice of any . . . defect in the title of the person negotiating it." However, under Section 59 every holder is deemed prima facie to be a holder in due course.

2. Crossed checks, how made
The Negotiable Instruments Law regulating the issuance of negotiable checks as well as the rights and liabilities arising therefrom, does not mention "crossed checks". But the 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. Under usual practice, crossing a check is done by placing two parallel lines 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 intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the present case, in which case the drawee should not encash the same but merely accept the same for deposit.

3. Payee’s duty, effect of negligence
Circumstance arising from the crossing of the check 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.

4. Effects of crossing a check; Ocampo vs. Gatchalian
The effects of crossing a check are: the check may not be encashed but only deposited in the bank; the check may be negotiated only once — to one who has an account with a bank; and 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 (Ocampo v. Gatchalian).

5. SIHI not in good faith, not a holder in due course; Personal defenses available
When SIHI rediscounted the check knowing that it was a crossed check he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, New Sikatuna Wood Industries, the purpose for which the three checks were crossed, 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, SIHI is subject to personal defenses, such as lack of consideration between the spouses and New Sikatuna Wood Industries. To note, the checks were postdated and issued only as a loan to New Sikatuna Wood Industries if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence the 3 checks are without consideration (Sec. 28, Negotiable Instruments Law). Likewise New Sikatuna Wood Industries negotiated the 3 checks in breach of faith in violation of Section 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check.

6. Section 541 NIL (US)
Such instruments, i.e. crossed checks, are mentioned in Section 541 of the Negotiable Instruments Law, to wit: “The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company. "The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made."

7. Effect of crossing check relates to mode of presentment for payment, Section 72 NIL
The effect of crossing a check relates to the mode of its presentment for payment. Under Section 72 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 payment on his behalf . . . As to who the holder or authorized person will be depends on the instructions stated on the face of the check.

8. SIHI not proper party authorized to make presentment of crossed checks; Liability did not attach to drawer
The 3 checks had been crossed generally and issued payable to New Sikatuna Wood Industries 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 against the drawer of the subject checks, Chua’s wife, considering that SIHI is not the proper party authorized to make presentment of the checks.

9. Holder not in due course may still recover on the checks (from indorser)
It does not follow that simply because SIHI was not a holder in due course for having taken the instruments with notice that the same is for deposit only to the account of payee named in the subject checks, SIHI 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 for in the present case, SIHI may recover from the New Sikatuna Wood Industries 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.

10. Unconsummated loan a good defense against holder not in due course; Lack of consideration
That the subject checks had been issued subject to the condition that the spouses on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by the spouses to New Sikatuna Wood Industries constitutes a good defense against SIHI who is not a holder in due course.

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