BDO UNIBANK, INC., Petitioner, v. ENGR.

SELWYN LAO, DOING BUSINESS UNDER THE

NAME AND STYLE "SELWYN F. LAO CONSTRUCTION" AND "WING AN CONSTRUCTION
AND DEVELOPMENT CORPORATION" AND INTERNATIONAL EXCHANGE BANK (NOW
UNION BANK OF THE PHILIPPINES), Respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the October 14, 2015
Decision1 and the September 5, 2016 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV
No. 100351, which affirmed, with modification, the July 9, 2012 Decision3 of the Regional Trial
Court, Branch 55, Manila (RTC) in Civil Case No. 99-93068, a case for collection of sum of
money.

The Antecedents

On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint
for collection of sum of money against Equitable Banking Corporation, now petitioner Banco de
Oro Unibank (BDO), Everlink Pacific Ventures, Inc. (Everlink), and Wu Hsieh a.k.a. George Wu
(Wu).

In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn
Lao Construction"; that he was a majority stockholder of Wing An Construction and
Development Corporation (Wing An); that he entered into a transaction with Everlink, through its
authorized representative Wu, under which, Everlink would supply him with "HCG sanitary
wares"; and that for the down payment, he issued two (2) Equitable crossed checks payable to
Everlink: Check No. 0127-2422494 and Check No. 0127-242250,5 in the amounts of
P273,300.00 and P336,500.00, respectively.

Lao further averred that when the checks were encashed, he contacted Everlink for the
immediate delivery of the sanitary wares, but the latter failed to perform its obligation. Later, Lao
learned that the checks were deposited in two different bank accounts at respondent
International Exchange Bank, now respondent Union Bank of the Philippines (Union Bank). He
was later informed that the two bank accounts belonged to Wu and a company named New
Wave Plastic (New Wave), represented by a certain Willy Antiporda (Antiporda). Consequently,
Lao was prompted to file a complaint against Everlink and Wu for their failure to comply with
their obligation and against BDO for allowing the encashment of the two (2) checks. He later
withdrew his complaint against Everlink as the corporation had ceased existing.

In its answer, BDO asserted that it had no obligation to ascertain the owner of the account!s to
which the checks were deposited because the instruction to deposit the said checks to the
payee's account only was directed to the payee and the collecting bank, which in this case was
Union Bank; that as the drawee bank, its obligations consist in examining the genuineness of
the signatures appearing on the checks, and paying the same if there were sufficient funds in
the account under which the checks were drawn; and that the subject checks were properly
negotiated and paid in accordance with the instruction of Lao in crossing them as they were
deposited to the account of the payee Everlink with Union Bank, which then presented them for
payment with BDO.

On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as
additional defendant for allowing the deposit of the crossed checks in two bank accounts other
than the payee's, in violation of its obligation to deposit the same only to the payee's account.

In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the account of
Everlink; that Check No. 0127-242250 was validly negotiated by Everlink to New Wave; that
Check No. 0127-242250 was presented for payment to BDO, and the proceeds thereof were
credited to New Wave's account; that it was under no obligation to deposit the checks only in
the account of Everlink because there was nothing on the checks which would indicate such
restriction; and that a crossed check continues to be negotiable, the only limitation being that it
should be presented for payment by a bank.

During trial, BDO presented as its witnesses Elizabeth P. Tinimbang (Tinimbang) and Atty.
Carlos Buenaventura (Atty. Buenaventura).

Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by their
client, Wing An; that the checks were deposited with Union Bank, which presented them to BDO
for payment. She further narrated that after the checks were cleared and that the drawer's
signatures on the checks were determined to be genuine, that there was sufficient fund to cover
the amounts of the checks, and that there was no order to stop payment, the checks were paid
by BDO. Tinimbang continued that sometime in July 1998, BDO received a letter from Wing An
stating that the amounts of the checks were not credited to Everlink's account. This prompted
BDO to write a letter to Union Bank demanding the latter to refund the amounts of the checks. In
a letter-reply, Union Bank claimed that the checks were deposited in the account of Everlink.

Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the
checks were indeed credited to the account of Everlink. He stated that BDO's only obligations
under the circumstances were to ascertain the genuineness of the checks, to determine if the
account was sufficiently funded and to credit the proceeds to the collecting bank. On cross-
examination, Atty. Buenaventura clarified that Union Bank endorsed the crossed checks as
could be seen on the dorsal portion of the subject checks. According to him, such endorsement
meant that the lack of prior endorsement was guaranteed by Union Bank.

For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its Branch
Business Manager. Vega testified that the transaction history of Everlink's account with Union
Bank and the notation at the back of the check indicating Everlink's Account No.
(005030000925) revealed that the proceeds of Check No. 0127-242249 were duly credited to
Everlink's account on September 22, 1997. As regards Check No. 0127-242250, Vega clarified
that the proceeds of the same were credited to New Wave's account. She explained that New
Wave was a valued client of Union Bank. As a form of accommodation extended to valued
clients, Union Bank would request the signing of a second endorsement agreement because the
payee was not the same as the account holder. In this case, Antiporda executed a Deed of
Undertaking (Second Endorsed Checks) wherein he assumed the responsibilities for the
correctness, genuineness, and validity of the subject checks.

The RTC Ruling

In its Decision, dated July 9, 2012, the RTC absolved BDO from any liability, but ordered Union
Bank to pay Lao the amount of P336,500.00, representing the value of Check No. 0127-242250;
P50,000.00 as moral damages; P100,000.00 as exemplary damages; and P50,000.00 as
attorney's fees.

The RTC observed that there was nothing irregular with the transaction of Check No. 0127-
242249 because the same was deposited in Everlink's account with Union Bank. It, however,
found that Check No. 0127-242250 was irregularly deposited and encashed because it was not
issued for the account of Everlink, the payee, but for the account of New Wave. The trial court
noted further that Check No. 0127-242250 was not even endorsed by Everlink to New Wave.
Thus, it opined that Union Bank was negligent in allowing the deposit and encashment of the
said check without proper endorsement. The RTC wrote that considering that the subject check
was a crossed check, Union Bank failed to take reasonable steps in order to determine the
validity of the representations made by Antiporda. In the end, it adjudged that BDO could not be
held liable because of Union Bank's warranty when it stamped on the check that "all prior
endorsement and/or lack of endorsement guaranteed." The dispositive portion of the decision
reads:

WHEREFORE, premises considered, judgment is hereby rendered in FAVOR of the plaintiff

Engr. Selwyn F. Lao and AGAINST the defendant International Exchange Bank (now Union
Bank) ordering the latter to pay the former the following:chanRoblesvirtualLawlibrary
The amount of Three Hundred Thirty Six Thousand Five Hundred Pesos (P336,500.00)
representing the Equitable Bank Check No. 0127-242250;

The amount of Fifty Thousand Pesos (P50,000.00) representing moral damages;

The amount of One Hundred Thousand Pesos (P100,000.00) representing exemplary damages;
and,

The amount of Fifty Thousand Pesos (P50,000.00) as attorney's fees.

The Complaints against defendants Equitable Banking Corporation (now Banco de Oro) and Wu
Shu Chien a.k.a. George Wu are hereby ordered DISMISSED.

Costs against the defendant International and Exchange Bank (now Union Bank).
SO ORDERED.6
Aggrieved, Union Bank elevated an appeal to the CA.7

The CA Ruling

In its assailed Decision, dated October 14, 2015, the CA affirmed, with modification, the ruling of
the RTC. It ordered BDO to pay Lao the amount of P336,500.00, with legal interest from the
time of filing of the complaint until its full satisfaction. The appellate court further directed Union
Bank to reimburse BDO the aforementioned amount. It concurred with the RTC that Union Bank
was liable because of its negligence and its guarantee on the validity of all prior endorsements
or lack of it.

With regard to BDO's liability, the CA explained that it violated its duty to charge to the drawer's
account only those authorized by the latter when it paid the value of Check No. 0127-242250.
Thus, it held that BDO was liable for the amount charged to the drawer's account. The fallo
reads:chanRoblesvirtualLawlibrary
FOR THESE REASONS, the appeal is PARTLY GRANTED. The July 9, 2012 Decision of the
Regional Trial Court of Manila, Branch 55 is AFFIRMED with MODIFICATIONS that Equitable
Bank is ordered to pay Selwyn Lao the amount corresponding to Check No. 0127-242250, i.e.,
P336,500.00, with legal interest from the time of filing of the complaint until the amount is fully
paid. International Exchange Bank (now Union Bank of the Philippines) is ordered to reimburse
Equitable Bank the abovementioned amount. The award of damages and attorney's fees is
DELETED. The rest of the Decision stands.

SO ORDERED.8
On November 5, 2012, BDO filed its Motion for Partial Reconsideration. It argued that neither
Lao nor Union Bank appealed the dismissal of the complaint against it, thus, the RTC decision
had already attained finality as far as it was concerned. It also prayed that Lao should be
allowed to recover directly from Union Bank.

In its assailed Resolution, dated September 6, 2016, the CA denied BDO's Motion for Partial
Reconsideration. It ratiocinated that in Bank of America, NT & SA v. Associated Citizens Bank,9
(Bank of America) the drawee bank was adjudged liable for the amount charged to the drawer's
account, while the collecting bank was ordered to reimburse the drawee bank whatever amount
the latter was made to pay.

Hence, this petition anchored on the following:chanRoblesvirtualLawlibrary

GROUNDS

I.

ISSUES NOT RAISED BY THE PARTIES ON APPEAL CANNOT BE REVIEWED NOR RULED
UPON BY THE APPELLATE COURT.
II.

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A

GENERAL ENDORSER IN ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE
INSTRUMENTS LAW.

III.

THE PARTY WHICH DID NOT EXERCISE THE REQUIRED DILIGENCE IS THE CAUSE OF
THE LOSS AND BEARS THE DAMAGES.10
BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already
adjudged with finality that it was not liable. It posited that the appellate court could not resolve
issues not raised on appeal by both parties thereto. BDO pointed out that it was not a party in
the appeal before the CA. It further stressed that neither Lao nor Union Bank assailed the RTC
decision with respect to the dismissal of the complaint against it during the appeal before the
CA, and even on motion for reconsideration before the RTC. Thus, for failure to appeal
therefrom, the RTC decision had already attained finality as to BDO.

BDO further averred that Union Bank, as the collecting bank and last endorser, must suffer the
loss because it had the duty to ascertain the genuineness of all prior endorsement. It asserted
that as the drawee bank, it could not be held liable because it merely relied on Union Bank's
express guarantee. It added that the proximate cause of the loss suffered by Lao was the
negligence of Union Bank when it allowed the deposit of the crossed check intended for Everlink
to New Wave's account.

In his Comment,11 dated January 26, 2017, Lao asserted that the CA did not commit any error
when it resolved the issue on the liability of BDO even if it was not raised on appeal. He was of
the view that the said issue was inextricably intertwined with the principal issue. Lao stated that
the CA correctly adjudged BDO liable, without prejudice to its right to seek reimbursement from
Union Bank, as it was the correct sequence in the enforcement of payment in cases where the
collecting bank allowed a crossed check to be deposited in the account of a person other than
the payee.

Union Bank did not file any comment on BDO's petition.

The Court's Ruling

The petition is meritorious.

Ordinarily, this Court would have concurred with the CA as regards the applicability of Bank of
America. There is, however, a peculiar circumstance which would prevent the application of
Bank of America in the present case.

Sequence of Recovery in cases of unauthorized payment of checks

The Court agrees with the appellate court that in cases of unauthorized payment of checks to a
person other than the payee named therein, the drawee bank may be held liable to the drawer.
The drawee bank, in turn, may seek reimbursement from the collecting bank for the amount of
the check. This rule on the sequence of recovery in case of unauthorized check transactions
had already been deeply embedded injurisprudence.12

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to
the latter's accounts only those payables authorized by him. A drawee bank is under strict
liability to pay the check only to the payee or to the payee's order. When the drawee bank pays
a person other than the payee named in the check, it does not comply with the terms of the
check and violates its duty to charge the drawer's account only for properly payable items.13

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has
good title to it; that all prior parties had capacity to contract; and that the instrument is at the
time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuineness of the endorsements. If
any of the warranties made by the collecting bank turns out to be false, then the drawee bank
may recover from it up to the amount of the check.14

In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank, which, in
turn, credited the amount to New Wave's account. The payment by BDO was in violation of
Lao's instruction because the same was not issued in favor of Everlink, the payee named in the
check. It must be pointed out that the subject check was not even endorsed by Everlink to New
Wave. Clearly, BDO violated its duty to charge to Lao's account only those payables authorized
by him.

Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately
pertained to Union Bank. By stamping at the back of the subject check the phrase "all prior
endorsements and/or lack of it guaranteed," Union Bank had, for all intents and purposes
treated the check as a negotiable instrument and, accordingly, assumed the warranty of an
endorser. Without such warranty, BDO would not have paid the proceeds of the check. Thus,
Union Bank cannot now deny liability after the aforesaid warranty turned out to be false.15

Union Bank was clearly negligent when it allowed the check to be presented by, and deposited
in the account of New Wave, despite knowledge that it was not the payee named therein.
Further, it could not have escaped its attention that the subject checks were crossed checks.
A crossed check is one where two parallel lines are drawn across its face or across the comer
thereof. A check may be crossed generally or specially. A check is crossed especially when the
name of a particular banker or company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written at all between the parallellines.16

Jurisprudence dictates that the effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be negotiated only once - to
one who has an account with a bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose.17 The effects of crossing a check,
thus, relate to the mode of payment, meaning that the drawer had intended the check for
deposit only by the rightful person, i.e., the payee named therein.18

It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written
between the parallel lines appearing on the face of the instrument. This indicated that Lao, the
drawer, had intended the same for deposit only to the account of Everlink, the payee named
therein. Despite this clear intention, however, Union Bank negligently allowed the deposit of the
proceeds of the said check in the account of New Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union
Bank would be ordered to reimburse BDO the amount of the check. The aforesaid sequence of
recovery, however, is not applicable in the present case due to the presence of certain factual
peculiarities.

Simplification of the proceedings for Recovery

Although the rule on the sequence of recovery has been deeply engrained in jurisprudence,
there may be exceptional circumstances which would justify its simplification. Stated differently,
the aggrieved party may be allowed to recover directly from the person which caused the loss
when circumstances warrant. In Associated Bank v. Court of Appeals (Associated Bank),19 the
person who suffered the loss as a result of the unauthorized encashment of crossed checks
was allowed to recover the loss directly from the negligent bank despite the latter's contention of
lack of privity of contract. The Court said:chanRoblesvirtualLawlibrary
There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in turn could
go against their respective drawee banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the
illegally encashed checks should be allowed to recover directly from the bank responsible for
such encashment regardless of whether or not the checks were actually delivered to the payee.
We approve such direct action in the case at bar.20
A peculiar circumstance in Associated Bank is the fact that the drawer companies, which should
have been directly liable to the aggrieved payee, were not impleaded as parties in the suit. In
this regard, it is a fundamental principle in this jurisdiction that a person cannot be prejudiced by
a ruling rendered in an action or proceeding in which he has not been made a party. This
principle conforms to the constitutional guarantee of due process of law.21 To the mind of the
Court, this principle was a foremost underlying consideration for allowing the direct recovery by
the payee from the negligent collecting bank.

Finality of the RTC decision with respect to BDO justifies the simplification of the proceedings
for recovery.

BDO argues that the appellate court erred in ordering it to pay the amount of the subject check
to Lao because it was no longer a party in the case, not being impleaded in the appeal, and that
the issue as regards its liability had already been settled with finality by the RTC.

The Court agrees.

It has been held that it is not the caption of the pleading, but the allegations therein that are
controlling. The non-inclusion of a party in the title of the pleading is not fatal to the case,
provided there is a statement in the body indicating that such non-included person is a party to
the case.22

BDO was not impleaded as a party in Union Bank's appeal before the CA. This is evident from
the title of the case before the CA, and the respective briefs of Union Bank and Lao, which
mentioned only Lao and Union Bank as parties thereto. Moreover, in their respective briefs
before the appellate court, neither Lao23 nor Union Bank24 made any statement or raised any
issue on BDO's liability and its inclusion as a party in the appeal.

Consequently, because of Lao and Union Bank's failure to appeal the July 9, 2012 Decision of
the RTC with respect to BDO's lack of liability, said decision became final as to the latter.

The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any liability,
necessarily means that it could not be prejudiced or adversely affected by the decision rendered
in the appeal. It is elementary in this jurisdiction that a person cannot be bound by a decision
wherein it was not a party.25 A contrary finding would violate BDO's constitutional right to due
process. Needless to state, the appellate court erred in ordering BDO to pay the amount of the
subject check because the latter was not made a party in the appeal, and the issue as to its
liability or lack thereof, was not raised on appeal.

From the foregoing, the Court is of the considered view that the pronouncements made in
Associated Bank as regards the simplification of the recovery proceedings are applicable in the
present case. The factual milieu of this case are substantially similar with that of Associated
Bank, i.e., a crossed check was presented and deposited, without authority, in the account of a
person other than the payee named therein; the collecting bank endorsed the crossed check
and warrant the validity of all prior endorsements and/or lack of it; the warranty turned out to be
false; and, a party to the check transaction, which would otherwise be held liable to the party
aggrieved, was not made a party in the proceedings in court.
To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its
failure to comply with its duty as the drawee bank. BDO, in turn, would have a right of action
against Union Bank because of the falsity of its warranties as the collecting bank. Considering,
however, that BDO was not made a party in the appeal, it could no longer be held liable to Lao.
Thus, following Associated Bank, the proceedings for recovery must be simplified and Lao
should be allowed to recover directly from Union Bank.

WHEREFORE, the petition is GRANTED. The October 14, 2015 Decision and the September 5,
2016 Resolution of the Court of Appeals in CA-G.R. CV No. 100351 are hereby REVERSED
and SET ASIDE insofar as it ordered petitioner BDO Unibank, Inc. to pay Selwyn Lao the
amount of Check No. 0127-242250. The rest of the decision is AFFIRMED.

The amount shall earn interest at the rate of twelve percent (12%) per annum from August
24,2001, the date of judicial demand, to June 30,2013. From July 1, 2013, the rate shall be six
percent (6%) per annum until full satisfaction.

SO ORDERED.

Peralta,**(Acting Chairperson), Leonen, and Martires, JJ., concur.

Carpio, J., on official leave.