Bataan Cigar v. CA

Bataan Cigar v.
CA
G.R. No. 93048 March 3, 1994
Lessons Applicable: Rights of a holder (Negotiable Instruments Law)
FACTS:
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the
manufacturing of cigarettes purchased from King Tim Pua George (George King) 2,000
bales of tobacco leaf to be delivered starting October 1978.
o July 13, 1978: it issued crossed checks post dated sometime in March 1979 in the
total amount of P820K
George represented that he would complete delivery w/in 3 months from Dec 5 1978
so BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the
previous failure in delivery
o It issued post dated crossed checks in the total amount of P1.1M payable
sometime in September 1979.
July 19, 1978: George sold to SIHI at a discount check amounting to P164K, post dated
March 31, 1979, drawn by BCCFI w/ George as payee.
December 19 and 26, 1978: George sold 2 checks both in the amount of P100K, post
dated September 15 & 30, 1979 respectively, drawn by BCCFI w/ George as payee
Upon failure to deliver, BCCFI issued on March 30, 1979 and September 14 & 28, 1979
a stop payment order for all checks
SIHI failing to claim, filed a claim against BCCFI
RTC: SIHI = holder in due course. Non-inclusion of Gearoge as party is immaterial to the
case
ISSUE: W/N SIHI is a holder in due course beign a second indorser and a holder of crossed
checks
HELD: YES. GRANTED. RTC reversed.
Sec. 52
1. That it is complete and regular upon its face
2. 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
3. That he took it in good faith and for value
4. 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
Sec. 59
o every holder is deemed prima facie a holder in due course
o 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.
effect of crossing of a check
1. check may not be encashed but only deposited in the bank

2. check may be negotiated only once to one who has an account with a bank
3. act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose - he must inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due course
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 - failure = guilty
of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of
the Negotiable Instruments Law
SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the
checks. However, that SIHI could not recover from the checks. The only disadvantage of
a holder who is not a holder in due course is that the instrument is subject to defenses as
if it were non-negotiable. Hence, SIHI can collect from the immediate indorser, George
lawphil.net
G.R. No. 93048
Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.
NOCON, J.:
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.," 1 affirming the decision of the Regional
Trial Court 2 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.
(hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI,
the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory,
Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its
suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales
of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued
crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months
from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves,
despite the supplier's failure to deliver in accordance with their earlier agreement. Again
petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable
sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI. On
July 19, 1978, he sold at a discount check TCBT 551826 5 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, 6
both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by
petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite
petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks
payable to George King, including check TCBT 551826. Subsequently, stop payment was also
ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due
to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only
BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a
holder in due course. It further said that the non-inclusion of King Tim Pua George as party
defendant is immaterial in this case, since he, as payee, is not an indispensable party.
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.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the very
respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the
effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on
demand. 8 There are a variety of checks, the more popular of which are the memorandum check,
cashier's check, traveler's check and crossed check. 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 (NIL) does
not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such
instruments.
According to commentators, 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. 10 This is specially true in England
where the Negotiable Instrument Law originated.
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 so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood
Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita
Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a
holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued payable
to New Sikatuna Wood Industries, Inc. 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 petitioner (SIHI)
against the drawer of the subject checks, private respondent wife (Anita),
considering that petitioner is not the proper party authorized to make presentment
of the checks in question.
xxx xxx xxx

That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) 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 private respondents to
New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner
who is not a holder in due course. 12
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, 13 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.
The foregoing does not mean, however, that respondent could not recover from the checks. The
only disadvantage of a holder who is not a holder in due course is that the instrument is subject
to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case,
George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is
hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.
#Footnotes
1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N.
Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987.
2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region,
Manila.
3 Exhibit "1", Folder of Exhibits, p. 11.

4 Exhibit "4", Folder of Exhibits, p. 14.
5 Annex "A", Folder of Exhibits, p. 3.
6 Annexes "B" and "C", Folder of Exhibits, pp. 4-5.
7 G.R. No. 72764, 175 SCRA 310.
8 Sec. 185, Negotiable Instruments Law.
9 Article 541 -- The maker of 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".
10 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575;
AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed.,
p. 446.
11 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated
Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra.
12 Id. at pp. 316-317.
13 quoted supra.
14 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v.
IAC, supra.
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Bataan Cigar v.

SIHI failing to claim, filed a claim against BCCFI

1. That it is complete and regular upon its face

effect of crossing of a check

1. check may not be encashed but only deposited in the bank

Republic of the Philippines

xxx xxx xxx

3 Exhibit "1", Folder of Exhibits, p. 11.

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