Title
BDO Unibank, Inc. vs. Lao
Case
G.R. No. 227005
Decision Date
Jun 19, 2017
Engr. Lao issued crossed checks to Everlink, but they were deposited into unauthorized accounts. BDO, as drawee bank, avoided liability due to finality of RTC decision, while Union Bank, as collecting bank, was held negligent for improper deposit, allowing Lao to recover directly from Union Bank.
crossed check
liability
payment

Case Summary (G.R. No. 227005)

Parties, Claims, and Material Dates; Court and Governing Law

Lao filed his original complaint on March 9, 1999. He later filed an Amended Complaint on August 24, 2001 by impleading Union Bank as additional defendant. The RTC rendered its Decision on July 9, 2012, absolving BDO but ordering Union Bank to pay Lao P336,500.00, with damages and attorney’s fees. The CA promulgated its Decision on October 14, 2015 and its Resolution on September 5, 2016. In the Supreme Court, the petition was anchored on issues that included the CA’s supposed resolution of matters not raised on appeal, the purported nature of a collecting bank’s responsibility under Section 66 of the Negotiable Instruments Law, and the allocation of fault for the loss.

The controlling statutory and doctrinal framework involved the Negotiable Instruments Law, particularly Section 66 on the warranties of an endorser, and the jurisprudential rules on crossed checks and the sequence of recovery in unauthorized or unauthorizedly negotiated check transactions.

Factual Background: Issuance of the Checks and the Deposit to the Wrong Account

In his complaint, Lao alleged that he was doing business under “Selwyn Lao Construction,” that he was a majority stockholder of Wing An Construction and Development Corporation (Wing An), and that Wing An entered into a transaction with Everlink Pacific Ventures, Inc. (Everlink) through Everlink’s authorized representative Wu. Lao stated that Everlink was to supply “HCG sanitary wares.” For the down payment, Lao issued two crossed checks payable to Everlink: Check No. 0127-242249 in P273,300.00 and Check No. 0127-242250 in P336,500.00.

Lao averred that when Everlink failed to deliver, he learned that the checks were deposited into two different bank accounts at International Exchange Bank, later Union Bank. He was informed that these accounts belonged to Wu and a company named New Wave Plastic (New Wave) represented by Willy Antiporda (Antiporda). Lao thus filed a case initially against Everlink and Wu for failure to perform and against BDO for permitting encashment of the checks. Lao later withdrew the case against Everlink because the corporation had ceased existing.

In its answer, BDO contended that it had no obligation to ascertain the owner of the account into which the checks were deposited. It maintained that as drawee bank, its obligation consisted of examining signature genuineness and paying the check if there were sufficient funds. BDO asserted that the checks were properly negotiated and paid based on the instruction of Lao in crossing them, since the checks were deposited to Everlink’s account with Union Bank, which then presented them for payment to BDO.

Through his Amended Complaint, Lao impleaded Union Bank. He alleged that Union Bank allowed deposit of the crossed checks in accounts other than the payee’s, in violation of Union Bank’s obligation to deposit the checks only to the payee’s account.

The Parties’ Defenses and Trial Evidence: Assurances, Endorsements, and Banking Practice

BDO presented witnesses Elizabeth P. Tinimbang and Atty. Carlos Buenaventura. Tinimbang testified that Everlink was the payee of the checks issued by Wing An, and that the checks were deposited with Union Bank, which presented them to BDO for payment. She explained that after clearance, signature genuineness and sufficient funds were determined, and no stop-payment order was issued. She also recounted that in July 1998 BDO received a letter from Wing An that the check amounts were not credited to Everlink’s account, prompting BDO to demand refund from Union Bank.

Atty. Buenaventura stated that BDO gave credence to Union Bank’s representation that the checks were credited to Everlink’s account. He further asserted that BDO’s obligations were limited to checking genuineness and sufficient funds, and crediting proceeds to the collecting bank. On cross-examination, he clarified that Union Bank endorsed the crossed checks as shown on the dorsal portion of the checks and that such endorsement meant that Union Bank guaranteed the lack of prior endorsement, among other aspects.

Union Bank presented Jojina Lourdes C. Vega, its Branch Business Manager. Vega testified that transaction history and the notation at the back of the check indicating Everlink’s Account No. (005030000925) showed that proceeds of Check No. 0127-242249 were credited to Everlink’s account on September 22, 1997. For Check No. 0127-242250, Vega stated that proceeds were credited to New Wave’s account. She explained that New Wave was a valued client, and that Union Bank asked for a second endorsement agreement because the payee was not the same as the account holder. She testified that Antiporda executed a Deed of Undertaking (Second Endorsed Checks) assuming responsibilities for correctness, genuineness, and validity of the checks.

Trial Court Proceedings and Ruling: Liability Allocated to Union Bank and Not to BDO

In its July 9, 2012 Decision, the RTC absolved BDO, but ordered Union Bank to pay Lao P336,500.00 (value of Check No. 0127-242250), plus P50,000.00 moral damages, P100,000.00 exemplary damages, and P50,000.00 attorney’s fees.

The RTC found no irregularity regarding Check No. 0127-242249 because it was deposited in Everlink’s account with Union Bank. However, it concluded that Check No. 0127-242250 was irregularly deposited and encashed. The RTC reasoned that the check was not issued for Everlink’s account, the payee, but for New Wave’s account, and that the check was not even endorsed by Everlink to New Wave. It therefore held Union Bank negligent for allowing deposit and encashment without proper endorsement.

The RTC also relied on the nature of crossed checks and Union Bank’s liability. It noted that because the check was crossed, Union Bank failed to take reasonable steps to determine the validity of Antiporda’s representations. Finally, it held that BDO could not be held liable because of Union Bank’s warranty in the form of its guarantee stamped on the check: “all prior endorsement and/or lack of endorsement guaranteed.”

Appellate Proceedings: CA’s Modification and Assignment of BDO’s Liability

On appeal, the CA in its October 14, 2015 Decision affirmed with modifications. It ordered BDO to pay Lao P336,500.00, with legal interest from the filing of the complaint until full satisfaction. It also directed Union Bank to reimburse BDO the same amount. The CA agreed that Union Bank was liable due to negligence and its guarantee on the validity of all prior endorsements or lack of it.

Regarding BDO, the CA explained that BDO violated its duty to charge only those authorized by the drawer when it paid the value of Check No. 0127-242250. On that basis, the CA held BDO liable for the amount charged to the drawer’s account. In the fallo, the CA deleted the awards of damages and attorney’s fees, and affirmed the rest of the RTC decision.

BDO moved for partial reconsideration, arguing that Lao and Union Bank did not appeal the dismissal of the complaint against BDO, and that the RTC decision had therefore become final as to BDO. In its September 5, 2016 Resolution, the CA denied the motion, relying on Bank of America, NT & SA v. Associated Citizens Bank, which explained the drawee bank’s liability to the drawer and the collecting bank’s reimbursement to the drawee bank.

The Supreme Court Petition: Issues Raised by BDO

BDO’s petition contended that the CA improperly resolved issues not raised on appeal by the parties. It argued that, because BDO was not a party in the CA appeal and because Lao and Union Bank did not assail the RTC’s absolution of BDO, that portion of the RTC decision had become final. BDO further asserted that Union Bank, as collecting bank and last endorser, must suffer the loss because it had the duty to ascertain the genuineness of all prior endorsements. BDO also insisted that it could not be held liable as drawee bank because it merely relied on Union Bank’s express warranty. It attributed proximate cause to Union Bank’s negligence in allowing deposit of a crossed check intended for Everlink into New Wave’s account.

Lao, in his Comment, maintained that the CA did not commit reversible error in adjudging BDO’s liability because the issue was allegedly inextricably intertwined with the principal issue. Lao argued that BDO’s liability and the right of Union Bank to reimbursement followed the correct sequence of enforcement where the collecting bank permitted a crossed check to be deposited into someone other than the named payee.

Legal Framework: Drawee Bank Duty and Collecting Bank Warranties

The Supreme Court agreed with the CA on the general rule that in cases of unauthorized payment of checks to a person other than the payee named in the check, the drawee bank may be held liable to the drawer. Under the Court’s articulation, the drawee bank’s liability rested on its contract with the drawer and its duty to charge the drawer’s account only those payables authorized by him. A drawee bank was described as under strict liability to pay a check only to the payee or the payee’s order. When the drawee bank paid a person other than the payee named in the check, it did not comply with the terms of the check and violated its duty to charge the drawer only for properly payable items.

The Court also reiterated that collecting bank liability was anchored on the warranties of an endorser under Section 66 of the Negotiable Instruments Law. An endorser was said to warrant that the instrument was genuine and what it purported to be, that the endorser had good title, that prior parties had capacity to contract, and that at the time of endorsement the instrument was valid and subsisting. In check transactions, the collecting bank generally bore the loss because it had the duty to ascertain the genuineness of all prior endorsements, since presentment for payment asserted that duty. If those warranties were false, then the drawee bank could recover from

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