Haystack: State Investment House vs. Court of Appeals (GR 101163, 11 January 1993)

State Investment House vs. CA
[G.R. No. 101163. January 11, 1993.]
First Division, Bellosillo (J): 2 concurring, 1 took no part

Facts: Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, 2 post-dated Equitable Banking Corporation checks in the amount of P50,000 each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to the State Investment House Inc. (SIHI). Moulic failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, Moulic withdrew her funds from the drawee bank.Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, SIHI allegedly notified Moulic of the dishonor of the checks and requested that it be paid in cash instead, although Moulic avers that no such notice was given her.

On 6 October 1983, SIHI sued to recover the value of the checks plus attorney's fees and expenses of litigation. In her Answer, Moulic contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered SIHI to pay Moulic P3,000.00 for attorney's fees.

SIHI elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to Moulic was made beyond the period prescribed by the Negotiable Instruments Law and that even if SIHI did serve such notice on Moulic within the reglementary period it would be of no consequence as the checks should never have been presented for payment. Hence, the petition for review.

The Supreme Court granted the petition, reversed the decision appealed from, and entered a new one declaring private Moulic liable to SIHI for the value of EBC Checks 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the Victorianos as Third-Party Defendants; with costs against Moulic

1. Negotiability of checks not in dispute
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not SIHI was a holder of the checks in due course.

2. Section 52 NIL, Holder in due course; Burden of proving a holder not in due course
Section 52 of the Negotiable Instruments Law (What constitutes a holder in due course) provides “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 was 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." Thus, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. Consequently, the burden of proving that SIHI is not a holder in due course lies in the person who disputes the presumption. In this regard, Moulic failed. The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular; (b) SIHI bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) SIHI took these checks in good faith and for value, albeit at a discounted price; and, (d) SIHI was never informed nor made aware that these checks were merely issued to payee as security and not for value. Consequently, SIHI is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; SIHI may, therefore, enforce full payment of the checks.

3. Personal defense of failure or absence of consideration not available
Moulic cannot set up against SIHI the defense that there was failure or absence of consideration. Moulic can only invoke this defense against SIHI if it was privy to the purpose for which they were issued and therefore is not a holder in due course.

4. Section 119 NIL, Instrument how discharged
That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For, the only grounds are those outlined in Section 119 of the Negotiable Instrument Law (Instrument; how discharged), i.e. “A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right."

5. Section 119 (c) NIL; intentional cancellation contemplated in paragraph (c)
The intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since Moulic failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible.

6. Section 119 (d) NIL; Acts discharging a simple contract not specified in Section 119
The acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Section 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Section 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present case, the payee, Corazon Victoriano, was no longer Moulic's creditor at the time the jewelry was returned. Correspondingly, Moulic may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.

7. Need for notice of dishonor not absolute
The fact that SIHI failed to give Notice of Dishonor to Moulic is of no moment. The need for such notice is not absolute; there are exceptions under Section 114 of the Negotiable Instruments Law (When notice need not be given to drawer), to wit: “Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment." In the present case, Moulic did not retrieve the checks when she returned the jewelry; but simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored; therefore, she was responsible for the dishonor of her checks, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

8. Purpose of the enactment of the Negotiable Instruments Law
The Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.

9. Effects of drawing and negotiation of a check; Drawer liable to holder in due course
The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the present case, such withdrawal renders the drawer, Nora B. Moulic, liable to SIHI, a holder in due course of the checks.

10. Right of mortgagee to claim deficiency in extrajudicial foreclosure of mortgage
The obligation of Corazon Victoriano and her husband at the time their property mortgaged to SIHI was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million. Thus, the value of the property foreclosed was not even enough to pay the debt in full. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt.

11. Legislative intent to foreclose right of a creditor to sue for deficiency usually expressed; Creditor does not lose right to recover in the absence of provision
While Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". Thus, in the absence of a similar provision in Act 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage.

12. Complaint and Third-party complaint another means of recovering unpaid balance
The filing of the Complaint and the Third-Party Complaint to enforce the checks against Moulic and the Victoriano spouses, respectively, is just another means of recovering the unpaid balance of the debt of the Victorianos. Moulic, as drawer, is liable for the value of the checks she issued to the holder in due course, SIHI, without prejudice to any action for recompense she may pursue against the Victorianos as Third-Party Defendants who had already been declared as in default.

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