Associated Bank vs. Court of Appeals

A collecting bank that accepts and encashes crossed checks marked "for payee's account only" for a person other than the payee, without verifying that person's authority to endorse or deposit, is liable to the payee for the value of the checks; crossing restricts presentment for payment to deposit in the payee's account and imposes a duty of inquiry on the collecting bank.

Merle V. Reyes was engaged in ready-to-wear garments under the firm name "Melissa's RTW" and dealt with Robinson's Department Store, Payless Department Store, Rempson Department Store, and Corona Bazaar as customers. Associated Bank was the collecting bank, and Conrado Cruz was its branch manager. The case concerns the legal effect of crossing checks under the Negotiable Instruments Law, particularly the collecting bank's duty when presented with crossed checks.

Merle V. Reyes, doing business under the firm name "Melissa's RTW," was engaged in ready-to-wear garments and dealt with Robinson's Department Store, Payless Department Store, Rempson Department Store, and Corona Bazaar as customers. In payment of their respective accounts, those customers issued crossed checks payable to Melissa's RTW: Payless, through Solid Bank, for P3,960.00 dated January 19, 1982; Robinson's, through FEBTC, for P4,140.00 dated December 18, 1981; Robinson's, through FEBTC, for P1,650.00 dated December 24, 1981; Robinson's, through FEBTC, for P1,980.00 dated January 12, 1982; Rempson, through TRB, for P1,575.00 dated January 9, 1982; and Corona, through RCBC, for P2,500.00 dated December 22, 1981.

When Reyes went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the crossed checks. Further inquiry revealed that the checks had been deposited with Associated Bank and subsequently paid by it to Rafael Sayson, one of its "trusted depositors," in the words of its branch manager and co-petitioner Conrado Cruz. Sayson had not been authorized by Reyes to deposit and encash the checks.

The checks were crossed and issued "for payee's account only." The Bank accepted them for deposit to Sayson's account even though the payee was not Sayson but Melissa's RTW. Before presenting the checks for clearing and payment, the Bank stamped on the back thereof the words: "All prior endorsements and/or lack of endorsements guaranteed."

Reyes maintained a savings account with the Prudential Bank, Cubao Branch, Quezon City, which never cleared the checks. There was no evidence that the crossed checks were actually received by Reyes. Petitioners also asserted that it was Eddie Reyes, the private respondent's own husband, who endorsed the checks.

Reyes sued Associated Bank and Conrado Cruz in the RTC of Quezon City for recovery of the total value of the checks plus damages. The CA found that the checks were crossed or "for payee's account only," that Melissa's RTW was the payee, that Reyes had never authorized anyone to deposit or encash the checks, that the Bank allowed all the checks to be deposited, cleared, and paid to Rafael Sayson in violation of the instructions, and that Reyes maintained the Prudential Bank account which never cleared the checks and was damaged by the encashment.

• No Cause of Action / Proper Defendant: Petitioners argued that private respondent had no cause of action against them and should have proceeded instead against the companies that issued the checks.
• Ownership of Cause of Action: Petitioners argued that the cause of action for violation of the common instruction found on the face of the checks belonged exclusively to the issuers thereof and not to the payee.
• Good Faith: Petitioners argued that they acted in good faith and merely facilitated the encashment of the checks, so they cannot be made liable to private respondent.
• Privity: Petitioners argued that private respondent had no cause of action against them because they had no privity of contract with her.
• Endorsement by Eddie Reyes: Petitioners argued that it was Eddie Reyes, private respondent's own husband, who endorsed the checks.

• Cause of Action: Whether the payee of crossed checks marked "for payee's account only" has a cause of action against the collecting bank and its branch manager for encashing and paying the checks to an unauthorized person.
• Liability Despite Lack of Privity and Good Faith: Whether the collecting bank may be held liable to the payee despite lack of privity and its claim of good faith.
• Unauthorized or Forged Endorsement: Whether the collecting bank is liable where the checks were allegedly endorsed by the payee's husband without authority or with a forged endorsement.
• Exemplary Damages: Whether the award of exemplary damages should be reduced for lack of sufficient evidence.

• Cause of Action: Yes. The payee of crossed checks marked "for payee's account only" has a cause of action against the collecting bank for encashing and paying them to an unauthorized person; crossing restricts presentment for payment and imposes a duty to verify the endorser's authority.
• Liability Despite Lack of Privity and Good Faith: Yes. Lack of privity is not a defense; the bank paid the checks at its peril and became liable to the payee for their value, regardless of whether it was aware of the unauthorized endorsement.
• Unauthorized or Forged Endorsement: Yes. Even if Eddie Reyes endorsed the checks, the Bank is liable because he was not authorized; even if the endorsement was forged, the Bank is liable for not verifying the endorser's authority.
• Exemplary Damages: Yes. The reduction of exemplary damages was affirmed for lack of sufficient evidence to support them.

• Cause of Action: The SC affirmed the CA's finding that the cause of action arose from the illegal, anomalous, and irregular acts of the petitioners in violating common banking practices to the damage and prejudice of private respondent. The three elements of a cause of action were present: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the plaintiff's right or constituting a breach thereof. The checks were crossed "for payee's account only." Under State Investment House vs. Intermediate Appellate Court, 175 SCRA 310, the effects of crossing are: (1) the check may not be encashed but only deposited in the bank; (2) it may be negotiated only once—to one who has an account with a bank; and (3) the act of crossing 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 it pursuant to that purpose. Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf; who the holder or authorized person is depends on the instruction stated on the face of the check. The six checks crossed "for payee's account only" signified that the drawers intended them for deposit only by Melissa's RTW, but the Bank accepted them for Sayson's account and paid him although he was not authorized.
• Liability Despite Lack of Privity and Good Faith: The SC rejected the lack of privity defense. The Bank stamped on the checks its guarantee that "all prior endorsements and/or lack of endorsements (were) guaranteed"; by that deliberate and positive act, the Bank treated the checks as negotiable instruments and assumed the warranty of the endorser. The SC held that possession of a check on a forged or unauthorized indorsement is wrongful, and when the money is collected on the check, the bank can be held for moneys had and received; the proceeds are held for the rightful owner and may be recovered by him. The bank's position is the same as if it had taken the check and collected without indorsement at all, and the act amounts to conversion. Since the proceeds belonged to Reyes and Sayson was not authorized, there was conversion by the Bank. When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and became liable to the payee for the value of the checks, whether or not it was aware of the unauthorized endorsement. The Bank was negligent in permitting the encashment by Sayson; it should have verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds to his own account. The Bank was put on notice by the nature of the checks that they were issued for deposit only to Reyes's account; its failure to inquire into Sayson's authority was a breach of duty. Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., 157 SCRA 188, imposes a duty of diligence on the collecting bank to scrutinize checks for genuineness and regularity and holds the collecting bank to a high standard of conduct.
• Unauthorized or Forged Endorsement: Assuming Eddie Reyes endorsed the crossed checks, the SC held the Bank would still be liable because he was not authorized to make the endorsements. Even if the endorsements were forged, the Bank would still be liable for not verifying the endorser's authority. There is no substantial difference between an actual forging of a name to a check as an endorsement by a person not authorized to make the signature and the affixing of a name to a check as an endorsement by a person not authorized to endorse it. The Bank did not deny collecting the money on the endorsement; it was its responsibility to inquire into Rafael Sayson's authority to deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. Its failure to make this inquiry was a breach of duty that made it liable to Reyes for the amount of the checks.
• Exemplary Damages: The SC agreed with the reduction of the award of exemplary damages for lack of sufficient evidence to support them.

• Crossed checks — Crossing restricts the mode of presentment for payment. Under State Investment House vs. Intermediate Appellate Court, the effects are: (1) the check may not be encashed but only deposited in the bank; (2) it may be negotiated only once—to one who has an account with a bank; and (3) the crossing warns the holder that the check was issued for a definite purpose and that he must inquire whether he received it pursuant to that purpose. A general crossing with "for payee's account only" means the drawee should not encash the check but merely accept it for deposit. Applied: the six checks were crossed "for payee's account only" and payable to Melissa's RTW, but the Bank accepted them for Sayson's account and paid him.
• Collecting bank's duty of diligence — A collecting bank must scrutinize checks deposited with it to determine their genuineness and regularity; as a banking expert, it is held to a high standard of conduct. Applied: the Bank should have verified Sayson's right to endorse crossed checks not payable to him and to deposit the proceeds to his own account; its failure breached its duty to Reyes.
• Liability for unauthorized or forged endorsement — Possession of a check on a forged or unauthorized indorsement is wrongful; when the bank collects the money, it can be held for moneys had and received, the proceeds are held for the rightful owner, and the bank's act amounts to conversion. The bank pays at its peril and is liable to the payee for the value of the checks whether or not it was aware of the unauthorized endorsement. Applied: Sayson was not authorized; even if Eddie Reyes endorsed, he was not authorized; even if the endorsement was forged, the Bank failed to verify authority.
• Direct action by payee against collecting bank — To simplify proceedings, the payee of illegally encashed checks may recover directly from the bank responsible for the encashment, regardless of whether the checks were actually delivered to the payee. Applied: the SC approved Reyes's direct action against Associated Bank.
• Privity not required — Lack of privity of contract does not bar the payee's cause of action against the collecting bank for unauthorized encashment of crossed checks. Applied: the SC rejected the petitioners' no-privity defense.
• Elements of a cause of action — The elements are: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the plaintiff's right or constituting a breach thereof. Applied: the CA found all three present, and the SC affirmed.

• "The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf. Who the holder or authorized person is depends on the instruction stated on the face of the check." — This defines the legal effect of crossing and ties presentment to the instruction on the face of the check.
• "The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossed checks and the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes treated the said checks as negotiable instruments and, accordingly, assumed the warranty of the endorser." — This is the SC's key characterization of the Bank's act in accepting the crossed checks for a non-payee.
• "When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and became liable to the payee for the value of the checks. This liability attached whether or not the Bank was aware of the unauthorized endorsement." — This states the collecting bank's liability rule for unauthorized endorsement.
• "The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed to the private respondent." — This articulates the Bank's duty of inquiry arising from the crossed checks.

• State Investment House vs. Intermediate Appellate Court, 175 SCRA 310 — Controlling precedent; laid down the effects of crossing a check.
• Vicente R. de Ocampo & Co. vs. Gatchalian, 3 SCRA 596 — Cited for special and general crossing, including "for payee's account only."
• Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., 157 SCRA 188 — Controlling precedent; imposed a duty of diligence on the collecting bank to scrutinize checks and held it to a high standard of conduct.
• Republic Planters Bank vs. Intermediate Appellate Court, 131 SCRA 631 — Cited in the CA opinion quoted by the SC for the three elements of a cause of action.
• Hoffman vs. First Nat. Bank, 20 N.E. (2d.) 121 — Cited for allowing the payee of illegally encashed checks to recover directly from the bank responsible for the encashment.
• Possaic-Bergen Lumber Co. vs. United States Trust Co., 164 A. 580 — Cited on unauthorized or forged endorsement and on the direct action by the payee.
• Buckley vs. Second Nat. Bank, 35 N.J.L. 400 — Cited for the rule that possession of a check on a forged or unauthorized indorsement is wrongful and the bank can be held for moneys had and received.
• Teas vs. Third National Bank & Trust Co., 4 A 2d. 64 — Cited for liability attaching whether or not the bank was aware of the unauthorized endorsement.

• Sec. 72, Negotiable Instruments Law — Presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf; who the holder or authorized person is depends on the instruction stated on the face of the check. Applied: the crossed checks marked "for payee's account only" could be presented for deposit only by Melissa's RTW, so the Bank's payment to Sayson was not a sufficient presentment.