State Investment House vs. Intermediate Appellate Court

A taker of a generally crossed check who fails to inquire into the holder's title and the purpose of issuance is not a holder in due course and takes subject to personal defenses such as lack of consideration and breach of faith, with no right of recourse against the drawer absent due presentment by the payee.

State Investment House, Inc. engages in the business of acquiring receivables through assignment and discounting of postdated checks under deeds of sale. Anita Peña Chua and Harris Chua are defendant spouses, with the wife as drawer of the checks in question. The Negotiable Instruments Law governs holder-in-due-course status, presentment for payment, and defenses, although it does not expressly mention crossed checks, a commercial practice recognized in jurisprudence.

Shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested a loan from Harris Chua. Harris agreed to grant the loan on condition that New Sikatuna wait until December 1980 when funds would be available. In view of that agreement, his wife Anita Peña Chua issued three crossed checks payable to New Sikatuna Wood Industries, Inc., all postdated December 22, 1980: China Banking Corporation Check No. 589053 for P98,750.00, International Corporate Bank Check No. 04045549 for P102,313.00, and Metropolitan Bank and Trust Co. Check No. 036512 for P98,387.00, totaling P299,450.00.

Subsequently, New Sikatuna entered into an agreement with State Investment House, Inc. whereby for P1,047,402.91 under a deed of sale, it assigned and discounted eleven postdated checks including the three checks issued by Anita Peña Chua. When allegedly deposited by petitioner, the three checks were dishonored for insufficient funds, stop payment, and account closed, respectively. Despite demands to make good the checks, Anita Peña failed to pay, prompting petitioner to file the collection action against her and her husband.

The spouses sought reimbursement and indemnification from New Sikatuna, which did not answer and was declared in default. The trial court found for petitioner and ordered joint and several payment as stated above, with reimbursement over against New Sikatuna.

• Holder in Due Course and Lack of Notice: Petitioner argued that at the time of negotiation and endorsement by New Sikatuna Wood Industries, Inc., it had no knowledge of the transaction and arrangement between New Sikatuna and private respondents, implying taking in good faith and for value as to entitle it to proceed against private respondents for the dishonored amounts.

• Holder in Due Course: Whether petitioner is a holder in due course as to entitle it to proceed against private respondents for the amounts stated in the dishonored crossed checks.
• Presentment and Recourse Against Drawer: Whether liability attached to the drawer where generally crossed checks payable to the named payee were not presented for payment by the proper payee, and whether a non-holder in due course may still recover.

• Holder in Due Course: No. Petitioner was not a holder in due course, having taken crossed checks with notice of a definite purpose without inquiry, thus lacking good faith and taking subject to personal defenses.
• Presentment and Recourse Against Drawer: No recourse lies against the drawer. There was no due presentment by the payee of the generally crossed checks, so liability did not attach, though a non-holder in due course may still recover from its immediate negotiator absent a valid excuse.

• Holder in Due Course: A holder in due course must take in good faith and for value under Section 52(c), and without notice of any defect in the title of the person negotiating under Section 52(d), although every holder is deemed prima facie to be such under Section 59. A check with two parallel lines in the upper left corner may only be deposited and not converted into cash, putting the taker on inquiry to ascertain title and nature of possession, with failure constituting gross negligence amounting to legal absence of good faith. The effects of crossing are that the check may not be encashed but only deposited, may be negotiated only once to one with a bank account, and serves as warning that it was issued for a definite purpose requiring inquiry, otherwise the taker is not a holder in due course. Rediscounting with knowledge of the crossing and failure to inquire from New Sikatuna as to purpose prevented good-faith status, leaving the instruments subject to lack of consideration where the postdated checks were issued only as a loan if back-up deposits were made, which were not made, and to negotiation in breach of faith under Article 55.
• Presentment and Recourse Against Drawer: Crossing relates to mode of presentment, with general crossing requiring acceptance for deposit rather than encashment, and presentment under Section 72 must be by the holder or authorized person as indicated on the face of the check. The three checks were crossed generally and payable to New Sikatuna Wood Industries, Inc., meaning intended for deposit only by the named payee, but presentment was made by one other than the payee. In the absence of due presentment, the drawer did not become liable and no right of recourse was available against the drawer-wife. The Negotiable Instruments Law does not bar all recovery by one who is not a holder in due course; recovery may still be had from New Sikatuna Wood Industries, Inc. if without valid excuse, the only disadvantage being that the instrument is subject to defenses as if non-negotiable.

• Crossed check — meaning and effects — A check bearing two parallel lines in the upper left corner, generally by lines alone or with and Co. and specially by naming a banker or institution, may not be encashed but only deposited; may be negotiated only once to one who has an account with a bank; and serves as warning that it was issued for a definite purpose so the taker must inquire whether receipt was pursuant to that purpose. Applied here, petitioner's rediscounting of generally crossed checks without inquiry violated the avowed intention of the crossing and negated good faith.
• Holder in due course — good faith, value, and notice — Under Section 52(c) and (d), a holder in due course takes in good faith and for value and without notice of defect in the negotiator's title at negotiation, while Section 59 creates only a prima facie presumption. Applied here, the presumption was overcome by notice from the crossing and failure to ascertain title and purpose, constituting gross negligence amounting to legal absence of good faith as in Ocampo and Co. vs. Gatchalian.
• Presentment of crossed checks — proper party — Under Section 72, sufficient presentment must be by the holder or authorized person determined by instructions on the face of the check, with general crossing limiting presentment to deposit by the named payee. Applied here, presentment by one other than New Sikatuna Wood Industries, Inc. was improper, so liability did not attach to the drawer as in Chan Wan vs. Tan Kim.
• Non-holder in due course — subject to defenses but not barred from recovery — One who is not a holder in due course is not precluded from all recovery; the instrument is merely subject to defenses as if non-negotiable and recovery may be had against a party without valid excuse for refusing payment. Applied here, petitioner remained subject to lack of consideration and breach of faith against the drawers but could look to New Sikatuna Wood Industries, Inc.

• "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." — States the canonical effects of crossing relied upon to deny holder-in-due-course status for failure to inquire.
• "every holder is deemed prima facie to be a holder in due course." — States the Section 59 presumption that was overcome in this case by notice imparted through crossing.
• "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." — Defines the limited consequence of non-holder-in-due-course status, preserving recourse against the immediate negotiator.

• Ocampo and Co. vs. Gatchalian, 3 SCRA 603 (1961) — Followed as controlling on crossed checks; that failure to inquire upon notice from crossing constitutes gross negligence amounting to legal absence of good faith, precluding holder-in-due-course status.
• Chan Wan vs. Tan Kim and Chen So, L-15380, September 30, 1960, 109 Phil. 706 (1960) — Followed on presentment and recourse; that absent due presentment liability does not attach to the drawer, and that a non-holder in due course takes subject to defenses as if non-negotiable but may recover from a party without valid excuse.

• Section 52(c), Negotiable Instruments Law — Defines a holder in due course as one taking in good faith and for value; applied to test petitioner's taking of the crossed checks.
• Section 52(d), Negotiable Instruments Law — Requires that at negotiation the holder had no notice of defect in the negotiator's title; applied to defeat good faith because crossing gave notice of definite purpose.
• Section 59, Negotiable Instruments Law — Provides every holder is deemed prima facie a holder in due course; applied as a rebuttable presumption overcome by the crossing and failure to inquire.
• Section 28, Negotiable Instruments Law — On absence or failure of consideration; applied to sustain the defense that no loan was consummated for lack of back-up deposits.
• Article 55, Negotiable Instruments Law — On negotiation in breach of faith; applied as a personal defense available to the drawer against a non-holder in due course.
• Section 72, Negotiable Instruments Law — Requires presentment for payment by the holder or authorized person; applied to hold presentment improper where one other than the named payee presented generally crossed checks.
• Section 541, Negotiable Instruments Law — On indication that a check be paid to a certain banker or institution and effect of payment otherwise; cited on the nature and effect of crossing by general or special lines.

Gutierrez, Jr., Bidin and Cortes, JJ., concur. Feliciano, J., is on leave.