Bank of America, NT and SA vs. Associated Citizens Bank G.R. No.

141001, May 21, 2009

The Bank is under strict liability, based on the contract between the bank and its customer
(drawer), to pay the check only to the payee or the payees order. The drawers instructions are
reflected on the face and by the terms of the check. When the drawee bank pays a person other
than the payee named on the check, it does not comply with the terms of the check and
violates its duty to charge the drawers account only for properly payable items.

Facts: BA-Finance Corporation (BA Finance) and Miller Offset Press, Inc. (Miller) entered into
a credit line facility agreement whereby Miller can discount and assign its trade receivables with
the BA Finance. At the same time, Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng,
acting for Miller, executed a Continuing Suretyship Agreement with BA-Finance. Under the
agreement, they jointly and severally guaranteed the full and prompt payment of any and all
indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of
Assignment in favor of the latter. In consideration thereof, BA-Finance issued four checks
payable to the order of Miller with the notation For Payees Account Only. These checks were
drawn against Bank of America. The four checks were deposited by Ching Uy Seng in
Associated Citizens Bank with his joint account with Uy Chung Seng. Associated Bank stamped
the checks and guaranteed all prior endorsements and/or lack of endorsements and sent them
through clearing. Later, Bank of America as drawee bank honored the checks and paid the
proceeds to Associated Bank as the collecting bank. When Miller failed to deliver to BA-Finance
the proceeds of the assigned trade receivables, BA-Finance filed a collection suit against Miller
and impleaded the three representative of the latter.

Bank of America filed a third party complaint against Associated Bank. In its answer to the third
party complaint, Associated Bank admitted having received the four checks for deposit in the
joint account of Ching Uy Seng and Uy Chung Guan Seng, but alleged that Ching Uy Seng,
being one of the corporate officers of Miller, was duly authorized to act for and on behalf of
Miller.

Issues: Whether or not Bank of America is liable to pay BA-Finance and whether or not
Associated Bank should reimburse Bank of America the amount of the four checks.

Held: The bank on which a check is drawn, known as the drawee bank, is under strict liability,
based on the contract between the bank and its customer (drawer), to pay the check only to the
payee or the payees order. The drawers instructions are reflected on the face and by the terms of
the check. When the drawee bank pays a person other than the payee named on the check, it does
not comply with the terms of the check and violates its duty to charge the drawers account only
for properly payable items. On the part of Associated Bank, the law imposes a duty of diligence
on the collecting bank to scrutinize 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 and the law holds it to a high standard of conduct. In presenting
the checks for clearing and for payment, the defendant [collecting bank] made an express
guarantee on the validity of all prior endorsements. Thus, stamped at the back of the checks are
the defendants clear warranty. As the warranty has proven to be false and inaccurate, Associated
Bank is liable for any damage arising out of the falsity of its representation.

Held: A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. This Court has recognized
the unique public interest possessed by the banking industry and the need for the people to have
full trust and confidence in their banks. For this reason, banks are minded to treat their
customers accounts with utmost care, confidence, and honesty. In a checking transaction, the
drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the
check strictly in accordance with the drawers instructions, i.e., to the named payee in the check.
It should charge to the drawers accounts only the payables authorized by the latter. Otherwise,
the drawee will be violating the instructions of the drawer and it shall be liable for the amount
charged to the drawers account. Rodriguez checks are payable to order since the bank failed to
prove that the named payees therein are fictitious.

Hence, the fictitious-payee rule which will make the instrument payable to bearer does not apply.
PNB accepted the 69 checks for deposit to the PEMSLA account even without any indorsement
from the named payees. It bears stressing that order instruments can only be negotiated with a
valid indorsement.