Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation

PCHC has jurisdiction over clearing disputes involving non-negotiable checks, as the term "check" in its Articles of Incorporation covers all checks used in commercial and business activities, not merely negotiable instruments. A collecting bank that stamps its guarantee of "all prior endorsements and/or lack of endorsements" on checks presented for clearing is estopped from denying liability when those endorsements prove forged, and assumes the warranty of an endorser under Section 66 of the Negotiable Instruments Law.

Banco de Oro Savings and Mortgage Bank (BDO) and Equitable Banking Corporation (EBC) are commercial banks participating in the clearing operations of the Philippine Clearing House Corporation (PCHC), an entity organized to facilitate check processing and sorting among member banks pursuant to Section 107 of Republic Act No. 265. The PCHC operates under Clearing House Rules and Regulations (CHRR) that include an arbitration mechanism for resolving interbank disputes arising from clearing transactions. BDO, through its Visa Card Department, issues manager's checks payable to member establishments of the Visa Card system. EBC accepts deposits from its customers and participates in PCHC clearing as a collecting bank.

Sometime in March, April, May, and August 1983, Banco de Oro Savings and Mortgage Bank (BDO), through its Visa Card Department, drew six crossed manager's checks in the aggregate amount of P45,982.23, payable to certain member establishments of Visa Card. These checks were subsequently deposited with Equitable Banking Corporation (EBC) to the credit of its depositor, one Aida Trencio. Following standard banking procedure, EBC stamped the back of the checks with the usual endorsement guarantee — "ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED" — and thereafter sent the checks for clearing through the Philippine Clearing House Corporation (PCHC). BDO paid the checks; its clearing account was debited for the value of the checks, and EBC's clearing account was credited for the same amount.

After the clearing settlement, BDO discovered that the endorsements appearing on the back of the checks, purporting to be those of the payees, were forged, unauthorized, or belonged to persons other than the named payees. Pursuant to the PCHC Clearing Rules and Regulations, BDO presented the checks directly to EBC for the purpose of claiming reimbursement. EBC refused to accept the direct presentation and declined to reimburse BDO for the value of the checks, prompting BDO to file a complaint — Civil Case No. Q-46517 — before the Regional Trial Court of Quezon City.

In accordance with Section 38 of the PCHC Clearing House Rules and Regulations, the dispute was submitted to arbitration (ARBICOM Case No. 84033, styled EBC vs. BDO), with Atty. Caesar Querubin designated as Arbitrator. After exhaustive investigation and hearing, the Arbitrator rendered a decision in favor of BDO, ordering the PCHC to debit EBC's clearing account and credit BDO's clearing account in the amount of P45,982.23, with interest at 12% per annum from the date of the complaint, and attorney's fees of P5,000. A motion for reconsideration was filed before the PCHC Board of Directors, which affirmed the Arbitrator's decision. A petition for review was thereafter filed with the RTC of Quezon City, Branch XCII, which rendered a decision on March 24, 1986 affirming in toto the PCHC Board's ruling. BDO then elevated the matter to the Supreme Court via petition for review on certiorari, raising questions on PCHC jurisdiction, the negotiability of the subject checks, and its own alleged negligence.

• PCHC Jurisdiction Limited to Negotiable Checks: Petitioner maintained that the PCHC is not clothed with jurisdiction over the dispute because the Clearing House Rules and Regulations cover and apply only to checks that are genuinely negotiable, citing the primary purpose of the PCHC as stated in its Articles of Incorporation and Section 107 of Republic Act No. 265.
• Non-negotiability of the Checks: Petitioner argued that with the cancellation of the printed words "or bearer" from the face of the checks, the checks became non-negotiable, thereby placing them outside the ambit of PCHC jurisdiction. Petitioner cited Section 185 of the Negotiable Instruments Law defining a check as a bill of exchange and Section 126 requiring that a negotiable instrument be payable to "order" or "bearer."
• Statutory Definition of "Check": Petitioner contended that by law and common sense, the term "check" as used in the PCHC Articles of Incorporation, Central Bank circulars, and Clearing House Rules should be interpreted to mean a negotiable instrument, as defined under the Negotiable Instruments Law.
• Petitioner Bank's Negligence: Petitioner raised the issue of whether it was negligent and thus responsible for any undue payment, presumably contesting any finding of negligence against it.

• Nullity of Underlying Transactions Does Not Diminish BDO's Right to Recover: It was contended that BDO should be held responsible for issuing the checks notwithstanding that the underlying transactions were fictitious. The PCHC Board rejected this contention, ruling that the nullity of the underlying transactions strengthens rather than diminishes BDO's right to recover from EBC, as it emphasizes the obligation of the payees to return the proceeds, and EBC — neither the payee nor a person authorized by the payee — has no title to the checks.

• PCHC Jurisdiction: Whether the PCHC had jurisdiction to give due course to and adjudicate ARBICOM Case No. 84033.
• Non-negotiability and PCHC Coverage: Whether the subject checks were non-negotiable and, if so, whether they fall under the ambit of the PCHC's power.
• Applicability of the NIL: Whether the Negotiable Instruments Law (Act No. 2031) is applicable in deciding controversies of this nature by the PCHC.
• Governing Law: What law should govern in resolving controversies of this nature.
• Petitioner Bank's Negligence: Whether the petitioner bank was negligent and thus responsible for any undue payment.

• PCHC Jurisdiction: Yes. The PCHC has jurisdiction over clearing disputes involving non-negotiable checks, the term "check" in its Articles of Incorporation covering all checks used in commercial and business activities without distinction as to negotiability.
• Non-negotiability and PCHC Coverage: The checks are non-negotiable, but they fall within the ambit of PCHC jurisdiction. The PCHC rules make no distinction between negotiable and non-negotiable checks, and the principle ubi lex non distinguere nec nos distinguere debemos applies.
• Applicability of the NIL: Yes. The Negotiable Instruments Law is applicable to checks in general, including crossed checks, and its provisions on warranties of endorsers govern the liability of the collecting bank.
• Governing Law: The PCHC Clearing House Rules and Regulations, the Negotiable Instruments Law, and the Civil Code collectively govern the resolution of clearing disputes of this nature.
• Petitioner Bank's Negligence: No. The drawer owes no duty of diligence to the collecting bank; the law imposes the duty of diligence on the collecting bank to scrutinize checks and determine their genuineness and regularity.

• PCHC Jurisdiction: The Articles of Incorporation of the PCHC state that its operations extend to "clearing checks and other clearing items." The term "check" as used therein connotes checks in general use in commercial and business activities and cannot be conceived to be limited to negotiable checks only. Applying the maxim ubi lex non distinguere nec nos distinguere debemos, where the law makes no distinction, courts are not authorized to distinguish. The PCHC rules refer simply to "check(s)" without qualification as to negotiability. Furthermore, the participation of both banks in the PCHC clearing operations constitutes submission to its jurisdiction, pursuant to Sections 3 and 36.6 of the PCHC-CHRR, which provide that participation in clearing operations manifests agreement to the rules and constitutes written consent to the binding effect of the arbitration agreement as if done in accordance with Section 4 of Republic Act No. 876 (the Arbitration Law).

• Non-negotiability and PCHC Coverage: While the cancellation of the words "or bearer" from the face of the checks rendered them non-negotiable, this does not remove them from PCHC jurisdiction. The Court of Appeals in Reyes vs. Chuanico recognized four kinds of checks — the regular check, the cashier's check, the traveller's check, and the crossed check — and noted that while the Negotiable Instruments Law contains no provision on crossed checks, it is common practice in commercial and banking operations to issue such checks pursuant to Article 541 of the Code of Commerce. Section 185 of the NIL defines a check as a bill of exchange drawn on a bank payable on demand, and the provisions applicable to bills of exchange payable on demand apply to checks. The use of the term "check" in the PCHC Articles of Incorporation is not limited to negotiable checks but encompasses checks as generally known and used in commercial transactions. Moreover, the collecting bank is estopped from raising the defense of non-negotiability, having stamped its guarantee on the back of the checks and presented them for clearing, thereby treating them as negotiable instruments and assuming the warranty of an endorser.

• Applicability of the NIL: Section 66 of the Negotiable Instruments Law ordains that every endorser who endorses without qualification warrants to all subsequent holders in due course that the instrument is genuine and in all respects what it purports to be, that the endorser has good title to it, that all prior parties have capacity to contract, and that the instrument is at the time of endorsement valid and subsisting. The collecting bank, by stamping its guarantee, assumed the liabilities of an endorser under this provision. Even though the checks are non-negotiable, the responsibility of the collecting bank as endorser remains. The collecting bank has the duty to ascertain the genuineness of all prior endorsements, as the act of presenting a check for payment to the drawee is an assertion that the party making presentment has done its duty to ascertain the genuineness of the endorsements.

• Governing Law: The PCHC Clearing House Rules and Regulations govern the arbitration of interbank clearing disputes, supplemented by the Negotiable Instruments Law on warranties of endorsers and the Civil Code on the obligation to return unduly received payments. Article 1240 of the Civil Code provides that payment shall be made to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized to receive it. Article 2154 mandates that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Since neither EBC nor its depositor was entitled to receive payment on the checks, the obligation to return the amounts received arises.

• Petitioner Bank's Negligence: The drawer generally owes no duty of diligence to the collecting bank, as there is no privity between the drawer and the collecting bank, and the drawer owes no duty of vigilance to that bank. No act of the collecting bank is induced by any act, representation, or admission of the drawer. Negligence on the part of the drawer cannot create any liability from it to the collecting bank. The law instead imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert, and the law holds it to a high standard of conduct. The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are the absence of privity, the absence of any duty of vigilance owed by the drawer to the collecting bank, and the fact that no act of the collecting bank is induced by any act or representation of the drawer.

• Ubi lex non distinguere nec nos distinguere debemos — Where the law does not distinguish, courts should not distinguish. The PCHC Articles of Incorporation and rules refer to "check(s)" without distinction as to negotiability; accordingly, PCHC jurisdiction extends to both negotiable and non-negotiable checks.

• Estoppel in Banking Transactions — A collecting bank that stamps its guarantee of "all prior endorsements and/or lack of endorsements" on checks presented for clearing is estopped from denying liability when those endorsements prove forged. The doctrine of estoppel, based on public policy, fair dealing, good faith, and justice, forbids one from speaking against his own act, representations, or commitments to the injury of one who reasonably relied thereon. The collecting bank, having treated the checks as negotiable instruments by stamping its guarantee and presenting them for clearing, cannot later claim they are non-negotiable to escape liability.

• Duty of Diligence of Collecting Banks — The collecting bank has the duty to scrutinize checks deposited with it and to ascertain the genuineness of all prior endorsements. The act of presenting a check for payment to the drawee is an assertion that the presenting party has done its duty to ascertain the genuineness of the endorsements. The drawer owes no duty of diligence to the collecting bank, as there is no privity between them.

• Warranty of Endorser under Section 66, NIL — Every endorser who endorses without qualification warrants to all subsequent holders in due course: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has good title to it; (c) that all prior parties have capacity to contract; and (d) that the instrument is at the time of his endorsement valid and subsisting. A bank that stamps its guarantee on the back of a check assumes the warranty of an endorser.

• Crossed Checks — While the Negotiable Instruments Law contains no provision on crossed checks, it is common practice in commercial and banking operations to issue checks of this character, pursuant to Article 541 of the Code of Commerce. A crossed check is one of the four recognized kinds of checks in this jurisdiction.

• "The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. It cannot be conceived to be limited to negotiable checks only." — This passage articulates the ratio decidendi on PCHC jurisdiction, establishing that the term "check" in the PCHC charter encompasses all checks used in commerce, not merely negotiable instruments.

• "The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at the back of the checks." — This passage states the estoppel ruling against the collecting bank, holding that the act of stamping the endorsement guarantee constitutes an assumption of endorser liability that cannot later be repudiated.

• "while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct." — This passage defines the respective duties of care of the drawer and collecting bank, establishing the high standard of diligence required of collecting banks in examining endorsements.

• "To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would deal a negative blow to the whole banking system of this country." — This passage underscores the policy basis for holding the collecting bank liable, emphasizing the systemic importance of honoring endorsement warranties in the banking system.

• Reyes vs. Chuanico, CA-G.R. No. 20813-R, Feb. 5, 1962 — Cited for the proposition that there are four kinds of checks in this jurisdiction (regular check, cashier's check, traveller's check, and crossed check) and that while the NIL contains no provision on crossed checks, it is common practice to issue them pursuant to Article 541 of the Code of Commerce.

• Loc Cham vs. Ocampo, 77 Phil. 636 (1946) — Cited for the principle that general words and phrases in a statute should be accorded their natural and general significance, and that there should be no distinction in the application of a statute where none is indicated.

• Philippine National Bank vs. Court of Appeals, 94 SCRA 357 — Cited for the doctrine of estoppel as based on public policy, fair dealing, good faith, and justice, forbidding one from speaking against his own act or representation to the injury of one who reasonably relied thereon.

• PNB vs. National City Bank, 63 Phil. 711 — Cited for the rule that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements, as presentment for payment is an assertion that the party making presentment has done its duty.

• Republic Bank vs. Ebrada, 65 SCRA 680 — Cited for the proposition that if the drawee bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder, it can recover the amount paid from the collecting bank.

• Philippine National Bank vs. The National City Bank of NY & Motor Service Co. — Cited for the rules on acceptance and certification of checks, including that a drawee bank that pays a forged check previously accepted or certified cannot recover from a holder who did not participate in the forgery.

• American Exchange National Bank vs. Yorkville Bank, 204 N.Y.S. 621 — Cited for the principle that the drawer owes no duty of diligence to the collecting bank, that there is no privity between the drawer and the collecting bank, and that negligence of the drawer constitutes no defense to the collecting bank.

• Section 107, Republic Act No. 265 — Provides that deposit reserves maintained by banks in the Central Bank serve as a basis for the clearing of checks and settlement of interbank balances. Cited by petitioner to argue that PCHC jurisdiction is limited to negotiable checks; the Court held the provision does not distinguish between negotiable and non-negotiable checks.

• Section 185, Negotiable Instruments Law (Act No. 2031) — Defines a check as a bill of exchange drawn on a bank payable on demand, with the provisions applicable to a bill of exchange payable on demand applying to checks. Applied to show that checks in general, including crossed checks, fall within the NIL's framework.

• Section 126, Negotiable Instruments Law — Requires that a negotiable instrument be payable to "order" or "bearer." Petitioner cited this to argue that cancellation of "or bearer" renders a check non-negotiable; the Court held that non-negotiability does not remove the check from PCHC jurisdiction.

• Section 66, Negotiable Instruments Law — Enumerates the warranties of an endorser who endorses without qualification: (a) the instrument is genuine and in all respects what it purports to be; (b) the endorser has good title; (c) all prior parties have capacity to contract; (d) the instrument is valid and subsisting at the time of endorsement. Applied to hold the collecting bank liable as endorser by virtue of its stamped guarantee.

• Sections 3 and 36.6, PCHC Clearing House Rules and Regulations — Section 3 provides that participation in PCHC clearing operations manifests agreement to the rules. Section 36.6 provides that participation in clearing operations constitutes written consent to the binding effect of the arbitration agreement. Applied to establish PCHC jurisdiction and the parties' submission to arbitration.

• Section 21, PCHC Clearing House Rules and Regulations — Provides that items bearing forged endorsements, when such endorsement is necessary for negotiation, shall be returned by direct presentation or demand to the Presenting Bank. Cited to show that PCHC rules contemplate forged endorsement disputes.

• Section 2, Republic Act No. 876 (Arbitration Law) — Mandates that submissions to arbitration are valid and irrevocable save upon grounds existing at law for revocation of any contract. Applied to uphold the binding effect of the PCHC arbitration agreement.

• Article 1240, Civil Code of the Philippines — Provides that payment shall be made to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized to receive it. Applied to show that payments to persons other than the payees are not valid.

• Article 2154, Civil Code of the Philippines — Provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Applied to establish EBC's obligation to return the amounts received.

Teehankee, C.J., Narvasa, Cruz, and Paras, JJ., concurred.