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September 19, 2016

Bank of America vs. Associated

Facts:

  • October 6, 1978: BA-Finance Corporation entered into a transaction with Miller Offset Press through Miller’s authorized representatives (Uy Kiat Chung, Ching Uy Seng and Uy Chung Guan Seng).
  • BA-Finance granted Miller a credit line facility through which Miller could assign or discount its trade receivables with the BA Finance. 
  • October 20, 1978: The representatives of Miller executed a Continuing Suretyship Agreement with BA-Finance whereby 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 BA-Finance.
  • BA-Finance issued four checks payable to the “Order of Miller Offset Press, Inc.” with the notation “For Payee’s Account Only.”  
  • These checks were drawn against Bank of America and had the following details:

Check No.    Date      Amount
128274 13 February 1981     P222,363.33
129067  26 February 1981      252,551.16
132133  20 April 1981            206,450.57
133057  7 May 1981                      59,862. 
 Total    P741,227.78

  • The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate secretary of Miller, in Account No. 989 in Associated Citizens Bank. (Note: Said account is a joint account under the names of representatives Ching Uy Seng and Uy Chung Guan Seng.)
  • Associated Bank stamped the checks with the notation “all prior endorsements and/or lack of endorsements guaranteed,” and sent them through clearing. 
  • Later, the drawee bank, Bank of America, honored the checks and paid the proceeds to Associated Bank as the collecting bank.
  • Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables.
  • BA-Finance filed a Complaint against Miller for collection of the amount of P731,329.63 which BA-Finance allegedly paid in consideration of the assignment, plus interest at the rate of 16% per annum and penalty charges. (note: representatives were impleaded in the case)
  • BA-Finance filed an Amended Complaint impleading Bank of America as additional defendant for allegedly allowing encashment and collection of the checks by person or persons other than the payee named thereon.  
  • 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 (a.k.a. Robert Ching) and Uy Chung Guan Seng, but alleged that Robert Ching, being one of the corporate officers of Miller, was duly authorized to act for and on behalf of Miller.
  • RTC ruled in favor of BA Finance Corporation. Bank of America was ordered to pay.
  • CA modified the RTC decision: Bank of America was ordered to pay BA Finance, Associated Bank was ordered to reimburse Bank of America, representatives were ordered to pay Associated Bank.


Issue:  WON the CA erred in rendering judgment finding:
(1) Bank of America liable to pay BA-Finance the amount of the four checks; 
(2)  Associated Bank liable to reimburse Bank of America the amount of the four checks; and 
(3) Ching Uy Seng and/or Uy Chung Guan Seng liable to pay Associated Bank the amount of the four checks.  

Held: NO.

The Court of Appeals did not err in finding Bank of America liable to pay BA-Finance the amount of the four checks
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 payee’s order. The drawer’s 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 drawer’s account only for properly payable items. 

Thus, we ruled in  Philippine National Bank v. Rodriguez that a drawee should charge to the drawer’s accounts only the payables authorized by the latter; otherwise, the drawee will be violating the instructions of the drawer and shall be liable for the amount charged to the drawer’s account.  

Bank of America violated the instructions of the drawer and therefore, it is liable for the amount charged to the drawer’s account
In this case, the four checks were drawn by BA-Finance and made payable to the “Order of Miller Offset Press, Inc.”  The checks were also crossed and issued “For Payee’s Account Only.” Clearly, the drawer intended the check for deposit only by Miller Offset Press, Inc. in the latter’s bank account.  Thus, when a person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented and deposited the checks in his own personal account (Ching Uy Seng’s joint account with Uy Chung Guan Seng), and the drawee bank, Bank of America, paid the value of the checks and charged BA-Finance’s account therefor, the drawee Bank of America is deemed to have violated the instructions of the drawer, and therefore, is liable for the amount charged to the drawer’s account.

The Court of Appeals did not err in finding Associated Bank liable to reimburse Bank of America the amount of the four checks
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.” This Court has repeatedly held that in check transactions, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements.

Associated Bank cannot deny liability since it assumed the warranty of an indorser
When Associated Bank stamped the back of the four checks with the phrase “all prior endorsements and/or lack of endorsement guaranteed,” that bank had for all intents and purposes treated the checks as negotiable instruments and, accordingly, assumed the warranty of an endorser.  Being so, Associated Bank cannot deny liability on the checks.

Associated Bank was negligent in depositing the checks to the account other than Miller’s
Associated Bank was also clearly negligent in disregarding established banking rules and regulations by allowing the four checks to be presented by, and deposited in the personal bank account of, a person who was not the payee named in the checks.  The checks were issued to the “Order of Miller Offset Press, Inc.,” but were deposited, and paid by Associated Bank, to the personal joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng.  It could not have escaped Associated Bank’s attention that the payee of the checks is a corporation while the person who deposited the checks in his own account is an individual.  Verily, when the bank allowed its client to collect on crossed checks issued in the name of another, the bank is guilty of negligence.

Citation:
  • G.R. No. 141001
  • May 21, 2009

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