FACTS:

Petitioner, then a professional basketball player and respondent, a well-known sports columnist, entered into a business venture under the name of Slam Dunk Corporation, a production related to basketball.

In the course of their business, the petitioner pre-signed several checks to answer for the expenses of Slam Dunk. Although signed, these checks had no payee’s name, date or amount. The blank checks were entrusted to Gutierrez with the specific instruction not to fill them out without previous notification to and approval by the petitioner. Without the petitioner’s knowledge and consent, Gutierrez secured a loan from Marasigan on the excuse that the petitioner needed the money for the construction of his house.

Gutierrez delivered to Marasigan one of the blank checks which petitioner pre-signed.

Marasigan deposited the check but it was dishonored for the reason “ACCOUNT CLOSED.” Marasigan sought recovery from Gutierrez and petitioner to no avail. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.

The petitioner filed before the RTC a Complaint for Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely denied authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.

The RTC ruled in favor of Marasigan, and ordered the petitioner to pay Marasigan the face value of the check with a right to claim reimbursement from Gutierrez.

The CA affirmed the RTC ruling.

After the CA denied the subsequent motion for reconsideration, the petitioner filed the present petition.

ISSUES:

Whether the petitioner can be made liable under the check he signed.
Whether Marasigan is a holder in due course.

RULING:

The petition is impressed with merit.
1.

Liability Under the Instrument
The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments Law (NIL).

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the possession of a person other than the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks.

In order however that one who is not a holder in due course can enforce the instrument against a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set this up as a personal defense and avoid liability. However, if the holder is a holder in due course, there is a conclusive presumption that authority to fill it up had been given and that the same was not in excess of authority.

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the contract and loan and under the check because: first, the subject check was not completely filled out strictly under the authority he has given and second, Marasigan was not a holder in due course.

2.

Marasigan is Not a Holder in Due Course

The NIL defines a holder in due course, thus:

Sec. 52 — 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 had 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 present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of loan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith.

As correctly noted by the CA, his inaction and failure to verify, despite knowledge of that the petitioner was not a party to the loan, may be construed as gross negligence amounting to bad faith.