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.

FACTS

Petitioner Bataan Cigar & Cigarette Factory, Inc. (BCCFI) issued post-dated crossed checks to its supplier, King Tim Pua George (George King), as payment for the delivery of tobacco leaves. The checks were issued in two sets: the first set totaling P820,000.00 post-dated March 1979, and the second set totaling P1,100,000.00 post-dated September 1979. George King subsequently sold three of these crossed checks at a discount to private respondent State Investment House, Inc. (SIHI) on various dates in 1978. Due to George King’s failure to deliver the tobacco leaves as agreed, BCCFI issued stop payment orders on all checks payable to him, including the ones sold to SIHI. SIHI instituted a collection case against BCCFI after its efforts to collect failed.

ISSUE

Whether SIHI, a second indorser and holder of crossed checks, is a holder in due course entitled to collect payment from the drawer, BCCFI.

RULING

No, SIHI is not a holder in due course. The Supreme Court ruled that the crossing of a check serves as a warning to the holder that the check has been issued for a definite purpose. It devolves upon the holder the duty to ascertain the indorser’s title to the check or the nature of his possession. By failing to make such inquiry, SIHI was guilty of gross negligence amounting to legal absence of good faith. Consequently, SIHI does not qualify as a holder in due course under Section 52 of the Negotiable Instruments Law. Since SIHI is not a holder in due course, BCCFI’s defense of failure of consideration (George King’s non-delivery of the tobacco leaves) is valid against it. Therefore, BCCFI cannot be obliged to pay the checks. The Supreme Court granted the petition and reversed the decisions of the lower courts. SIHI’s recourse is to collect from its immediate indorser, George King.