Understanding Dishonored Checks and Debt Payment in the Philippines

A check, while a common payment method, is not legal tender in the Philippines. This means that simply issuing a check, even if it’s accepted by the creditor, doesn’t automatically discharge a debt if the check is later dishonored. The debt remains until the check is actually cashed or the creditor’s negligence impairs it. This principle is crucial for businesses and individuals to understand to avoid legal and financial pitfalls.

G.R. No. 123031, October 12, 1999

INTRODUCTION

Imagine you’ve just made a significant investment, expecting a timely return. Instead of cash, you receive a check which later bounces, leaving you in financial limbo. This scenario isn’t just a hypothetical; it’s the reality faced by Vicente Alegre in this Supreme Court case against Cebu International Finance Corporation (CIFC). Alegre invested in CIFC’s money market operations and received a check for his matured investment. However, the check was dishonored due to an investigation into counterfeit checks. The central legal question: Did CIFC’s issuance of a dishonored check constitute valid payment of its debt to Alegre?

LEGAL CONTEXT: ARTICLE 1249 OF THE CIVIL CODE AND NEGOTIABLE INSTRUMENTS LAW

Philippine law distinguishes between payment in legal tender and payment via negotiable instruments like checks. Article 1249 of the Civil Code is pivotal here, stating:

“The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.”

This provision clearly establishes that checks are not considered legal tender. Legal tender refers to the currency officially designated for use in a country for settling debts, which in the Philippines is the Philippine Peso. The Negotiable Instruments Law (NIL) governs checks, defining them as bills of exchange drawn on a bank and payable on demand. While checks are widely used, their acceptance as payment is conditional. They serve as a substitute for money, but the obligation is only extinguished upon actual encashment, not mere delivery. Therefore, a dishonored check generally does not fulfill the payment obligation unless the creditor’s fault caused the impairment of the check.

CASE BREAKDOWN: CIFC VS. ALEGRE – THE DISHONORED CHECK DEBACLE

Vicente Alegre invested P500,000 with CIFC, a quasi-banking institution, for a short-term money market placement. Upon maturity, CIFC issued a check for P514,390.94, representing Alegre’s principal plus interest. Alegre’s wife deposited the check, but it was dishonored by the Bank of the Philippine Islands (BPI), CIFC’s bank, with the annotation “Check (is) Subject of an Investigation.” BPI was investigating counterfeit checks drawn against CIFC’s account and held the check as evidence.

Despite Alegre’s demands for cash payment, CIFC insisted he wait for their bank reconciliation with BPI. CIFC even promised to replace the check but demanded the original dishonored check’s surrender – an impossible condition since BPI held it. Alegre then sued CIFC to recover his investment. Adding another layer of complexity, CIFC had separately sued BPI to recover funds lost due to counterfeit checks, including the amount of Alegre’s check.

CIFC attempted to bring BPI into Alegre’s case as a third-party defendant, arguing BPI should be liable. However, this third-party complaint was dismissed due to lis pendens (another pending case involving the same issue – CIFC’s case against BPI). Crucially, CIFC and BPI entered into a compromise agreement in their separate case. BPI credited CIFC’s account for the counterfeit checks, and then debited it for Alegre’s check amount. CIFC argued this debiting constituted payment to Alegre, even though Alegre never received the funds.

The Regional Trial Court ruled in favor of Alegre, ordering CIFC to pay. The Court of Appeals affirmed this decision. The Supreme Court then reviewed the case, focusing on whether the dishonored check and the subsequent debiting of CIFC’s account by BPI constituted valid payment to Alegre. The Supreme Court sided with Alegre, emphasizing:

“A check is not a legal tender, and therefore cannot constitute valid tender of payment… Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3.)”

The Court highlighted that while BPI debited CIFC’s account, the funds were not actually delivered to Alegre. The compromise agreement between CIFC and BPI, which stipulated the debiting, was not binding on Alegre as he was not a party to it. The Court also pointed out that BPI’s action effectively amounted to a garnishment of Alegre’s funds without proper legal procedure.

“The compromise agreement could not bind a party who did not sign the compromise agreement nor avail of its benefits. Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an agreement between CIFC and BPI.”

Ultimately, the Supreme Court upheld the lower courts’ decisions, affirming that CIFC remained liable to Alegre because the dishonored check did not constitute valid payment, and Alegre was not bound by the CIFC-BPI compromise agreement.

PRACTICAL IMPLICATIONS: CHECKS ARE CONDITIONAL PAYMENT

This case serves as a critical reminder that in the Philippines, payment by check is conditional, not absolute. For businesses and individuals, this has significant practical implications:

• For Creditors: Do not assume a debt is paid simply because you’ve received a check. Wait for the check to clear and the funds to be credited to your account before considering the debt settled. You have the right to demand payment in cash, which is legal tender.
• For Debtors: Issuing a check does not automatically discharge your obligation. If the check is dishonored, you remain liable for the debt, potentially incurring additional interest and penalties. Ensure sufficient funds are in your account to cover the check.
• Compromise Agreements: Be aware that compromise agreements are only binding on the parties involved. They cannot unilaterally affect the rights of third parties like Alegre in this case.
• Due Diligence with Checks: While manager’s checks are generally considered safer, they are still not legal tender and can be subject to dishonor, although less frequently.

Key Lessons from CIFC vs. Alegre

• Checks are not legal tender: Payment by check is not equivalent to payment in cash under Philippine law.
• Dishonor revives obligation: A dishonored check does not extinguish the debt; the obligation to pay remains.
• Creditor’s rights: Creditors are not obligated to accept checks and can demand payment in legal tender.
• Third-party rights: Compromise agreements do not bind individuals who are not parties to the agreement.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q: Is a check considered legal tender in the Philippines?

A: No, a check is not legal tender in the Philippines. Legal tender is Philippine currency (coins and banknotes).

Q: What happens if I pay a debt with a check, and it bounces?

A: If the check bounces (is dishonored), the debt is not considered paid. You are still legally obligated to pay the debt, and you may also face penalties for issuing a bad check.

Q: Can a creditor refuse to accept a check as payment?

A: Yes, a creditor has the right to refuse payment by check and demand payment in legal tender (cash).

Q: Is a manager’s check considered legal tender?

A: No, even a manager’s check is not legal tender. While it is generally considered more secure than a personal check, it is still a check and not cash.

Q: What should I do if I receive a check as payment?

A: Deposit the check promptly and wait for it to clear before considering the payment final. If it’s a significant amount, you may want to verify with the issuing bank that the check is valid.

Q: What are my legal options if I receive a dishonored check?

A: You can demand cash payment from the issuer. If they refuse, you can file a legal action to recover the amount of the check, plus potentially damages and legal costs.

Q: If a bank debits the drawer’s account for a check, is the debt automatically paid, even if the payee doesn’t receive the funds?

A: No, as illustrated in the CIFC vs. Alegre case, merely debiting the drawer’s account, especially as part of a compromise agreement not involving the payee, does not constitute payment to the payee if the funds are not actually received by them.

ASG Law specializes in Debt Recovery and Commercial Litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.