In the realm of negotiable instruments, the Supreme Court addressed the liability of a collecting bank when handling checks payable to multiple parties. The Court held that a collecting bank is liable for the full amount of a check if it allows one payee to deposit and withdraw the proceeds without the endorsement or authority of the other payees. This decision underscores the bank’s duty to ensure all payees properly endorse checks, safeguarding the rights and interests of all parties involved. The ruling serves as a stern reminder of the high standards of diligence expected from banking institutions.

Double Trouble: When a Bank Mishandles a Two-Payee Check

The case of Metropolitan Bank and Trust Company v. BA Finance Corporation and Malayan Insurance Co., Inc. arose from a loan secured by Lamberto Bitanga with BA Finance, with his car as collateral. The loan agreement stipulated that Bitanga would insure the car, with any loss payable to BA Finance. Bitanga obtained an insurance policy from Malayan Insurance, naming BA Finance as the loss payee. When the car was stolen, Malayan Insurance issued a crossed check payable to “B.A. Finance Corporation and Lamberto Bitanga.” Bitanga, without BA Finance’s endorsement or authorization, deposited the check into his account with Asianbank (now Metrobank) and withdrew the funds. BA Finance, upon discovering this, demanded payment from Asianbank, leading to a legal battle that reached the Supreme Court.

The central legal question was whether Asianbank, as the collecting bank, was liable to BA Finance for the entire amount of the check, given that BA Finance had not endorsed the check nor authorized Bitanga to do so on its behalf. This case hinges on Section 41 of the Negotiable Instruments Law, which states that when an instrument is payable to the order of two or more payees who are not partners, all must endorse unless one has the authority to endorse for the others. This principle ensures that all parties with an interest in the instrument must consent to its negotiation and payment.

The Supreme Court affirmed the lower courts’ decisions, holding Metrobank liable for the full value of the check. The Court emphasized that Bitanga’s lone endorsement was insufficient, and Metrobank’s acceptance of the check without BA Finance’s endorsement constituted negligence. The Court underscored that the payment of an instrument over a missing endorsement is equivalent to payment on a forged endorsement. This is based on the principle that a collecting bank, when presenting a check for payment, warrants the genuineness of all prior endorsements. The absence of BA Finance’s endorsement was a clear violation of banking procedure and a breach of the bank’s duty of diligence.

Metrobank argued that since Bitanga was a co-payee, his endorsement was sufficient, and there was no forgery or unauthorized endorsement. The Court rejected this argument, stating that the absence of endorsement from one of the joint payees rendered the payment irregular and akin to a forged endorsement. This highlighted the crucial point that all joint payees must endorse a check unless one is authorized to act on behalf of the others. To further emphasize the bank’s lapse in procedure, the Court presented the testimony of Imelda Cruz, Asianbank’s then accounting head, attesting that accepting joint checks for single account deposit is against the bank’s policy and procedure. This policy underscores the bank’s internal recognition of the need to protect the interests of all payees.

The Court also addressed Metrobank’s liability for the full value of the check, rejecting the argument that BA Finance was only entitled to half of the amount. The Court reasoned that the collecting bank, as the last endorser, bears the loss because it has a duty to ascertain the genuineness of all prior endorsements. One who credits the proceeds of a check to the account of the endorsing payee is liable in conversion to the non-endorsing payee for the entire amount of the check. This is because the collecting bank’s warranty of prior endorsements is essential for the drawee bank (China Bank, in this case) to honor the check.

Moreover, the Court found no reason to disturb the award of exemplary damages against Metrobank. The Court clarified that Metrobank’s liability was based on quasi-delict, not contract or quasi-contract. Article 2231 of the Civil Code allows for exemplary damages in quasi-delict cases if the defendant acted with gross negligence. The Court held that Metrobank’s actions constituted gross negligence, justifying the award of exemplary damages to serve as a warning to the bank and others in the industry to exercise the highest degree of diligence in serving their depositors.

The Supreme Court also affirmed the dismissal of Metrobank’s third-party complaint against Malayan Insurance. Metrobank alleged that Malayan Insurance was negligent in issuing the check payable to both BA Finance and Bitanga. However, Malayan Insurance presented evidence that it was company policy to issue checks in the name of both the insured and the financing company, and that the check was crossed to ensure it was used for a specific purpose. Metrobank failed to dispute these assertions, and the Court found no basis to hold Malayan Insurance liable.

Regarding the legal interest, the Court modified the rate of interest imposed by the appellate court. Since the obligation did not arise from a loan or forbearance of money, goods, or credit, the interest rate was reduced to 6% per annum from the date of extrajudicial demand until the finality of the judgment. After the judgment becomes final and executory, the interest rate would then be 12% per annum until fully satisfied. This adjustment reflects the proper application of legal interest rates as outlined in Eastern Shipping Lines, Inc. v. Court of Appeals.

FAQs

What was the key issue in this case?	The central issue was whether the collecting bank (Metrobank) was liable to BA Finance for allowing a co-payee (Bitanga) to deposit and withdraw the full amount of a check without the other co-payee’s (BA Finance) endorsement or authorization.
What is the significance of Section 41 of the Negotiable Instruments Law in this case?	Section 41 mandates that when an instrument is payable to two or more payees who are not partners, all must endorse unless one has the authority to endorse for the others. This provision was crucial in establishing Metrobank’s liability due to the missing endorsement of BA Finance.
Why was Metrobank held liable for the full amount of the check, and not just half?	As the collecting bank and last endorser, Metrobank had a duty to ascertain the genuineness of all prior endorsements; thus, Metrobank is liable in conversion to the non-endorsing payee for the entire amount of the check.
On what basis was Metrobank found liable for exemplary damages?	Metrobank was found liable for exemplary damages based on quasi-delict due to its gross negligence in allowing the deposit and withdrawal of the check without proper endorsement, justifying exemplary damages under Article 2231 of the Civil Code.
Was Malayan Insurance also found liable in this case?	No, Malayan Insurance was not found liable. The court dismissed Metrobank’s third-party complaint, as Malayan Insurance followed its company policy in issuing the check to both payees, and the check was crossed to ensure proper use.
How did the court modify the interest rate in this case?	The court modified the interest rate to 6% per annum from the date of extrajudicial demand until the finality of the judgment, and 12% per annum thereafter until fully satisfied, in accordance with prevailing jurisprudence for obligations not arising from loans or forbearance of money.
What is a “crossed check,” and what is its purpose?	A crossed check is one with two parallel lines drawn across its face, indicating that it should be deposited only into a bank account and not directly encashed. This serves as a warning that the check was issued for a definite purpose.
What does the phrase “all prior endorsements and/or lack of endorsement guaranteed” mean on a check?	This phrase is a guarantee by the collecting bank that all endorsements on the check are genuine and authorized. It assures the drawee bank that the collecting bank has verified the validity of all endorsements.
Why is the banking business considered to be imbued with public interest?	The banking business is imbued with public interest because banks handle the financial resources of the public, making it essential to maintain trust and confidence in the banking sector through high standards of diligence and integrity.

This case highlights the responsibilities and potential liabilities of collecting banks in handling checks with multiple payees. It reinforces the importance of adhering to the Negotiable Instruments Law and exercising due diligence in verifying endorsements. The decision serves as a reminder to banking institutions to implement strict internal controls and procedures to prevent similar incidents, thereby safeguarding the interests of all parties involved in negotiable instruments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Metropolitan Bank and Trust Company v. BA Finance Corporation and Malayan Insurance Co., Inc., G.R. No. 179952, December 04, 2009