Case Summary (G.R. No. 227005)
Petitioner
BDO Unibank, Inc. (formerly Equitable Banking Corporation) — argued it had no duty to verify the identity of the account holder receiving the proceeds beyond examining genuineness of signature and sufficiency of funds, and that it relied on the collecting bank’s warranty.
Respondents
Engr. Selwyn S. Lao (plaintiff/drawer who sought recovery); International Exchange Bank/Union Bank of the Philippines (collecting bank alleged negligent and gave warranty as last endorser); Everlink (payee; later ceased existence) and individuals implicated in deposit/endorsement irregularities.
Key Dates and Procedural Posture
- Initial complaint filed: March 9, 1999.
- Amended complaint (impleading Union Bank): August 24, 2001.
- Regional Trial Court (Branch 55, Manila) Decision: July 9, 2012 — absolved BDO; held Union Bank liable and awarded P336,500 plus moral, exemplary damages and attorney’s fees.
- Court of Appeals Decision: October 14, 2015 — affirmed with modification; ordered BDO to pay Lao P336,500 with legal interest and directed Union Bank to reimburse BDO; deleted awards for damages and fees.
- Court of Appeals Resolution (denying BDO’s motion): September 6, 2016.
- Supreme Court review applied the 1987 Constitution in resolving due process/privity issues.
Applicable Law
- Negotiable Instruments Law, particularly Section 66 (warranties of endorsers).
- Principles on drawee bank obligations (strict liability to pay only to payee or payee’s order and to charge the drawer’s account only for properly payable items).
- Doctrines on collecting bank liability as last endorser and warranties on endorsements.
- Jurisprudence on sequence of recovery in unauthorized payment of checks (including Bank of America; Associated Bank; and related precedent cited by the courts).
- Constitutional due process principles governing finality and binding effect of decisions upon non-parties.
Core Facts (Antecedents)
Lao issued two crossed Equitable Bank checks (No. 0127-242249 and No. 0127-242250) payable to Everlink as down payments for sanitary wares. When the goods were not delivered, Lao discovered the checks had been deposited into two different accounts at Union Bank — one credited to Everlink and the other credited to New Wave Plastic (without Everlink’s endorsement). Lao sued the drawee bank (Equitable/BDO), Everlink, and Wu, later amending to implead Union Bank for allowing deposit/encashment contrary to the purpose of the crossed checks.
Positions of the Banks at Trial
- BDO (drawee): maintained its duty was limited to verifying signatures and funds; it relied on Union Bank’s presentment and warranty and thus paid upon proper presentment.
- Union Bank (collecting): asserted Check No. 242249 was credited to Everlink; Check No. 242250 was negotiated to New Wave under accommodation practice with a Deed of Undertaking executed by Antiporda assuming responsibility for correctness/genuineness of the checks; denied duty to deposit only to payee absent express restriction on the instrument.
RTC Ruling (July 9, 2012)
- Found Check No. 242249 properly deposited to Everlink; Check No. 242250 irregularly deposited to New Wave without endorsement by Everlink.
- Held Union Bank negligent for allowing deposit/encashment of the crossed check absent proper endorsement; Union Bank liable for P336,500 plus P50,000 moral damages, P100,000 exemplary damages, and P50,000 attorney’s fees.
- BDO absolved of liability on account of Union Bank’s warranty stamped on the check (“all prior endorsement and/or lack of endorsement guaranteed”).
Court of Appeals Ruling (Oct. 14, 2015)
- Modified RTC judgment: ordered BDO to pay Lao P336,500 with legal interest from filing of complaint; ordered Union Bank to reimburse BDO that amount; deleted awards of damages and attorney’s fees.
- Grounding: reaffirmed the established sequence of recovery — drawee bank may be held liable to drawer for unauthorized payment, and the drawee may recover from the collecting bank which, as last endorser, warranties validity of prior endorsements per Section 66 of the Negotiable Instruments Law.
Issues Presented in the Supreme Court Petition
- Whether the CA erred in adjudging BDO liable though BDO was not a party to the appeal from the RTC decision which had absolved it.
- Proper allocation of loss between drawee and collecting banks in unauthorized payment of a crossed check.
- Whether, given the circumstances, the court should allow direct recovery by Lao from Union Bank despite the typical sequence of recovery (drawer → drawee → collecting bank).
Supreme Court Legal Analysis — Sequence of Recovery Principle
- Reaffirmed the general rule: a drawee bank is strictly liable to the drawer to charge only properly payable items and to pay the payee or payee’s order; when the drawee pays an unauthorized person, it breaches its duty and may be liable to the drawer.
- Reiterated that the collecting bank, as last endorser, gives warranties under Section 66 (genuineness, title, validity) and generally bears the loss because it should have ascertained genuineness of prior endorsements; if warranties are false, the drawee can recover from the collecting bank.
Supreme Court Factual Application — Liability Findings
- BDO violated its duty by paying Check No. 0127-242250 to a party other than the named payee and without proper endorsement by Everlink; the payment was contrary to the instruction implicit in crossing the check (deposit only to payee’s account).
- Union Bank had warranted the endorsements (“all prior endorsements and/or lack of endorsement guaranteed”) and therefore assumed the role of endorser; when the warranty proved false, Union Bank cannot deny liability.
- Union Bank was negligent in allowing the deposit of a crossed check to an account of a party who was not the named payee.
Supreme Court Rationale on Finality, Due Process, and Simplification of Recovery
- The Court emphasized the due process principle that a person cannot be prejudiced by a judgment in a proceeding to which it was not a party; because BDO was absolved by the RTC and was not included in Union Bank’s appeal to the CA, that absolution became final as to BDO.
- Given BDO’s non-participation in the appeal, it would violate its right to due process to have the appellate court reverse the RTC’s finding of non-liability as to BDO by ordering BDO to pay Lao.
- Recognizing established precedent (Associated Bank), the Court allowed procedural simplification: when the party primarily responsible for the loss (here, BDO) was not made a party on appeal, the aggrieved party (Lao) may recover directly from the negligent collecting bank (Union Bank) to avoid multiplicity and injustice, consistent with due process principles.
Effects of Crossing and Negotiability Considerations
- The Court reiterated the legal effects of crossing: a crossed check may not be encashed but must be deposited; it is intended for deposit to the rightful payee’s account and serves as a warning to holders to inquire into proper purpose and authority.
- Check No. 0127-242250 was crossed generally (no specific banker named), which indicated an intention that it be deposited only to Everlink’s account; the deposit to New Wave without Everlink’s endorsement violated that intention and warned against the deposit, accentuating Union Bank’s negligence.
Disposition and Relief Ordered by the Supreme Court
- The Supreme Court granted the petition in
Case Syllabus (G.R. No. 227005)
Procedural Posture
- Petition for review on certiorari filed by petitioner BDO Unibank, Inc. (BDO) seeking reversal and setting aside of the Court of Appeals (CA) Decision dated October 14, 2015 and Resolution dated September 5, 2016 in CA-G.R. CV No. 100351.
- The CA had affirmed with modification the July 9, 2012 Decision of the Regional Trial Court (RTC), Branch 55, Manila, in Civil Case No. 99-93068 (case for collection of sum of money).
- RTC decision (July 9, 2012) had absolved BDO from liability and found International Exchange Bank (now Union Bank of the Philippines, Union Bank) liable; CA modified and ordered BDO to pay the amount of Check No. 0127-242250 and directed Union Bank to reimburse BDO; CA deleted award of damages and attorney’s fees.
- BDO filed a Motion for Partial Reconsideration (November 5, 2012) before the CA; CA denied the motion in its September 6, 2016 Resolution.
- Supreme Court rendered decision on June 19, 2017 granting the petition in part, reversing and setting aside the CA insofar as it ordered BDO to pay, and affirming the rest.
Antecedent Facts and Parties
- Plaintiff-Respondent: Engr. Selwyn S. Lao (Lao), doing business under the name "Selwyn F. Lao Construction"; majority stockholder of Wing An Construction and Development Corporation (Wing An).
- Defendants initially impleaded: Equitable Banking Corporation (now BDO), Everlink Pacific Ventures, Inc. (Everlink), and Wu Hsieh a.k.a. George Wu (Wu).
- Additional defendant impleaded by amended complaint (Aug. 24, 2001): International Exchange Bank (now Union Bank) for allowing deposit of crossed checks into accounts other than payee’s.
- Underlying commercial transaction: Lao entered into a transaction with Everlink (through Wu) for supply of "HCG sanitary wares"; Lao issued two Equitable crossed checks as down payment.
- Checks issued by Lao (drawer/Wing An): Check No. 0127-242249 in amount P273,300.00 and Check No. 0127-242250 in amount P336,500.00, both crossed and payable to Everlink as payee.
- Lao’s allegation: after encashment/deposit of checks he contacted Everlink for delivery of wares, Everlink failed to perform; he learned that checks were deposited in two different bank accounts at Union Bank supposedly belonging to Wu and a company named New Wave Plastic (New Wave) represented by Willy Antiporda (Antiporda); Everlink later ceased to exist and was withdrawn as defendant.
Pleadings and Parties’ Contentions
- BDO (drawee bank) contentions:
- No obligation to ascertain owner of accounts where checks were deposited; instruction to deposit to payee’s account is directed to payee and collecting bank (Union Bank).
- As drawee, BDO’s obligations limited to examining genuineness of signatures and paying if sufficient funds.
- The crossed checks were properly negotiated and paid in accordance with crossing instruction; they were deposited to Everlink's account with Union Bank which then presented them to BDO.
- BDO relied on Union Bank’s representation (and the stamp/warranty) that the checks were credited to payee’s account.
- Union Bank (collecting bank) contentions:
- Check No. 0127-242249 was deposited in Everlink’s account.
- Check No. 0127-242250 validly negotiated by Everlink to New Wave; proceeds credited to New Wave’s account.
- No obligation to deposit only in Everlink’s account because nothing on the checks indicated such restriction; a crossed check continues to be negotiable with the only limitation that it should be presented for payment by a bank.
- As accommodation to valued clients (New Wave), Union Bank required signing of second endorsement agreement (Deed of Undertaking) executed by Antiporda assuming responsibilities for correctness, genuineness, and validity of checks.
- Lao’s position:
- Complained against Everlink and Wu for failure to deliver; impleaded Union Bank for allowing deposit of crossed checks into accounts other than payee’s account; sought recovery for P336,500 (Check No. 0127-242250) and damages, attorney’s fees.
Trial Evidence and Witnesses
- BDO witnesses:
- Elizabeth P. Tinimbang: testified that Everlink was the payee of the two crossed checks drawn by Wing An; checks were deposited with Union Bank which presented them to BDO for payment; after clearance and verification of genuineness and sufficient funds, BDO paid; in July 1998 BDO received a letter from Wing An claiming amounts were not credited to Everlink’s account, prompting BDO to write to Union Bank demanding refund.
- Atty. Carlos Buenaventura: testified BDO relied on Union Bank’s representation that checks were credited to Everlink; BDO’s obligations were limited to authenticating signatures, ensuring sufficient funds, and crediting proceeds to collecting bank; clarified that Union Bank endorsed the crossed checks on the dorsal portion—meaning lack of prior endorsement was guaranteed by Union Bank.
- Union Bank witness:
- Jojina Lourdes C. Vega (Branch Business Manager): testified that transaction history and notation on back of Check No. 0127-242249 (Everlink’s Account No. 005030000925) showed proceeds duly credited to Everlink on Sept. 22, 1997; proceeds of Check No. 0127-242250 were credited to New Wave’s account; explained accommodation practice and Antiporda’s Deed of Undertaking.
RTC Ruling (July 9, 2012)
- Findings:
- Check No. 0127-242249: no irregularity; proceeds credited to Everlink’s account.
- Check No. 0127-242250: irregularly deposited and encashed because it was not issued for the account of Everlink but for New Wave; not endorsed by Everlink to New Wave; Union Bank negligent in allowing deposit/encashment without proper endorsement and failed to take reasonable steps given the check was crossed.
- BDO absolved from liability due to Union Bank’s warranty when it stamped the check with "all prior endorsement and/or lack of endorsement guaranteed."
- Dispositive judgment:
- International Exchange Bank (now Union Bank) ordered to pay Lao:
- P336,500.00 representing Check No. 0127-242250;
- P50,000.00 moral damages;
- P100,000.00 exemplary damages;
- P50,000.00 attorney’s fees.
- Complaints against Equitable Banking Corporation (now BDO) and Wu Shu Chien a.k.a. George Wu dismissed.
- Costs against International Exchange Bank.
- International Exchange Bank (now Union Bank) ordered to pay Lao:
Court of Appeals Ruling (October 14, 2015) and Resolution (Sept. 5, 2016)
- CA Decision (assailed):
- Affirmed RTC decision with modifications:
- Ordered Equitable Bank (BDO) to pay Lao P336,500.00 (value of Check No. 0127-242250) with legal interest from filing of complaint until full satisfaction.
- Ordered International Exchange Bank (Union Bank) to reimburse BDO the said amount.
- Deleted award of damages and attorney’s fees (i.e., awards ordered by RTC were removed).
- Rest of RTC Decision affirmed.
- Affirmed RTC decision with modifications:
- CA Rationale:
- Cited precedent (Bank of America, NT & SA v. Associated Citizens Bank) that drawee bank may be liable to drawer where unauthorized payment occurred and collecting bank must reimburse drawee bank.
- Concluded BDO violated its duty to charge to the drawer’s account only those authorized by the drawer when it paid Check No. 0127-242250; thus BDO liable for amount charged to drawer’s account, while Union Bank to reimburse BDO.
- CA Resolution: Denied BDO’s Motion for Partial Reconsideration (Sept. 6, 2016), relying on Bank of America and similar authorities.
Grounds Raised on Petition (as stated)
- I. Issues not raised by the parties on appeal cannot be reviewed nor ruled upon by the appellate court.
- II. A collecting bank assumes respon