GR 72764; (July, 1989) (Digest)

G.R. No. 72764 July 13, 1989
STATE INVESTMENT HOUSE, petitioner, vs. INTERMEDIATE APPELLATE COURT, ANITA PEÑA CHUA and HARRIS CHUA, respondents.

FACTS

Private respondent Anita Peña Chua issued three crossed checks, all postdated December 22, 1980, and payable to New Sikatuna Wood Industries, Inc. (NSWI). The checks were issued in connection with a loan her husband, Harris Chua, agreed to grant to NSWI, subject to the condition that funding would be available by December 1980. Subsequently, NSWI entered into an agreement with petitioner State Investment House, assigning and discounting eleven postdated checks, including the three crossed checks from Anita Chua. When petitioner presented these three checks for payment, they were dishonored for reasons including “insufficient funds” and “stop payment.”
Petitioner filed a collection suit against the spouses Chua. The Regional Trial Court ruled in favor of petitioner, ordering the spouses to pay the value of the checks. On appeal, the Intermediate Appellate Court reversed the decision and dismissed the complaint.

ISSUE

Whether petitioner State Investment House is a holder in due course of the crossed checks, thereby entitling it to collect from the drawer despite the dishonor.

RULING

No, petitioner is not a holder in due course and cannot recover from the drawer. The Supreme Court affirmed the decision of the Intermediate Appellate Court. The legal logic rests on the nature and legal effects of a crossed check. A crossing with two parallel lines is a recognized banking practice indicating the check is for deposit only to the account of the named payee, not for encashment. This crossing serves as a warning to any subsequent holder to inquire into the holder’s title and the purpose of the issuance.
Under the Negotiable Instruments Law, a holder in due course must take the instrument in good faith and for value, without notice of any defect in title. Here, the crossed checks put petitioner on inquiry notice. By discounting the checks despite the clear crossing, petitioner knowingly disregarded the drawer’s restriction that the checks were for deposit solely to NSWI’s account. This failure to inquire constitutes gross negligence, negating good faith and preventing petitioner from attaining the status of a holder in due course.
Consequently, as a holder not in due course, petitioner is subject to all personal defenses available between the original parties. The defense in this case—that the checks were issued subject to a condition (the availability of funds by December for the loan) that ultimately failed—is valid against petitioner. Furthermore, as the checks were crossed and payable only to NSWI, presentment for payment by petitioner, who was not the named payee, was improper. Absent proper presentment by the rightful holder, the drawer’s liability did not attach. Therefore, petitioner has no right of recourse against the drawer-spouses Chua.