Republic Bank vs CA and FNCB

SMC(drawer) > Delgado (Payee and indorser to) > Republic (indorser to) > FNCB (drawee)
v
FNCB (drawee)

San Miguel Corporation (SMC), drew a dividend check for P240 on its account in the
respondent First National City Bank ("FNCB") in favor of Delgado, a stockholder. After
the check had been delivered to Delgado, the amount on its face was fraudulently and
without authority of the drawer, SMC, altered by increasing it from P240 to P9,240. The
check was indorsed and deposited by Delgado in his account with the petitioner
Republic Bank ("Republic").

Republic accepted the check for deposit without ascertaining its genuineness
and regularity. Later, Republic endorsed the check to FNCB and presented it to
FNCB for payment through the Central Bank Clearing House. Believing the check
was genuine, and relying on the guaranty and endorsement of Republic appearing on
the back of the check, FNCB paid P9,240 to Republic through the Central Bank
Clearing House

1 month later, SMC notified FNCB of the material alteration in the amount of the check
in question. FNCB lost no time in recrediting P9,240 to SMC. FNCB informed Republic
in writing of the alteration and the forgery of the endorsement of Delgado. By
then, Delgado had already withdrawn his account from Republic.

FNCB demanded that Republic refund the P9,240 on the basis of the Republic’s
endorsement and guaranty. Republic refused, claiming there was delay in giving
it notice of the alteration; that it was not guilty of negligence; that it was the
drawer’s (SMC’s) fault in drawing the check in such a way as to permit the insertion of
numerals increasing the amount; that FNCB, as drawee, was absolved of any liability to
the drawer (SMC), thus, FNCB had no right of recourse against Republic.

2 years later, the trial court rendered judgment ordering Republic to pay P9,240 to
FNCB.

ISSUE: is whether Republic, as the collecting bank, is protected, by the 24-hour

The petition for review is meritorious and must be granted.

RULING: The 24-hour clearing house rule is a valid rule applicable to commercial banks 
As a general rule when an endorsement is forged, the collecting bank or last endorser,
bears the loss. But the unqualified endorsement of the collecting bank on the
check should be read together with the 24-hour regulation on clearing house
operation. Thus, when the drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is absolved from
liability
The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee
bank, the burden of loss for the payment of the altered SMC check, the fraudulent
character of which FNCB failed to detect and warn Republic about, within the 24-hour
clearing house rule.

AREZA vs Express Savings Bank and Potenciano

Petitioners Cesar Areza and Lolita Areza maintained two bank deposits with respondent Express
Savings Bank’s (The Bank)

The Arezas received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a
second-hand Pajero and a brand-new Honda.

The buyer, Mambuay, paid petitioners with nine PVAO CHECKS (9) Philippine Veterans Affairs Office (PVAO)
checks payable to different payees and drawn against the Philippine Veterans Bank (drawee), a total
value of One Million Eight Hundred Thousand Pesos (₱1,800,000.00).

PVB(Drawee) < Mambuay (drawer) > Areza (payee and indorsed to) > Express Savings Bank
(indorsed to Equitable-PCI Bank) > Philippine Veterans Bank (drawee)

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch
manager of (the Bank) was present during the transaction and immediately offered the services of
the Bank. On the other hand, Potenciano countered that he was prevailed upon to accept the
checks by way of accommodation of petitioners who were valued clients of the Bank. 5

Areza then deposited the said checks in their savings account with the Bank. The Bank,
inturn, deposited the checks with its depositary bank, Equitable-PCI Bank. Equitable-PCI
Bank presented the checks to the drawee, the Philippine Veterans Bank, which honored the
checks.

Potenciano informed petitioners that the checks they deposited with the Bank were honored. He
allegedly warned petitioners that the clearing of the checks pertained only to the availability of funds
and did not mean that the checks were not infirmed.  Thus, the entire amount of ₱1,800,000.00
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was credited to petitioners’ savings account. Based on this information, petitioners released
the two cars to the buyer.

PROBLEM: The subject checks were returned by PVAO to the drawee on the ground that the
amount on the face of the checks was altered from the original amount of ₱4,000.00 to
₱200,000.00. The drawee(PV BANK) returned the checks to Equitable-PCI Bank by way of
Special Clearing Receipts. In August 2000, the Bank(EXPRESS) was informed by Equitable-PCI
Bank that the drawee dishonored the checks onthe ground of material alterations. Equitable-
PCI Bank initially filed a protest with the Philippine Clearing House. PCH ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank
in the amount of ₱1,800,000.00.
The Bank(express) insisted that they informed petitioners of said development in August 2000 by
furnishing them copies of the documents given by its depositary bank.  On the other hand,
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petitioners maintained that the Bank never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was
dishonored by the Bank for the reason "Deposit Under Hold." According to petitioners, the Bank
unilaterally and unlawfully put their account with the Bank on hold. On 22 March 2001,
petitioners’ counsel sent a demand letter asking the Bank to honor their check. The Bank
refused to heed their request and instead, closed the Special Savings Account of the
petitioners with a balance of ₱1,179,659.69 and transferred said amount to their savings account.
The Bank then withdrew the amount of ₱1,800,000.00representing the returned checks from
petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account, petitioners filed a Complaint for Sum of Money
with Damages against the Bank and Potenciano with the RTC of Calamba.

Issue: Whether or not Express Savings Bank had the right to debit ₱1,800,000.00 from
petitioners’ accounts.

Held: No, Express Savings Bank cannot debit the savings account of petitioners.
A depositary/collecting bank where a check is deposited, and which endorses the check
upon presentment with the drawee bank, is an endorser. 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.” As collecting bank, Express Savings Bank is liable for the amount of
the materially altered checks. It cannot further pass the liability back to the petitioners
absent any showing in the negligence on the part of the petitioners which substantially
contributed to the loss from alteration.

MAIN ISSUE: W/N The Drawee Bank (Philippine Veterans Bank) can be faulted for not
following the 24-hour clearing period.

AND RULING: NO. 24-HOUR CLEARING RULE does not apply to altered checks.

Petitioners faulted the drawee bank for not following the 24-hour clearing period because it was only
in August 2000 that the drawee bank notified Equitable-PCI that there were material alterations in
the checks.

Items which have been the subject of material alteration or items bearing forged endorsement when
such endorsement is necessary for negotiation shall be returned by direct presentation or demand to
the Presenting Bank and not through the regular clearing house facilities within the period prescribed
by law for the filing of a legal action by the returning bank/branch, institution or entity sending the
same

As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused
by the drawee bank in accordance with long standing and accepted banking practices shall be
returned through the PCHC/local clearing office, as the case may be, not later than the next regular
clearing (24-hour). The modification, however, is that items which have been the subject of material
alteration or bearing forged endorsement may be returned even beyond 24 hours so long that the
same is returned within the prescriptive period fixed by law. The consensus among lawyers is that
the prescriptive period is ten (10)years because a check or the endorsement thereon is a written
contract. Moreover, the item need not be returned through the clearing house but by direct
presentation to the presenting bank.29

In short, the 24-hour clearing rule does not apply to altered checks.

ASSOCIATED BANK and Cruz vs CA, Reyes(Melissa’s RTW)

Reyes is engaged in the business of ready-to-wear garments under the firm name "Melissa's
RTW." She deals with, among other customers, Robinson's Department Store, Payless
Department Store, Rempson Department Store, and the Corona Bazaar.

These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW in the amounts and on the dates indicated below:

PAYOR BANK AMOUNT DATE

Payless Solid Bank P3,960.00 January 19, 1982

(6 crossed checks with different amounts and dates from said companies)

When she went to these companies to collect on what she thought were still unpaid
accounts, she was informed of the issuance of the above-listed crossed checks. Further
inquiry revealed that the said checks had been deposited with the Associated Bank
(hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its
"trusted depositors," in the words of its branch manager and co-petitioner, Conrado Cruz,
Sayson had not been authorized by the private respondent to deposit and encash the
said checks.

The private respondent sued the petitioners in the RTC and the latter’s, judgment was
rendered requiring them to pay the Reyes the total value of the subject checks in the
amount of P15,805.00 plus 12% interest,

petitioners insist that the private respondent has no cause of action against them because they have
no privity of contract with her. They also argue that it was Eddie Reyes, the private respondent's own
husband, who endorsed the checks.

Issue: W/N the Bank is liable to Reyes as the former was not authorized to make the
endorsements to Sayson

The Bank does not deny collecting the money on the endorsement. It was its responsibility to
inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's
RTW upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry
was a breach of duty that made it liable to the private respondent for the amount of the
checks.

before presenting the checks for clearing and for payment, the Bank had stamped on the back
thereof the words: "All prior endorsements and/or lack of endorsements guaranteed," and thus
made the assurance that it had ascertained the genuineness of all prior endorsements.

petition is DENIED
Doctrine: The collecting bank, being primarily engaged in banking, holds itself out to the public as
the expert on this field, and the law thus holds it to a high standard of conduct.

Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be
liable to the private respondent because he was not authorized to make the endorsements.
And even if the endorsements were forged, as alleged, the Bank would still be liable to the
private respondent for not verifying the endorser's authority. (There is no substantial difference
between an actual forging of a name to a check as an endorsement by a person not authorized to
make the signature and the affixing of a name to a check as an endorsement by a person not
authorized to endorse it.) 
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BDO UNIBANK VS Engr. Lao

(lao issued two (2) Equitable crossed checks payable to Everlink)

When the checks were encashed, he contacted Everlink for the immediate delivery of the
sanitary wares, but the latter failed to perform its obligation. Apparently, checks were dthe
deposited in two different bank accounts Wu and NEW WAVE, represented by Antipordaat
the now (UnionBank).

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, UnionBank’s 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 Ever link 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.

ISSUE: Whether or not a collecting bank assumes responsibility for a crossed check as a general
endorser in accordance with section 66 of the negotiable instruments law? (YES)

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. 
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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 parallel lines. 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.   The effects of crossing a check, thus, relate to the
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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.