G.R. No.

L-15126           November 30, 1961

Facts:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Vasquez, presiding,
sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September
10, 1953 until paid, and to pay the costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by
defendant Anita C. Gatchalian.

That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then
interested in looking for a car for the use of her husband and the family, was shown and offered a car
by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being... personally known to
defendant Anita C. Gatchalian;

That Manuel Gonzales represented to defendant Anita C. Gatchalian that he was duly authorized by
the owner of the car, Ocampo Clinic... which facts were not known to plaintiff;... finding the price of
the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car
the day following together with the certificate of registration of the car... defendant Anita C.
Gatchalian drew and issued a check, Exh. 'B'; that Manuel Gonzales executed and issued a receipt for
said check, Exh. '1';

That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car
and its certificate of registration and to return the check, Exh. 'B' on the following day as previously
agreed upon, defendant Anita C. Gatchalian issued a 'Stop

Payment Order1 on the check, Exh. '3', with the drawee bank.

That defendants, both or either of them, had no ar- rangements or agreement with the Ocampo Clinic
at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel
Gonzales and neither or both of said defendants had assumed, expressly... or impliedly, with the
Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;

That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the
wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit 'A') thereof
to payment of said fees and expenses and delivering to Manuel

Gonzales the amount of P158.25 (as per receipt, Exhibit 'D') representing the balance on the amount
of the said check, Exh. 'B';

Issues:

whether or not the plaintiff-appellee is a holder in due course.

there has been no negotiation of the instrument, because the drawer did not deliver the instrument
to Manuel Gonzales with the intention of negotiating the same

Ruling:

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs, such as the fact... that appellants
had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice... means that the check could only be
deposited but may not be converted into cash all these circumstances should have put the plaintiff-
appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales,
and why he used it to pay Matilde's account.

It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title
to the check was or the nature of his possession. Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not finding out the... nature of the title and possession
of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a
holder of the check in good faith, to such effect is the consensus of authority

In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved
upon it, plaintiff-appellee, to prove that it actually acquired said check... in good faith. The stipulation
of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff
payee has not proved that it acquired the check in good faith and may not be deemed a holder in due
course thereof.

Principles:

Sec. 52 defines a... holder in due course as 'a holder who has taken the instrument under the
following conditions: 1. That it is complete and regular on 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.'

"In order to show that the defendant had knowledge of such facts that his action in taking the
instrument amounted to bad faith,' it is not necessary to prove that the defendant knew the exact
fraud that was practiced upon the plaintiff by the defendant's assignor, it being... sufficient to show
that the defendant had notice that there was something wrong about his assignor's acquisition of
title, although he did not have notice of the particular wrong that was committed. Paika vs. Perry, 225
Mass. 563, 114 N. E. 830.

Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith
may be inferred

"Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The
first had its origin in Gill vs. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down
by the court of King's Bench that the purchaser of... negotiable paper must exercise reasonable
prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion
of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona
fide holder.