ASG Law

Tag: Drawee Bank Liability

  • Liability for Unauthorized Check Payments: Drawee vs. Collecting Bank

    In cases involving the unauthorized payment of checks, the Supreme Court clarifies the liabilities between a drawee bank (the bank on which the check is drawn) and a collecting bank (the bank that initially accepts the check for deposit). The Court emphasizes that while the drawee bank is primarily liable to the drawer (the check issuer) for unauthorized payments, it can, in turn, seek reimbursement from the collecting bank. This decision reinforces the importance of due diligence by banks in ensuring that funds are paid to the correct parties, protecting both businesses and individuals from financial loss due to fraudulent activities.

    Whose Negligence Pays? Unraveling Bank Liabilities in Check Fraud

    This case revolves around a financial anomaly discovered by Junnel’s Marketing Corporation (JMC), a company engaged in selling wines and liquors. JMC found discrepancies involving eleven checks issued to suppliers, Jardine Wines and Spirits and Premiere Wines. These checks had been charged against JMC’s account but were not covered by official receipts from the suppliers. Examination of the checks revealed they were deposited with Bank of Commerce (Bankcom) under an account not belonging to either supplier. JMC filed a complaint against Bankcom, Metropolitan Bank and Trust Company (Metrobank, the drawee bank), and a former accountant suspected of involvement in the fraudulent scheme. The central legal question is determining which bank bears the responsibility for the unauthorized encashment of these checks.

    The Regional Trial Court (RTC) initially ruled that both Bankcom and Metrobank were liable to JMC, assigning a 2/3 to 1/3 ratio of responsibility, respectively, while absolving the former accountant, Delizo. The RTC’s decision was based on the finding of negligence on the part of both banks, stating Bankcom failed to verify the legitimacy of the account where the checks were deposited, and Metrobank failed to scrutinize the checks properly before honoring them. The Court of Appeals (CA) affirmed this decision, but modified the interest rates and deleted the award of attorney’s fees. Dissatisfied, both Metrobank and Bankcom appealed, each seeking absolution from liability, leading to the Supreme Court’s review.

    The Supreme Court (SC) ultimately denied the appeals of both Metrobank and Bankcom, but modified the manner in which they were held liable. Citing the landmark case of Bank of America v. Associated Citizens Bank, the Court emphasized the principle of sequential liability in cases of unauthorized payment of checks. This principle dictates that the drawee bank (Metrobank) is primarily liable to the drawer (JMC) for the amount of the checks, but the drawee bank, in turn, can seek reimbursement from the collecting bank (Bankcom).

    The rationale behind this rule lies in the distinct duties of each bank. The drawee bank has a contractual obligation to its customer, the drawer, to ensure that payments are made only to the designated payee or their order. As the Supreme Court explained in BDO Unibank v. Lao:

    The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter’s accounts only those payables authorized by him. A drawee bank is under strict liability to pay the check only to the payee or to the payee’s order. When the drawee bank pays a person other than the payee named in the check, it does not comply with the terms of the check and violates its duty to charge the drawer’s account only for properly payable items.

    Metrobank breached its obligation to JMC by paying the value of the checks to Bankcom for the benefit of an account that did not belong to the designated payees. Therefore, Metrobank is liable to return the amount of the checks to JMC.

    However, Metrobank is not without recourse. The collecting bank, Bankcom, assumes certain warranties when presenting a check for payment, as highlighted in the Supreme Court’s decision. The Court stated:

    On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of the check. 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 good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting.”

    By presenting the checks to Metrobank, Bankcom guaranteed that the checks had been deposited with it to an account with good title. This guarantee was false because the checks were deposited into an account not belonging to the payees. Therefore, Bankcom is liable to reimburse Metrobank for the value of the checks.

    The significance of the collecting bank’s role in verifying endorsements and account legitimacy cannot be overstated. It serves as the first line of defense against fraudulent schemes involving checks. The banking industry relies on the warranties provided by collecting banks to ensure the integrity of financial transactions.

    The Court clarified that the doctrine of comparative negligence, which apportions liability based on the degree of negligence of each party, does not apply in this case. The factual circumstances differ significantly from cases like Bank of the Philippine Islands v. Court of Appeals and Allied Banking Corporation v. Lio Sim Wan, where the drawee bank was also negligent in issuing the checks. In this case, Metrobank’s liability stemmed solely from its unauthorized payment, not from any negligence in the check’s issuance. The Court therefore applied the rule on sequential recovery, placing the initial burden on Metrobank, which then has recourse against Bankcom.

    Regarding interests, the Supreme Court imposed a legal interest of 6% per annum on Metrobank’s principal liability to JMC from January 28, 2002 (the date JMC filed its complaint with the RTC) until full satisfaction. Similarly, Bankcom’s principal liability to Metrobank is subject to a legal interest of 6% per annum from March 5, 2003 (the date Metrobank filed its answer with a cross-claim against Bankcom) until full satisfaction. These interest rates reflect the legal framework for monetary obligations and compensation for damages.

    FAQs

    What was the key issue in this case? The key issue was determining which bank, the drawee (Metrobank) or the collecting bank (Bankcom), should bear the loss from unauthorized payments of checks deposited into an incorrect account. The court resolved this by applying the principle of sequential liability.
    What is a drawee bank? A drawee bank is the bank on which a check is drawn, meaning it’s the bank that holds the funds and is instructed to make payment to the payee. In this case, Metrobank was the drawee bank.
    What is a collecting bank? A collecting bank is the bank that initially accepts a check for deposit from a customer. It then presents the check to the drawee bank for payment. Bankcom acted as the collecting bank.
    What is the principle of sequential liability? Sequential liability dictates that the drawee bank is primarily liable to the drawer for unauthorized check payments, but can seek reimbursement from the collecting bank. This is based on the drawee’s duty to only pay checks as authorized and the collecting bank’s guarantee of valid endorsements.
    Why was Metrobank initially liable to JMC? Metrobank was liable because it breached its contractual duty to JMC by paying the check proceeds to an account not belonging to the intended payees (Jardine and Premiere). This constitutes an unauthorized payment.
    Why was Bankcom ultimately liable to Metrobank? Bankcom was liable because it presented the checks to Metrobank, guaranteeing that they were deposited into an account with good title. Since the account was not that of the payees, Bankcom breached this warranty.
    Does the doctrine of comparative negligence apply in this case? No, the doctrine of comparative negligence was deemed inapplicable. The court found that Metrobank’s liability stemmed solely from the unauthorized payment, not from any contributory negligence in issuing the checks.
    What is the significance of a collecting bank’s endorsement? A collecting bank’s endorsement acts as a guarantee to the drawee bank that all prior endorsements are genuine and valid. This allows the drawee bank to rely on the collecting bank’s verification processes.
    What interest rates apply in this case? The Supreme Court imposed a legal interest of 6% per annum on Metrobank’s liability to JMC from January 28, 2002, and on Bankcom’s liability to Metrobank from March 5, 2003, until full satisfaction of the respective obligations.

    In conclusion, this case underscores the importance of due diligence and adherence to established banking practices in handling check payments. The Supreme Court’s decision clarifies the responsibilities of drawee and collecting banks, providing a framework for resolving disputes arising from unauthorized check encashments. This ruling protects the interests of both drawers and payees by ensuring that banks are held accountable for their respective roles in facilitating secure and legitimate financial transactions.

    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 vs. Junnel’s Marketing Corporation, G.R. No. 235565, June 20, 2018

  • Liability for Check Fraud: When Can a Drawee Bank Recover from a Collecting Bank?

    In the case of BDO Unibank, Inc. v. Engr. Selwyn Lao, the Supreme Court addressed the liability of banks in instances of unauthorized check payments. The Court held that while a drawee bank (like BDO) generally bears the initial responsibility for paying a check to the wrong party, it can recover from the collecting bank (like Union Bank) if the latter’s actions, such as guaranteeing prior endorsements, contributed to the loss. However, if the aggrieved party fails to properly implead a party in the appeal process, that party may be absolved of liability, simplifying the proceedings to allow direct recovery from the negligent bank. This decision underscores the importance of due diligence by banks in handling checks and the necessity of correctly identifying and including all relevant parties in legal actions to ensure a fair and efficient resolution.

    The Case of the Misrouted Check: Who Pays When Funds Go Astray?

    Engineer Selwyn Lao filed a complaint against Equitable Banking Corporation (now BDO), Everlink Pacific Ventures, Inc., and Wu Hsieh, alleging that he issued two Equitable crossed checks payable to Everlink as a down payment for sanitary wares. However, Everlink failed to deliver, and Lao discovered that the checks were deposited into different bank accounts at International Exchange Bank (now Union Bank) belonging to Wu and New Wave Plastic. Lao then amended his complaint, including Union Bank for allowing the deposit of crossed checks into unauthorized accounts. This case hinges on determining which bank bears the responsibility when a crossed check, intended for a specific payee, is deposited into a different account, leading to financial loss for the drawer.

    BDO contended that its responsibility as the drawee bank was limited to verifying the genuineness of signatures and ensuring sufficient funds, while Union Bank argued that crossed checks remain negotiable and that it had no obligation to deposit the checks only into the payee’s account. During trial, it was revealed that one check was indeed deposited into Everlink’s account, but the other was credited to New Wave’s account, facilitated by a Deed of Undertaking signed by Willy Antiporda of New Wave. The RTC absolved BDO but held Union Bank liable, a decision which the CA affirmed with modifications, ordering BDO to pay Lao and Union Bank to reimburse BDO. BDO then appealed, arguing that the CA erred in holding it liable since the RTC’s decision regarding its non-liability had become final.

    The Supreme Court, in its analysis, reiterated the established sequence of recovery in cases of unauthorized payment of checks. The Court noted that in such cases, the drawee bank (BDO) may be held liable to the drawer (Lao) for violating its duty to charge the drawer’s account only for authorized payables. In turn, the drawee bank can seek reimbursement from the collecting bank (Union Bank), whose liability stems from its guarantees as the last endorser of the check under Section 66 of the Negotiable Instruments Law. According to Section 66, an endorser warrants the genuineness of the instrument, good title, capacity of prior parties, and the instrument’s validity.

    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 good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting.”

    Building on this principle, the Court highlighted that the collecting bank bears the responsibility of verifying all prior endorsements, and the act of presenting the check for payment implies that the collecting bank has fulfilled this duty. The Court further emphasized that in cases where the collecting bank’s warranties are false, the drawee bank can recover from the collecting bank up to the amount of the check. In this instance, BDO paid Union Bank, which then credited the amount to New Wave’s account, violating Lao’s instructions, as the check was not issued in favor of New Wave and was not even endorsed by Everlink to New Wave.

    The Supreme Court acknowledged that Union Bank’s warranty turned out to be false because Union Bank permitted the check to be presented by and deposited in the account of New Wave, despite knowing that it was not the named payee. Moreover, the Court noted the importance of the fact that the subject check was a crossed check. Jurisprudence indicates that crossing a check has several effects, including that the check may only be deposited in a bank, it may only be negotiated once to someone with a bank account, and it serves as a warning that the check was issued for a specific purpose, requiring inquiry if the holder received it pursuant to that purpose. The effects of crossing a check relate to the mode of payment, demonstrating the drawer’s intent for the check to be deposited only by the rightful payee.

    The Court, however, recognized that the standard sequence of recovery might be simplified in exceptional circumstances, allowing the aggrieved party to recover directly from the party that caused the loss. Citing Associated Bank v. Court of Appeals, the Court acknowledged that to simplify proceedings, the payee of illegally encashed checks could recover directly from the responsible bank, regardless of whether the checks were actually delivered to the payee. In this case, a critical factor was the finality of the RTC decision regarding BDO’s lack of liability, as neither Lao nor Union Bank appealed this aspect of the RTC’s ruling.

    The Supreme Court pointed out that BDO was not made a party in Union Bank’s appeal before the CA. Neither Lao nor Union Bank raised any issue regarding BDO’s liability in their briefs before the appellate court. Consequently, the RTC’s decision became final as to BDO, and it could not be prejudiced by the decision rendered in the appeal. To do so would violate BDO’s constitutional right to due process. In this situation, it was deemed appropriate to allow Lao to recover directly from Union Bank, following the principle established in Associated Bank.

    FAQs

    What was the key issue in this case? The key issue was determining which bank, the drawee bank (BDO) or the collecting bank (Union Bank), should bear the loss resulting from the unauthorized deposit of a crossed check into an account other than the payee’s. The case also considered the impact of a prior court decision absolving one of the parties.
    What is a crossed check? A crossed check has two parallel lines drawn across its face, indicating that it can only be deposited into a bank account and not directly encashed. This serves as a warning that the check is meant for deposit only by the rightful payee.
    What is the liability of a drawee bank? A drawee bank is responsible for ensuring that the checks it pays are authorized by the drawer and payable to the correct payee. If the drawee bank pays a check to the wrong party, it may be held liable to the drawer for the unauthorized payment.
    What is the liability of a collecting bank? A collecting bank, as the last endorser of a check, guarantees the genuineness of all prior endorsements. If a prior endorsement is fraudulent or unauthorized, the collecting bank may be held liable for the loss.
    What does it mean for a decision to become final? A court decision becomes final when it is no longer subject to appeal or modification. Once a decision is final, it is binding on the parties involved and cannot be overturned, even if it is later determined to be incorrect.
    What is the significance of the phrase “all prior endorsements guaranteed”? This phrase, often stamped on the back of a check by the collecting bank, signifies that the bank warrants the validity and genuineness of all endorsements made before it. It assures the drawee bank that the check has been properly negotiated.
    Why was BDO initially ordered to pay Selwyn Lao? The Court of Appeals initially ordered BDO to pay Selwyn Lao based on the principle that a drawee bank is liable for paying a check to the wrong party. However, the Supreme Court reversed this decision due to the prior RTC ruling that had absolved BDO.
    Why was Union Bank ultimately held liable in this case? Union Bank was held liable because it breached its warranty as the collecting bank by allowing the crossed check to be deposited into an unauthorized account, and the finality of the ruling absolving BDO led to the simplification of the recovery process, allowing direct recovery from Union Bank.
    What is the effect of crossing a check? The effect of crossing a check serves as instruction that the check cannot be encashed and may only be deposited in the bank, that the check may be negotiated only once to one who has an account with a bank; and it serves as a 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

    This case clarifies the liabilities of drawee and collecting banks in check fraud scenarios, emphasizing the importance of due process in legal proceedings and the significance of warranties provided by collecting banks. The decision serves as a reminder for banks to exercise caution and diligence in handling checks, particularly crossed checks, and for litigants to ensure all potentially liable parties are properly included in legal actions.

    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: BDO Unibank, Inc. v. Engr. Selwyn Lao, G.R. No. 227005, June 19, 2017

  • The Bank’s Balancing Act: Liability for Improperly Paid Checks and Guaranteed Endorsements

    In a dispute over improperly paid checks, the Supreme Court clarified the liabilities of banks involved in processing negotiable instruments. The Court ruled that both the drawee bank (Bank of America) and the collecting bank (Associated Citizens Bank) bear responsibility when checks are wrongly encashed. This decision reinforces the banking sector’s duty to ensure checks are only paid to the rightful payees, emphasizing the importance of due diligence in safeguarding financial transactions.

    Who Pays When a Crossed Check Lands in the Wrong Account?

    This case unfolded from a credit line facility granted by BA-Finance Corporation (BA-Finance) to Miller Offset Press, Inc. (Miller). Miller, through its representatives, assigned trade receivables to BA-Finance in exchange for checks. The checks, drawn against Bank of America, were made payable to “Miller Offset Press, Inc.” and bore the notation “For Payee’s Account Only.” However, Ching Uy Seng, Miller’s corporate secretary, deposited these checks into a personal joint account with Uy Chung Guan Seng at Associated Citizens Bank. Associated Bank then stamped the checks with a guarantee of prior endorsements and sent them for clearing, leading Bank of America to honor the checks.

    When Miller failed to deliver the proceeds of the assigned receivables, BA-Finance sued Miller, its representatives, and eventually included Bank of America, alleging wrongful encashment. Bank of America, in turn, filed a third-party complaint against Associated Bank. The central legal question revolved around which bank should bear the loss for allowing the checks to be deposited and cleared into an account not belonging to the named payee, especially considering the restrictive notations on the checks.

    The Supreme Court affirmed the Court of Appeals’ decision, holding Bank of America primarily liable to BA-Finance. The Court emphasized the strict liability of a drawee bank to pay a check only to the payee or their order, based on the contractual relationship with its customer, the drawer. By paying a person other than the payee named on the check, Bank of America violated its duty and the drawer’s instructions. This principle is particularly crucial when dealing with crossed checks, which serve as a warning that the check is intended for deposit only by the rightful payee.

    Building on this principle, the Court also found Associated Bank liable to reimburse Bank of America. As the collecting bank, Associated Bank endorsed the checks with a guarantee of prior endorsements, essentially warranting the genuineness of all preceding endorsements. This warranty placed a duty on Associated Bank to ascertain the validity of the endorsements and ensure that the checks were being deposited by the appropriate party. The Court highlighted the collecting bank’s responsibility to scrutinize checks and adhere to banking rules and regulations, reinforcing the importance of due diligence in check transactions.

    Furthermore, the Court addressed the liability of Ching Uy Seng and Uy Chung Guan Seng, ordering them to pay Associated Bank the amount it had to reimburse to Bank of America. This aspect of the ruling rests on the principle of unjust enrichment, ensuring that individuals who receive money without just cause are obligated to return it, preventing any undue gain at the expense of another party involved in the transaction. Each party involved in this dispute had a critical role to play in ensuring that this negotiation took place in accordance with accepted banking best practices.

    This case serves as a crucial reminder of the importance of adhering to established banking practices and exercising due diligence in handling negotiable instruments. The responsibilities and liabilities clearly rest on the Bank of America and Associated Citizens Bank because they were directly responsible for negotiating the instrument. It highlights the need for banks to have robust internal controls to prevent errors like these from happening and underscores the financial system’s safety. It is designed to allow people to put their trust in institutions designed to handle and negotiate their money and instruments.

    FAQs

    What was the key issue in this case? The central issue was determining which bank, the drawee (Bank of America) or the collecting bank (Associated Citizens Bank), should bear the loss for improperly paying checks made out to a specific payee but deposited into a different account.
    Why was Bank of America held liable? Bank of America was held primarily liable because as the drawee bank, it has a strict duty to pay the check only to the named payee or their order, according to the drawer’s instructions. Paying the check to someone else constituted a breach of this duty.
    What is the significance of a crossed check? A crossed check indicates that it should only be deposited into an account and not encashed directly. It serves as a warning to the holder that the check was issued for a specific purpose.
    Why was Associated Citizens Bank also found liable? Associated Citizens Bank, as the collecting bank, endorsed the checks with a guarantee of prior endorsements, warranting the genuineness of all previous endorsements. Allowing the deposit into the wrong account breached this warranty and constituted negligence.
    What does “all prior endorsements guaranteed” mean? This phrase means the bank is guaranteeing that all signatures and endorsements on the check before it are genuine and authorized. If an endorsement turns out to be fraudulent, the bank is liable.
    What is the principle of unjust enrichment in this case? The principle of unjust enrichment ensures that Ching Uy Seng and Uy Chung Guan Seng, who received the funds without a valid reason, are obligated to return the money to prevent them from unfairly benefiting at the expense of others.
    What lesson does this case teach about banking practices? This case emphasizes the importance of banks adhering to established rules and regulations, exercising due diligence, and having robust internal controls to prevent errors in check processing and payment.
    What was the modification made by the Supreme Court? The Supreme Court slightly corrected the total amount to be paid by Bank of America to BA-Finance to P741,227.78, reflecting the accurate sum of the four checks.

    In conclusion, this decision underscores the importance of vigilance in banking operations. It serves as a clear reminder of the responsibilities that banks bear in safeguarding financial transactions. It sets a firm precedent and acts as a deterrent. Everyone dealing with banking instruments, be they banks, corporations, or individuals, can reflect on how the Supreme Court weighed the evidence in this case and find ways to adapt their processes in line with industry best practices to minimize the possibility of facing financial penalties in the future.

    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: Bank of America vs. Associated Citizens Bank, G.R. No. 141001, May 21, 2009

  • Liability for Altered Checks: Protecting Holders in Due Course Under the Negotiable Instruments Law

    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