Atrium Management Corporation vs. Court of Appeals

A corporate officer who negligently signs a confirmation letter containing a false statement that enables the improper negotiation of crossed checks may be held personally liable for the resulting damage to the corporation, and a party that discounts crossed checks with knowledge that they are for deposit only to the payee's account is not a holder in due course, although it may still recover on the instrument subject to defenses as if it were non-negotiable.

Hi-Cement Corporation was a corporate entity whose treasurer, Lourdes M. de Leon, and chairman, the late Antonio de las Alas, were authorized signatories for corporate checks. E.T. Henry and Co., Inc. was a business entity that had dealings with Hi-Cement involving the delivery of petroleum products. Atrium Management Corporation was engaged in the business of discounting negotiable instruments and providing financial assistance. The dispute arose from the discounting of four crossed checks issued by Hi-Cement in favor of E.T. Henry, which were subsequently endorsed to Atrium, and the legal consequences of the crossed-check restriction on negotiability and holder-in-due-course status under the Negotiable Instruments Law.

Hi-Cement Corporation, through its treasurer Lourdes M. de Leon and chairman Antonio de las Alas, issued four postdated RCBC checks in the total amount of P2 million in favor of E.T. Henry and Co., Inc. The checks were crossed and specifically indorsed for deposit to the payee's account only. At the time of issuance, sufficient funds existed in the bank to cover the P2 million. The circumstances surrounding the issuance indicated that the checks were issued to extend financial assistance to E.T. Henry, not as payment for petroleum products delivered to Hi-Cement, as de Leon had requested counterpart checks from E.T. Henry — an arrangement consistent with securing a loan rather than paying for goods.

In February 1981, Enrique Tan of E.T. Henry approached Atrium Management Corporation for financial assistance, offering to discount the four RCBC checks. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement that the checks represented payment for petroleum products which E.T. Henry had delivered to Hi-Cement. Two letters, dated February 6 and February 9, 1981, were issued by Hi-Cement through de Leon as treasurer, confirming the issuance of the four checks in favor of E.T. Henry and stating that the checks were in payment of hydro oil bought by Hi-Cement from E.T. Henry. This representation was false, as the checks had been issued to secure financial assistance, not to pay for delivered goods. Erlinda Yap, formerly a secretary to de Leon at Hi-Cement, testified that E.T. Henry had offered to give Hi-Cement a loan which the subject checks would secure as collateral.

E.T. Henry endorsed the four checks to Atrium for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped." Atrium demanded payment of the value of the checks, but the demand was denied, prompting the filing of a collection action on January 3, 1983 before the Regional Trial Court, Manila. The trial court found for Atrium, ordering all defendants except the deceased Antonio de las Alas to pay jointly and severally P2 million with legal interest, P20,000 attorney's fees, and costs. On appeal, the Court of Appeals modified the decision by absolving Hi-Cement Corporation and de las Alas, and holding de Leon and E.T. Henry jointly and severally liable to Atrium for P2 million with interest and attorney's fees. The appellate court ruled that de Leon was not authorized to issue the checks, that the issuance constituted ultra vires acts, and that the checks were not issued for valuable consideration.

• Ultra Vires Act (Atrium): Atrium argued that the Court of Appeals erred in ruling that the issuance of the questioned checks was an ultra vires act of Hi-Cement Corporation.
• Holder in Due Course (Atrium): Atrium maintained that it was a holder in due course and for value of the rediscounted checks, contrary to the appellate court's ruling.
• Liability of Hi-Cement (Atrium): Atrium argued that the Court of Appeals erred in dismissing the complaint against Hi-Cement Corporation and in ordering Atrium to pay Hi-Cement P20,000 as attorney's fees.
• Personal Liability (de Leon): De Leon submitted that the Court of Appeals erred in holding her personally liable for the Hi-Cement checks issued to E.T. Henry, she being merely a corporate officer and authorized signatory.
• Holder in Due Course (de Leon): De Leon argued that the Court of Appeals erred in ruling that Atrium was a holder in due course, contending that Atrium could not claim such status.
• Absence of Consideration (de Leon): De Leon maintained that the Court of Appeals erred in ruling that she was personally liable for the value of checks declared to have been issued without consideration.
• Attorney's Fees (de Leon): De Leon argued that the Court of Appeals erred in ordering her to pay Hi-Cement attorney's fees and costs.

• Absence of Consideration (Hi-Cement): Hi-Cement maintained that the checks were not issued for consideration and that de Leon and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who was admittedly in need of financial assistance.
• Liability of E.T. Henry (Hi-Cement): Hi-Cement argued that assuming the checks were issued with its authorization, the same was without consideration, which is a defense against a holder in due course, and that the liability should be borne alone by E.T. Henry.

• Ultra Vires Act: Whether the issuance of the four checks by Hi-Cement's officers was an ultra vires act.
• Personal Liability of Corporate Officers: Whether Lourdes M. de Leon and Antonio de las Alas, as corporate officers and authorized signatories, were personally liable for the checks issued.
• Holder in Due Course: Whether Atrium Management Corporation was a holder in due course of the checks.

• Ultra Vires Act: No. The issuance of the checks was within the ambit of a valid corporate act, as it was for securing a loan to finance the activities of the corporation, and de Leon as treasurer was authorized to sign checks for the corporation with sufficient funds in the bank at the time of issuance.
• Personal Liability of Corporate Officers: Yes, as to de Leon. She was negligent in signing a confirmation letter containing a false statement that enabled the improper negotiation of crossed checks, resulting in damage to the corporation, thereby warranting personal liability.
• Holder in Due Course: No. Atrium was not a holder in due course because the checks were crossed and specifically indorsed for deposit to the payee's account only, and Atrium was aware of this restriction from the beginning.

• Ultra Vires Act: An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization, and therefore beyond the power conferred upon it by law; it is distinguished from an illegal act in that the former is merely voidable and may be enforced by performance, ratification, or estoppel, while the latter is void. The record showed that the checks were issued to extend financial assistance to E.T. Henry, not as payment for hydro oil delivered. De Leon's request for counterpart checks from E.T. Henry confirmed that the arrangement was to secure a loan. Since securing a loan to finance corporate activities falls within the scope of valid corporate acts, the issuance was not ultra vires. De Leon was the treasurer and authorized to sign checks, and sufficient funds existed at the time of issuance. The Court found no sufficient evidence to support Hi-Cement's claim that the checks were issued without consideration or as part of a "kiting operation."

• Personal Liability of Corporate Officers: Personal liability of a corporate director, trustee, or officer may validly attach only when: (1) he assents to a patently unlawful act of the corporation, or for bad faith or gross negligence in directing its affairs, or for conflict of interest resulting in damages; (2) he consents to the issuance of watered down stocks or fails to forthwith file written objection; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by specific provision of law to personally answer for his corporate action. Although de Leon and de las Alas were authorized to issue the checks, de Leon was negligent when she signed the confirmation letter requested by Atrium and E.T. Henry for the rediscounting of the crossed checks. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. Moreover, the confirmation letter contained a false clause stating that the checks were in payment of hydro oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in damage to the corporation, justifying personal liability.

• Holder in Due Course: Under Section 52 of the Negotiable Instruments Law, a holder in due course must take the instrument complete and regular upon its face, before it is overdue and without notice of prior dishonor, in good faith and for value, and without notice of any infirmity in the instrument or defect in the title of the person negotiating it. The checks were crossed and specifically indorsed for deposit to the payee's account only. Atrium was aware from the beginning that the checks were for deposit only to E.T. Henry's account, meaning it had notice of the restriction on further negotiation. Atrium therefore could not be considered a holder in due course. However, not being a holder in due course does not altogether preclude recovery on the instrument, as the Negotiable Instruments Law does not so provide. The disadvantage is that the instrument becomes subject to defenses as if it were non-negotiable, one such defense being absence or failure of consideration under Section 28. Since the Court found that there was consideration — the checks were issued to secure financial assistance — the defense of absence of consideration was unavailable, and Atrium could still recover from the parties held liable.

• Ultra Vires Acts — An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. It is distinguished from an illegal act: the former is merely voidable and may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. In this case, the Court held that issuing checks to secure a loan to finance corporate activities was within the scope of valid corporate acts and therefore not ultra vires.

• Personal Liability of Corporate Officers — A corporate director, trustee, or officer may be held personally liable along with the corporation only when: (1) he assents to a patently unlawful act of the corporation, or for bad faith or gross negligence in directing its affairs, or for conflict of interest resulting in damages to the corporation, its stockholders, or other persons; (2) he consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made, by a specific provision of law, to personally answer for his corporate action. The Court applied the first ground — negligence — holding de Leon personally liable for signing a false confirmation letter that enabled the improper negotiation of crossed checks, causing damage to the corporation.

• Holder in Due Course and Crossed Checks — Under Section 52 of the Negotiable Instruments Law, a holder in due course must take the instrument in good faith, for value, and without notice of any infirmity or defect. A party that discounts crossed checks with knowledge that they are for deposit only to the payee's account has notice of a restriction on further negotiation and therefore cannot qualify as a holder in due course. However, a holder not in due course is not altogether precluded from recovering on the instrument; the disadvantage is that the instrument is subject to defenses as if it were non-negotiable, including absence or failure of consideration under Section 28.

• "An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law" — This passage provides the canonical definition of ultra vires acts as applied in Philippine corporation law, distinguishing them from illegal acts and serving as the foundation for the Court's ruling that the check issuance was a valid corporate act.

• "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his corporate action." — This enumeration of the four circumstances for personal liability of corporate officers is the controlling test applied to hold de Leon personally liable for her negligence.

• "However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument." — This passage articulates the principle that a holder not in due course may still recover, subject to defenses as if the instrument were non-negotiable, a point frequently cited in subsequent negotiable instruments jurisprudence.

• Republic vs. Acoje Mining Co., Inc., 117 Phil. 379 (1963) — Cited as the source of the definition of ultra vires acts and the distinction between ultra vires and illegal acts. The Court relied on this precedent to hold that the check issuance was not ultra vires because it was within the scope of corporate purposes.

• FCY Construction Group, Inc. vs. Court of Appeals, G.R. No. 123358, Feb. 1, 2000 — Cited for the four-part test on personal liability of corporate officers, which in turn cited Tramat Mercantile, Inc. vs. Court of Appeals, 238 SCRA 14 (1994), and Equitable Banking Corporation vs. NLRC, 339 Phil. 541 (1997). The Court applied this test to hold de Leon personally liable for negligence.

• Chan Wan vs. Tan Kim and Chen So, 109 Phil. 706 (1960) — Cited for the proposition that the Negotiable Instruments Law does not provide that a holder not in due course cannot recover on the instrument. The Court relied on this to hold that Atrium, though not a holder in due course, could still recover subject to available defenses.

• State Investment House vs. Intermediate Appellate Court, 175 SCRA 310 (1989) — Cited for the principle that the disadvantage of not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. The Court applied this to explain that absence or failure of consideration under Section 28 of the NIL could be raised against Atrium.

• Section 52, Negotiable Instruments Law — Defines a holder in due course as one who takes the instrument complete and regular upon its face, before it is overdue and without notice of prior dishonor, in good faith and for value, and without notice of any infirmity in the instrument or defect in the title of the person negotiating it. Applied to hold that Atrium was not a holder in due course because it took the crossed checks with knowledge that they were for deposit only to the payee's account.

• Section 28, Negotiable Instruments Law — Provides that absence or failure of consideration is a defense against a holder not in due course. The Court noted this as one of the defenses available against Atrium, though it ultimately found that consideration existed.

• Section 45, Corporation Code — Cited in relation to the definition of ultra vires acts. The Court applied this provision to determine that the issuance of checks to secure financial assistance for corporate activities was within the scope of valid corporate acts.

Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concurred.