Holder in Due Course Rights Prevail Over Stop Payment Orders

The Supreme Court has clarified that a stop payment order does not automatically free a bank from liability on negotiable instruments it has drawn. In Llorente v. Star City Pty Limited (G.R. Nos. 212050 and 212216, January 15, 2020), the Court ruled that a holder in due course may enforce payment of bank drafts against the drawer bank, even when the payee had ordered payment stopped. The decision reinforces the stability of negotiable instruments and the protection given to those who take them in good faith and for value.

The Facts of the Case

Star City Pty Limited (SCPL), an Australian casino operator, accepted two bank drafts worth US$150,000 each from patron Quintin Llorente. The drafts were drawn by Equitable PCI Bank (now BDO Unibank) with Llorente as payee. Llorente used the drafts to buy into the casino's Premium Programme, which entitled him to commission rebates on his gaming turnover.

Before accepting the drafts, SCPL verified with the bank that they were issued on clear funds with no stop payment orders. When SCPL deposited the drafts, however, the bank later advised of a stop payment order. Llorente had requested the stoppage, claiming fraud and unfair gaming practices at the casino. SCPL filed a collection case against both Llorente and the bank.

The Issue

The central question was whether the bank, as drawer of the drafts, remained liable to SCPL as a holder in due course despite the stop payment order issued by Llorente.

The Ruling

The Supreme Court held that SCPL was a holder in due course under the Negotiable Instruments Law (NIL). It took the drafts complete and regular on their face, before they were overdue, in good faith and for value, and without notice of any defect.

The Court found that the right to play under the Premium Programme constituted "value" under the law. SCPL's good faith was also established—it had verified the drafts with the bank before accepting them.

Drawer Liability Under the NIL

The NIL governs the liability of a drawer of a negotiable instrument. A drawer, by drawing the instrument, engages that on due presentment, the instrument will be accepted or paid according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, the drawer will pay the amount thereof to the holder. The exact provision of the NIL on this point is not available in the ASG law library, but the Supreme Court applied this principle in the case.

The Court emphasized that a stop payment order does not discharge the drawer's liability to a holder in due course. While a drawer may countermand payment to the drawee, this right cannot be exercised to prejudice the rights of holders in due course. The drawer remains liable on the instrument.

No Unjust Enrichment Defense

The bank argued that it had already paid Llorente the face value of the drafts under an indemnity agreement, and that holding it liable would sanction unjust enrichment. The Court rejected this defense. The indemnity agreement was only between the bank and Llorente—it could not defeat SCPL's rights as a holder in due course. Under the NIL, a holder in due course holds the instrument free from defenses available to prior parties among themselves. The exact section number of this provision is not available in the ASG law library, but the principle was applied by the Court in this case.

Practical Takeaways

• Stop payment orders do not extinguish liability. A drawer remains liable to a holder in due course even if payment was countermanded.
• Verify instruments before accepting them. Conducting due diligence, as SCPL did by calling the bank, strengthens a claim of good faith.
• "Value" is broadly defined. A benefit or right received in exchange for an instrument—such as a casino credit—can constitute value under the NIL.
• Internal agreements do not bind third parties. An indemnity agreement between a bank and its client cannot defeat the rights of a holder in due course.
• Foreign corporations may sue on isolated transactions. A foreign entity not doing business in the Philippines can seek relief in Philippine courts for a singular transaction.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.