The Case

This is a petition for review^[1] of the 16 August 2005 Decision^[2] and 30 November 2005 Resolution^[3] of the Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed the decision of the Regional Trial Court, 7^th Judicial Region, Branch 56, Mandaue City (trial court), with the deletion of the award of interest, moral damages, attorney's fees and litigation expenses. The trial court ruled that respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with co-defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check, among others.

The Facts

Sometime in December 1992, a syndicate, one of whose members posed as an owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend the group P3,000,000.00 to be secured by a real estate mortgage on the properties. A member of the group, particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage contract.^[4] Enticed and convinced by the syndicate's offer, petitioner issued three Metrobank checks totaling P3,000,000.00, one of which is Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount of P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.^[5]

Upon scrutinizing the documents involving the properties, petitioner discovered that the documents covered rights over government properties. Realizing he had been deceived, petitioner advised Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA- 142119406-CA was ordered stopped. The other two checks were already encashed by the payees.

Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in exchange for cash in the sum of P948,000.00, which respondents borrowed from Metrobank and charged against their credit line. Before respondents accepted the check, they first inquired from the drawee bank, Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the subject check was sufficiently funded, to which Metrobank answered in the positive. However, when respondents deposited the check with Metrobank, Cebu-Mabolo Branch, the same was dishonored by the drawee bank for reason "PAYMENT STOPPED."

Respondents filed a collection suit^[6] against petitioner and Lobitana before the trial court. In their Complaint, respondents alleged, among other things, that they are holders in due course and for value of Metrobank Check No. C-MA-142119406-CA and that they had no prior information concerning the transaction between defendants.

In his Answer, petitioner denied respondents' allegations that "on the face of the subject check, no condition or limitation was imposed" and that respondents are holders in due course and for value of the check. For her part, Lobitana denied the allegations in the complaint and basically claimed that the transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia Ompok Consing to petitioner and that she was made a payee of the check only to facilitate its discounting.

The trial court ruled in favor of respondents and declared them due course holders of the subject check, since there was no privity between respondents and defendants. The dispositive portion of the 14 March 1996 Decision of the trial court reads:

In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:

1.) defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 representing the face value of subject Metrobank check;

2.) to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for accrued and paid interest;

3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of P100,000.00;

4.) to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for attorney's fees; and

5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of P10,000.00 and costs of the suit.

SO ORDERED.^[7]

Only petitioner filed an appeal. Lobitana did not appeal the trial court's judgment.

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court's finding that respondents are holders in due course of Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals pointed out that petitioner's own admission that respondents were never parties to the transaction among petitioner, Lobitana, Concordio Toring, Cecilia Villacarlos, and Consing, proved respondents' lack of knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. Moreover, respondents verified from Metrobank whether the check was sufficiently funded before they accepted it. Therefore, respondents must be excluded from the ambit of petitioner's stop payment order.

The Court of Appeals modified the trial court's decision by deleting the award of interest, moral damages, attorney's fees and litigation expenses. The Court of Appeals opined that petitioner "was only exercising (although incorrectly), what he perceived to be his right to stop the payment of the check which he rediscounted." The Court of Appeals ruled that petitioner acted in good faith in ordering the stoppage of payment of the subject check and thus, he must not be made liable for those amounts.

In its 16 August 2005 Decision, the Court of Appeals affirmed the trial court's decision with modifications, thus:

WHEREFORE, premises considered, finding no reversible error in the decision of the lower court, WE hereby DISMISS the appeal and AFFIRM the decision of the court a quo with modifications that the award of interest, moral damages, attorney's fees and litigation expenses be deleted.

No pronouncement as to costs.

SO ORDERED.^[8]

In its 30 November 2005 Resolution, the Court of Appeals denied petitioner's motion for reconsideration.

In denying the petitioner's motion for reconsideration, the Court of Appeals noted that petitioner raised the defense that the check is a crossed check for the first time on appeal (particularly in the motion for reconsideration). The Court of Appeals rejected such defense considering that to entertain the same would be offensive to the basic rules of fair play, justice, and due process.

Hence, this petition.

The Issues

Petitioner raises the following issues:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS A CROSSED CHECK CONSTITUTES SUFFICIENT WARNING TO THE RESPONDENTS TO EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.

II. THE COURT OF APPEALS ERRED IN DENYING PETITIONER'S MOTION FOR RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE COMMISSION OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.^[9]

The Ruling of this Court

The petition is meritorious.

Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA-142119406-CA is a crossed check for the first time in his motion for reconsideration before the Court of Appeals. Respondents insist that issues not raised during the trial cannot be raised for the first time on appeal as it would be offensive to the elementary rules of fair play, justice and due process. Respondents further assert that a change of theory on appeal is improper.

In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the Complaint, concerning the allegation that on the face of the subject check, no condition or limitation was imposed, and (2) Paragraph 8 of the Complaint, regarding the allegation that respondents were holders in due course and for value of the subject check. In his "Special Affirmative Defenses," petitioner claimed that "for want or lack of the prestation," he could validly stop the payment of his check, and that by rediscounting petitioner's check, respondents "took the risk of what might happen on the check." Essentially, petitioner maintained that respondents are not holders in due course of the subject check, and as such, respondents could not recover any liability on the check from petitioner.

Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be stressed, however, that petitioner consistently argues that respondents are not holders in due course of the subject check, which is one of the possible effects of crossing a check. The act of crossing a check serves as a warning to the holder that the check 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.^[10] Contrary to respondents' view, petitioner never changed his theory, that respondents are not holders in due course of the subject check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject check was presented and admitted as evidence during the trial and respondents did not and in fact cannot deny that it is a crossed check.

In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the lower courts in the interest of substantial justice.^[11] In Casa Filipina Realty v. Office of the President,^[12] the Court held:

[T]he trend in modern-day procedure is to accord the courts broad discretionary power such that the appellate court may consider matters bearing on the issues submitted for resolution which the parties failed to raise or which the lower court ignored. Since rules of procedure are mere tools designed to facilitate the attainment of justice, their strict and rigid application which would result in technicalities that tend to frustrate rather than promote substantial justice, must always be avoided. Technicality should not be allowed to stand in the way of equitably and completely resolving the rights and obligations of the parties.^[13]

Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The main issue is whether respondents are holders in due course of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect the face value of the check from its drawer or petitioner herein.

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, as in this case, the following principles must additionally 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.^[14]

Based on the foregoing, respondents had the duty to ascertain the indorser's, in this case Lobitana's, title to the check or the nature of her possession. This respondents failed to do. Respondents' verification from Metrobank on the funding of the check does not amount to determination of Lobitana's title to the check. Failing in this respect, respondents are guilty of gross negligence amounting to legal absence of good faith,^[15] contrary to Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check.^[16]

State Investment House v. Intermediate Appellate Court ^[17] squarely applies to this case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State Investment House three post-dated crossed checks, issued by Anita Peña Chua naming as payee New Sikatuna Wood Industries, Inc. The Court found State Investment House not a holder in due course of the checks. The Court also expounded on the effect of crossing a check, thus:

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some person authorized to receive payment on his behalf x x x As to who the holder or authorized person will be depends on the instructions stated on the face of the check.

The three subject 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 against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question.

In this case, there is no question that the payees of the check, Lobitana or Consing, were not the ones who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in exchange for P948,000.00. It was respondents who presented the subject check for payment; however, the check was dishonored for reason "PAYMENT STOPPED." In other words, it was not the payee who presented the check for payment; and thus, there was no proper presentment. As a result, liability did not attach to the drawer. Accordingly, no right of recourse is available to respondents against the drawer of the check, petitioner herein, since respondents are not the proper party authorized to make presentment of the subject check.

However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover on the check.^[18] 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.^[19] Among such defenses is the absence or failure of consideration,^[20] which petitioner sufficiently established in this case. Petitioner issued the subject check supposedly for a loan in favor of Consing's group, who turned out to be a syndicate defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of the check.

Respondents can collect from the immediate indorser,^[21] in this case Lobitana. Significantly, Lobitana did not appeal the trial court's decision, finding her solidarily liable to pay, among others, the face value of the subject check. Therefore, the trial court's judgment has long become final and executory as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30 November 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 57994.

SO ORDERED.

Brion, Del Castillo, Abad, and Perez, JJ., concur.

---

^[1] Under Rule 45 of the Rules of Court.

^[2] Rollo, pp. 24-32. Penned by Associate Justice Enrico A. Lanzanas with Associate Justices Arsenio J. Magpale and Sesinando E. Villon, concurring.

^[3] Id. at 34-36.

^[4] Records, p. 22.

^[5] Id.

^[6] Docketed as Civil Case No. MAN-1843.

^[7] Rollo, p. 77.

^[8] Id. at 31.

^[9] Id. at 14-15.

^[10] State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13 July 1989, 175 SCRA 310, 315.

^[11] Phil. Commercial & Industrial Bank v. CA, 242 Phil. 497, 503-504 (1988). See also Ortigas, Jr. v. Lufthansa German Airlines, 159-A Phil. 863, 889 (1975).

^[12] 311 Phil. 170, 181 (1995).

^[13] Id.

^[14] State Investment House v. Intermediate Appellate Court, supra note 10; Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, 3 March 1994, 230 SCRA 643, 648.

^[15] Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, 30 November 1961, 3 SCRA 596, 603.

^[16] State Investment House v. Intermediate Appellate Court, supra note 10.

^[17] Id. at 316-317.

^[18] Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra note 14 at 649.

^[19] Id., citing Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).

^[20] Section 28, Negotiable Instruments Law.

^[21] Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra.