Dino v. Judal-Loot et. al.

Decision date: April 19, 2010

Facts:

In 1992, a member of a syndicate who posed as an owner of several parcels of land in Lapu-Lapu City
induced Dino (petitioner) to lend the group P 3M to be secured by a REM on the properties. A certain
Consing from the group even offered to execute a Deed of Absolute Sale covering the properties instead
of the usual mortgage contract. This enticed and convinced the petitioner to issue three (3) Metrobank
checks totaling P 3M, one of which was postdated on Feb 13, 1993 in the amount of P 1M payable to
Consing and/or Fe Lobitana (postdated check).

When petitioner realized that he had been deceived, he advised Metrobank to stop payment of his
checks but only the postdated check was ordered stopped and the two other checks were already
encashed.

Lobitana negotiated and indorsed the postdated check to spouses Loot (respondents) in exchange for
cash amounting to P 948K which the spouses borrowed from Metrobank and charged against their
credit line. Before accepting the check, they first inquired Metrobank, the drawee bank which is also
their depository bank if the postdated check was sufficiently funded to which the bank answered in
the positive. However, when spouses deposited the check, the same was dishonored for reason of stop
payment.

Respondents filed a suit against petitioner and Lobitana and alleged that they are holders in due
course and had no prior info about the transaction between Dino and Lobitana. Dino denied the
allegations that on the face of the check, no condition or limitation was imposed and that the spouses
are holder in due course. Lobitana, on the other hand, claimed that she was just made a payee of the
check by Consing to facilitate its discounting.

RTC ruled in favor of the respondents and CA affirmed the decision with modification by deleting the
award of interest, moral damage, attorneys fees and litigation expenses. Petitioners raised the defense
that the check is a crossed check for the first time on appeal but CA rejected such defense because it
would be offensive to the basic rules of fair play, justice and due process.

Issue/Held:

W/N the CA erred in holding that the respondents were holders in due course. The fact that the subject
check is a crossed check constitutes sufficient warning to the respondents to exercise extraordinary
diligence to determine the title of the indorser. YES, CA erred in holding that respondents were
holders in due course.

Ruling:
Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:
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 has 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.

In the case of a crossed check, the following principles must also be considered: A crossed check
(a) may not be encashed but only deposited in the bank;
(b) may be negotiated only once to one who has an account with a bank; and
(c) warns the holder that it has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due
course.

Respondents had the duty to ascertain the indorsers (Lobitana) title to the check or the nature of her
possession but failed to do so. Respondents verification from Metrobank on the funding of the check
does not amount to determination of Lobitanas title to the check. Failing in this respect, respondents
are guilty of gross negligence amounting to legal absence of good faith, contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the
subject check.

However, that does not automatically mean that the respondents cannot recover on the check The
Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not
in any case recover on the instrument. 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.

Since there is no valid loan to speak of because one of the parties in the initial transaction was a
syndicate, there is no consideration for the issuance of the check. Petitioner cannot be obliged to pay
the face value of the check. Respondents can collect from the immediate indorser who is Lobitana.

Doctrine:

It is the duty of the holder of the instrument to ascertain the indorsers title to the check or the nature
of their possession. Verification on the funding of the instrument does not amount to the determination
of the title of indorser to the check. The determination must be exercised with extraordinary diligence.
Failure to do so would constitute gross negligence on the part of the holder amounting to legal absence
of good faith which is needed to be a holder in due course.