In Far East Bank & Trust Company v. Gold Palace Jewellery Co., the Supreme Court held that a drawee bank (Land Bank of the Philippines) that clears and pays a materially altered check is liable for the raised amount, especially to a holder in due course (Gold Palace Jewellery Co.) who was not involved in the alteration. The Court emphasized that the drawee bank’s payment implies its compliance with the obligation to pay according to the tenor of its acceptance. This ruling protects innocent parties who rely on a bank’s clearance and payment of negotiable instruments.

Who Pays When a Draft is Tampered? Examining Liability for Altered Checks

The heart of this case lies in a transaction that went awry when Samuel Tagoe, a foreigner, purchased jewelry worth P258,000.00 from Gold Palace, paying with a foreign draft for P380,000.00. Far East Bank & Trust Company, acting as the collecting bank, initially advised Gold Palace to wait for the draft to clear. Once Land Bank of the Philippines (LBP), the drawee bank, cleared the draft, Gold Palace released the jewelry and issued a change of P122,000.00. However, LBP later discovered that the draft had been materially altered from P300.00 to P380,000.00, leading Far East to debit P168,053.36 from Gold Palace’s account. This move prompted a legal battle over who should bear the loss from the fraudulent alteration.

The pivotal legal principle at play is Section 62 of the Negotiable Instruments Law (NIL), which stipulates the liability of an acceptor. Building on this principle, the Supreme Court underscored that the acceptor (drawee bank), by accepting an instrument, commits to paying it according to the tenor of his acceptance. This provision directly applies even when the drawee pays a bill without formal acceptance, as payment implies both acknowledgment and compliance with the obligation. Essentially, LBP’s act of clearing and paying the altered draft legally bound it to the raised amount, preventing subsequent repudiation of the payment to a holder in due course.

The Court firmly established Gold Palace’s status as a holder in due course, emphasizing its lack of involvement in the alteration, absence of negligence, and good-faith reliance on the drawee bank’s clearance and payment. Specifically, the NIL defines a holder in due course as someone who takes an instrument complete and regular on its face, before it is overdue, in good faith and for value, and without notice of any defect. Commercial policy strongly favors protecting those who change their position based on a bank’s payment. This stance aims to bolster the reliability and circulation of negotiable instruments, ensuring that businesses can confidently engage in transactions without fearing unforeseen reversals.

Furthermore, the Court dismissed Far East Bank’s attempt to invoke the warranties of a general indorser against Gold Palace. As clarified by the Court, Gold Palace’s endorsement was restrictive and solely for collection purposes. The NIL provides protection through the collecting bank’s payment, “closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the amount paid.” Since the Collecting Bank had presented this, and not owned it, it had no legal rights to debit the payee’s account and recover the amount.

Here is the exact language of the court decision.

As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank when it debited respondent’s account, because, as already explained, the drawee bank had no right to recover what it paid.

Ultimately, the Supreme Court stressed that Far East’s recourse should be against either the drawee bank or the party responsible for the alteration. The decision is consistent with existing statutory laws.

FAQs

What was the key issue in this case?	The central issue was determining who bears the loss when a materially altered check is cleared and paid by the drawee bank to a holder in due course.
Who is a holder in due course?	A holder in due course is someone who receives a negotiable instrument in good faith, for value, without notice of any defects, and before it becomes overdue. They are afforded special protections under the Negotiable Instruments Law.
What is the liability of the acceptor/drawee bank?	The acceptor (drawee bank), by accepting (or paying) an instrument, is obligated to pay it according to the tenor of their acceptance, meaning the amount as it appears at the time of acceptance or payment.
What happens if a bank pays an altered check?	If a bank pays an altered check, it is generally liable for the amount it paid, especially to a holder in due course who had no knowledge of or involvement in the alteration.
Can the collecting bank debit the payee’s account after the drawee bank pays an altered check?	The Supreme Court in this case held that no, the collecting bank cannot debit the payee’s account since their action of collection is a separate function with a specific set of legal rules.
Does this ruling affect everyday transactions?	Yes, it reinforces confidence in using negotiable instruments by ensuring that those who rely on bank clearances are protected, provided they acted in good faith and without negligence.
Does this ruling offer any solution to banks in order to be protected?	Yes, the Court states that it could qualify their acceptance or certification or purchase forgery insurance to protect themselves from liability of such incidents.
To whom does the collecting bank seek recompense if they cannot debit the money from payee?	Under this decision, Far East Bank’s recourse should be against either the drawee bank (LBP) or the party responsible for the alteration, in this case the foreign customer.

In conclusion, the Far East Bank v. Gold Palace case clarifies critical aspects of liability in negotiable instrument transactions, reinforcing the importance of due diligence by banks and the protection afforded to holders in due course under Philippine law. This ruling serves as a reminder of the risks associated with altered checks and the allocation of responsibility for such losses within the banking system.

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: Far East Bank & Trust Company v. Gold Palace Jewellery Co., G.R. No. 168274, August 20, 2008