MBTC v.

PBCOM (2007) FACTS: Pipe Master Corp (Pipe Master) represented by Yu Kio, its president, applied for check discounting with Filipinas Orient Finance Corp (Filipinas Orient). The latter approved and granted the same. BoD of Pipe Master issued a Board Resolution authorizing Yu Kio, in his capacity as president, and/or Tan Juan Lian, in his capacity as vice-president, to execute, indorse, make, sign, deliver or negotiate instruments, documents and such other papers necessary in connection with any transaction coursed through Filipinas Orient for and in behalf of the corporation. Tan Juan Lian then executed in favor of Filipinas Orient a continuing guaranty that he shall pay at maturity any and all promissory notes, drafts, checks, or other instruments or evidence of indebtedness for which Pipe Master may become liable; that the extent of his liability shall not at any one time exceed the sum of P1,000,000.00; and that in the event of default by Pipe Master, Filipinas Orient may proceed directly against him. Under the check discounting agreement between Pipe Master and Filipinas Orient, Yu Kio sold to Filipinas Orient four MBTC checks amounting to P1,000,000.00. In exchange for the four MBTC checks, Filipinas Orient issued to Yu Kio four PBCom crossed checks totaling P964,303.62, payable to Pipe Master with the statement for payees account only. Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in the MBTC, in his personal account, three of the checks valued at P721,596.95. As to the remaining check amounting to P242,706.67, he deposited it in the Solid Bank Corp (Solid Bank), also in his personal account. Eventually, PBCom paid MBTC and Solid Bank the amounts of the checks. In turn, MBTC and Solid Bank credited the value of the checks to the personal accounts of Yu Kio. Subsequently, when Filipinas Orient presented the four MBTC checks equivalent to P1,000,000.00 it received from Yu Kio, they were dishonored by the drawee bank. Pipe Master, the drawer, refused to pay the amounts of the checks, claiming that it never received the proceeds of the PBCom checks as they were delivered and paid to the wrong party, Yu Kio, who was not the named payee. Filipinas Orient then demanded that PBCom restore to its (Orients) account the value of the PBCom checks. In turn, PBCom sought reimbursement from MBTC and Solid Bank, being the collecting banks, but they refused. Thus, Filipinas Orient filed with the RTC, a complaint for a sum of money against Pipe Master, Tan Juan Lian and/or PBCom. RTC rendered a Decision against MBTC and Solid Bank. CA affirmed in toto the Decision of the trial court. Hence, the instant consolidated petitions filed by MBTC and Solid Bank. ISSUE: WON Metro Bank and Solid Bank, petitioners, are liable to respondent Filipinas Orient for accepting the PBCom crossed checks payable to Pipe Master Petitioner banks contend that Pipe Master, Tan Juan Lian and/or PBCom should be made liable to respondent Filipinas Orient for the value of the checks.

Pipe Master and Tan Juan Lian counter that although Yu Kio was expressly authorized to indorse Pipe Masters checks, such authority extended only to acts done in the ordinary course of business, not in his personal capacity. For its part, respondent Filipinas Orient contends that petitioner banks were negligent in allowing Yu Kio to deposit the PBCom checks in his account. Respondent PBCom, as the drawee bank, maintains that it has no liability because in clearing the checks, it relied on the express guarantee made by petitioner banks that the checks were validly indorsed. DECISION: Petitions DENIED. Decision AFFIRMED. HELD: A check is defined by law as a bill of exchange drawn on a bank payable on demand The NIL is silent with respect to crossed checks. Nonetheless, this Court has taken judicial cognizance of the practice that a check with two parallel lines on the upper left hand corner means that it could only be deposited and not converted into cash. The crossing of a check with the phrase Payees Account Only is a warning that the check should be deposited in the account of the payee. It is the collecting bank which is bound to scrutinize the check and to know its depositors before it can make the clearing indorsement, all prior indorsements and/or lack of indorsement guaranteed. Here, petitioner banks have the obligation to ensure that the PBCom checks were deposited in accordance with the instructions stated in the checks. The four PBCom checks in question had been crossed and issued for payees account only. This could only mean that the drawer, Filipinas Orient, intended the same for deposit only by the payee, Pipe Master. The effect of crossing a check means that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein Pipe Master. The banks accommodated Yu Kio, being a valued client and the president of Pipe Master, and accepted the crossed checks. They stamped at the back thereof that all prior indorsements and/or lack of indorsements are guaranteed. In so doing, they became general endorsers. 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 a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting. Clearly, petitioner banks, being endorsers, cannot deny liability. o In Associated Bank v. Court of Appeals, the Court held that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements and is privy to the depositor who negotiated the check. PBCom, as the drawee bank, cannot be held liable since it mainly relied on the express guarantee made by petitioners, the collecting banks, of all prior indorsements. Evidently, petitioner banks disregarded established banking rules and procedures. They were negligent in accepting the checks and allowing the transaction to push through. Therefore, petitioner banks are liable to respondent Filipinas Orient. In fine, it must be emphasized that the law imposes on the collecting bank the duty to diligently scrutinize the checks deposited with it for the purpose of determining

their genuineness and regularity. 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. Since petitioner banks negligence was the direct cause of the misappropriation of the checks, they should bear and answer for respondent Filipinas Orients loss, without prejudice to their filing of an appropriate action against Yu Kio. GO v. Metrobank (2010) FACTS: Petitioner filed two separate cases before the RTCCivil Case No. CEB-9713 was filed by petitioner against Ma. Teresa Chua (Chua) and Glyndah Tabaag (Tabaag) for a sum of money with preliminary attachment. Civil Case No. CEB-9866 was filed by petitioner for a sum of money with damages against Metrobank and Chua. In both cases, petitioner alleged that he was doing business under the name Hope Pharmacy which sells medicine and other pharmaceutical products in the City of Cebu. Petitioner had in his employ Chua as his pharmacist and trustee or caretaker of the business; Tabaag, on the other hand, took care of the receipts and invoices and assisted Chua in making deposits for petitioners accounts in the business operations of Hope Pharmacy. In CEB-9713, petitioner claimed that there were unauthorized deposits and encashments made by Chua and Tabaag. In CEB-9866, petitioner averred that there were 32 checks with Hope Pharmacy as payee, for varying sums, that were not endorsed by him but were deposited under the personal account of Chua with respondent bank. Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and that without the participation and connivance of respondent bank, the checks could not have been accepted for deposit to any other account, except petitioners account. RTC rendered a Decision in favor of Chua and Tabaag but against Metrobank. CA affirmed. ISSUE: WON Metrobank is liable for allowing the deposit of crossed checks which were issued in favor of and payable to petitioner and without being indorsed to the account of Chua DECISION: Decision AFFIRMED. HELD: A check is a bill of exchange drawn on a bank payable on demand. There are different kinds of checks. In this case, crossed checks are the subject of the controversy. A crossed check is one where two parallel lines are drawn across its face or across the corner thereof. It may be crossed generally or specially. o A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines, as in this case. It may be issued so that presentment can be made only by a bank.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check has the following effects: (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; and (c) the act of crossing the check serves as 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, otherwise, he is not a holder in due course. The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash. The effect of crossing a check, thus, relates 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. The crossing of a check is a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited to the payees account only. In the instant case, there is no dispute that the subject 32 checks were crossed checks with petitioner as the named payee. It is the submission of petitioner that respondent bank should be held accountable for the entire amount of the checks because it accepted the checks for deposit under Chuas account despite the fact that the checks were crossed and that the payee named therein was not Chua. o In its defense, respondent bank countered that petitioner is not entitled to reimbursement from either Maria Teresa Chua or bank because petitioner was not damaged thereby. Banks contention is meritorious. Respondent bank should not be held liable for the entire amount of the checks considering that, as found by the RTC and affirmed by the CA, the checks were actually given to Chua as payments by petitioner for loans obtained from the parents of Chua. Furthermore, petitioners non-inclusion of Chua and Tabaag in the petition before this Court is, in effect, an admission by the petitioner that Chua, in representation of her parents, had rightful claim to the proceeds of the checks, as payments by petitioner for money he borrowed from the parents of Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the account of Chua. However, we affirm the finding of the RTC that respondent bank was negligent in permitting the deposit and encashment of the crossed checks without the proper indorsement. An indorsement is necessary for the proper negotiation of checks specially if the payee named therein or holder thereof is not the one depositing or encashing it. Knowing fully well that the subject checks were crossed, that the payee was not the holder and that the checks contained no indorsement, respondent bank should have taken reasonable steps in order to determine the validity of the representations made by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that respondent bank should not have merely relied on the assurances given by Chua. Negligence was committed by bank in accepting for deposit the crossed checks without indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. As a business affected with public interest and because of the nature of its functions, the banks are under obligation to treat the accounts of

its depositors with meticulous care, always having in mind the fiduciary nature of the relationship. o The fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business which is imbued with public interest. DINO v. JUDAL-LOOT FACTS: A syndicate, one of whose members posed as an owner of several parcels of land approached petitioner and induced him to lend the group P3M to be secured by a REM on the properties. A member of the group, particularly a woman pretending to be a certain Vivencia Consing, even offered to execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage contract. Petitioner issued three Metrobank checks totaling P3M, one of which is in the amount of P1M payable to Vivencia Ompok Consing and/or Fe Lobitana. Petitioner discovered that the documents covered rights over government properties. Petitioner advised Metrobank to stop payment of his checks. However, The other two checks were already encashed by the payees. Lobitana negotiated and indorsed the check to respondents in exchange for cash, which respondents borrowed from Metrobank and charged against their credit line. Before respondents accepted the check, they first inquired from the drawee bank, Metrobank, which is also their depositary bank, if the subject check was sufficiently funded, to which Metrobank answered in the positive. However, when respondents deposited the check with Metrobank, the same was dishonored by the drawee bank for reason PAYMENT STOPPED. Respondents filed a collection suit against petitioner and Lobitana before the trial court. The trial court ruled in favor of respondents and declared them due course holders of the subject check, since there was no privity between respondents and defendants. CA affirmed. ISSUE: WON respondents are holders in due course of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect the face value of the check from its drawer or petitioner herein. DECISION: Decision SET ASIDE. HELD: Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank check is a crossed check. It must be stressed, however, that petitioner consistently argues that respondents are not holders in due course of the subject check, which is one of the possible effects of crossing a check. The act of crossing a check serves as a warning to the holder that the check has been issued for a definite

purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. o Contrary to respondents view, petitioner never changed his theory, that respondents are not holders in due course of the subject check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject check was presented and admitted as evidence during the trial and respondents did not and in fact cannot deny that it is a crossed check. o The Court is clothed with ample authority to entertain issues or matters not raised in the lower courts in the interest of substantial justice. In the case of a crossed check, as in this case, the following principles must additionally be considered: A crossed check (a) may not be encashed but only deposited in the bank; (b) may be negotiated only once to one who has an account with a bank; and (c) warns the holder that it has been issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. Respondents had the duty to ascertain the indorsers, in this case Lobitanas, title to the check or the nature of her possession. This respondents failed to do. o Respondents verification from Metrobank on the funding of the check does not amount to determination of Lobitanas title to the check. Failing in this respect, respondents are guilty of gross negligence amounting to legal absence of good faith, contrary to Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check. There is no question that the payees of the check, Lobitana or Consing, were not the ones who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in exchange for P948,000.00. It was respondents who presented the subject check for payment; however, the check was dishonored for reason PAYMENT STOPPED. In other words, it was not the payee who presented the check for payment; and thus, there was no proper presentment. As a result, liability did not attach to the drawer. Accordingly, no right of recourse is available to respondents against the drawer of the check, petitioner herein, since respondents are not the proper party authorized to make presentment of the subject check. However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover on the check. The NIL does not provide that a holder who is not a holder in due course may not in any case recover on the instrument. o The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable. Among such defenses is the absence or failure of consideration, which petitioner sufficiently established in this case. Petitioner issued the subject check supposedly for a loan in favor of Consings group, who turned out to be a syndicate defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of the check. Respondents can collect from the immediate indorser, in this case Lobitana. Significantly, Lobitana did not appeal the trial courts decision, finding her solidarily liable to pay, among others, the face value of the subject check. Therefore, the trial courts judgment has long become final and executory as to Lobitana.