Hi-Cement Corporation vs.

Insular Bank of Asia and America (later PCIB, now Equitable-PCI Bank)
G.R. no. 132403 Sept. 28, 2007
Corona, J.

Facts:

- Spouses Enrique and Lilia Tan (Spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (ET
Henry), a company engaged in the business of processing and distributing bunker fuel. Among ET Henrys
customers are petitioner H-Cement Corporation (Hi-Cement), Riverside Mills Corporation, and Kanebo
Cosmetics Philippines, Inc. For their purchases, these corporations issued postdated checks to ET Henry.
- From 1979 to 1981, ET Henry and respondent Insular Bank (Insular) were engaged in rediscounting of checks.
o Insular granted ET Henry a credit facility (Purchase of Short Term Receivables) which enabled ET Henry
to encash, with pre-deducted interest, the postdated checks of its clients.
- Feb 1981: 20 checks of Hi-Cement (which were crossed and bore the restriction to payees account only) were
dishonored, as well as some checks of Riverside and Kanebo.
o Insular filed a complaint of sum of money against ET Henry, Spouses Tan, Hi-Cement, Riverside, and
Kanebo.
o Hi-Cement: argued, among others, that its general manager and treasurer were not authorized to issue said
postdated checks in favor of ET Henry, and that Insular was not a holder in due course.
- TC: Ruled in favor of Insular; ET HENRY, Hi-Cement, Riverside, And Kanebo are all liable to Insular.
- CA: Affirmed in toto.
Hence, this petition.

Held:

- (Relevant issue): Respondent Insular could not be considered as a holder in due course.
o Effects of crossing a check: (a) the check may not be encashed but only deposited in the bank; (b) the
check may be negotiated only once to one who has an account with a bank; (c) the act of crossing the
checks serves as a warning to the holder that the check has been issued for a definite purpose so that he
may inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due
course.
o Insular was aware that the subject checks were crossed and bore restrictions that they were for deposit to
payees account onlyhence, they could not be further negotiated to it.
o Insular also disregarded a telling sign of irregularity in the re-discounting of the checks when the general
manager did not acquiesce to it as only the treasurers signature appeared in the deed of assignment.
o As a banking institution, Insular should have exercised extraordinary diligence in every transaction.
The crossing of checks should put the holder on inquiry and upon him devolves the duty to
ascertain the indorsers title to the check or the nature of his possession. Failing this, the hodler
is declared guilty of gross negligence amounting to legal absence of good faith.
o As a consequence, the drawer of the checksHi-Cementcannot be held liable to the holder.
o Not all hope is lost; Insular may still recover from ET Henry.

Affirmed with modification.