Far East Bank and Trust Company vs. Gold Palace Jewellery Co.

A collecting bank may not debit the payee's account for the amount it refunded to the drawee bank after the drawee bank had cleared and paid a materially altered draft; the drawee bank, by paying according to the tenor of the draft at the time of payment, cannot recover from a holder in due course protected by Section 62 of the Negotiable Instruments Law. An indorsement for collection is restrictive under Section 36 of the NIL, does not transfer title, and does not carry the general indorser's warranties under Section 66.

Gold Palace Jewellery Co. maintained an account with Far East Bank & Trust Company, which acted as its collecting bank. The controversy concerns a foreign draft issued by United Overseas Bank (Malaysia) BHD, addressed to Land Bank of the Philippines, Manila, and payable to Gold Palace. The Negotiable Instruments Law governs the liability of an acceptor or drawee bank, the status of a holder in due course, and the effect of a restrictive indorsement for collection.

Sometime in June 1998, Samuel Tagoe, a foreigner, purchased from Gold Palace Jewellery Co.'s store at SM-North EDSA several pieces of jewelry valued at P258,000.00. In payment, he offered Foreign Draft No. M-069670 issued by United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to Land Bank of the Philippines, Manila (LBP), and payable to Gold Palace for P380,000.00.

Before receiving the draft, Judy Yang, the assistant general manager of Gold Palace, inquired from Far East Bank & Trust Company's SM North EDSA Branch, its neighbor mall tenant, about the nature of the draft. The teller informed her that it was similar to a manager's check but advised her not to release the jewelry until the draft had been cleared. Following that advice, Yang issued Cash Invoice No. 1609 to the foreigner, asked him to come back, and informed him that the jewelry would be released once the draft had been cleared. Julie Yang-Go, the manager of Gold Palace, deposited the draft in the company's account with Far East on June 2, 1998.

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, LBP cleared it; UOB's account with LBP was debited, and Gold Palace's account with Far East was credited with the amount stated in the draft. The foreigner returned to Gold Palace's store on June 6, 1998 to claim the purchased goods. After ascertaining that the draft had been cleared, Yang released the jewelry to Samuel Tagoe; because the amount in the draft exceeded the value of the goods, she issued Far East Check No. 1730881 for P122,000.00 as change. This check was later presented for encashment and was paid by Far East.

On June 26, 1998, about three weeks later, LBP informed Far East that the amount in Foreign Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Attached to the correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB. The material alteration was discovered by UOB after LBP informed it that its funds were being depleted following the encashment of the subject draft.

Intending to debit the amount from Gold Palace's account, Far East refunded the P380,000.00 earlier paid by LBP. Gold Palace had already utilized portions of the amount. Thus, on July 20, 1998, as the outstanding balance of its account was inadequate, Far East debited only P168,053.36, without prior written notice to the account holder; it notified representatives of Gold Palace only by phone. On August 12, 1998, Far East demanded from Gold Palace payment of P211,946.64, the difference between the amount in the materially altered draft and the amount debited from Gold Palace's account. Because Gold Palace did not heed the demand, Far East instituted Civil Case No. 99-296 for sum of money and damages before the RTC, Branch 64 of Makati City.

• Indorser's Warranties: Far East invoked the warranty of the payee/depositor who indorsed the instrument for collection, seeking to shift to Gold Palace the burden of the refund it made to the drawee bank.
• Debit of Respondent's Account: Far East debited Gold Palace's account for the amount it refunded to LBP and sought to recover the remaining difference of P211,946.64 after the alteration was discovered.

• No Cause of Action / Alteration: Gold Palace denied the material allegations and argued that the complaint stated no cause of action because the foreign draft had been cleared and Gold Palace was not the party who made the material alteration.
• Improper Debit and Malicious Imputation: Gold Palace counterclaimed for actual, moral, and exemplary damages and attorney's fees, alleging that Far East had confiscated without basis its account balance, causing operational loss, and had maliciously imputed to it the act of alteration.

• Liability for Altered Draft / Debit of Account: Whether Far East, as collecting bank, could debit Gold Palace's account for the amount it refunded to the drawee bank after the drawee bank had cleared and paid the materially altered foreign draft.
• Indorser's Warranties: Whether Far East could invoke the warranties of a general indorser under the Negotiable Instruments Law against Gold Palace based on its indorsement for collection.
• Damages and Attorney's Fees: Whether the Court of Appeals properly awarded exemplary damages and attorney's fees to Gold Palace.

• Liability for Altered Draft / Debit of Account: No. The drawee bank, by clearing and paying the draft, engaged to pay according to the tenor at the time of payment and could not recover from Gold Palace, a holder in due course protected by Section 62 of the Negotiable Instruments Law; Far East, as collecting agent, could not debit Gold Palace's account.
• Indorser's Warranties: No. Gold Palace's indorsement was restrictive for collection under Section 36 of the NIL, did not transfer title, and the warranties of a general indorser under Section 66 did not attach.
• Damages and Attorney's Fees: The awards of exemplary damages and attorney's fees were properly deleted; no malice or bad faith was shown, and no entitlement to moral, temperate, or compensatory damages was established. The actual damages award of P168,053.36 plus 12% legal interest from July 20, 1998 was affirmed.

• Liability for Altered Draft / Debit of Account: Under Section 62 of the NIL, the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This applies with equal force when the drawee pays a bill without having previously accepted it. Actual payment by the drawee is greater than acceptance, which is merely a written promise to pay; payment of a check includes its acceptance. LBP cleared and paid the subject foreign draft and forwarded the amount to Far East, which credited Gold Palace's account. By that payment, LBP recognized and complied with its obligation to pay according to the tenor of its acceptance, determined by the terms of the bill as it was when the drawee accepted. LBP was therefore liable on its payment according to the tenor of the check at the time of payment, which was the raised amount, and could no longer repudiate the payment it erroneously made to a due course holder. Gold Palace was not a participant in the alteration, was not negligent, and was a holder in due course under Section 52: it received the draft complete and regular on its face, before it became overdue and without notice of dishonor, in good faith and for value, and without knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. Having relied on the drawee bank's clearance and payment and having delivered the jewelry only after clearance and payment, Gold Palace was protected by Section 62. Commercial policy favors protecting one who, in due course, changes position on the faith of the drawee bank's clearance and payment. The principle that where one of two innocent parties must suffer a loss, the law leaves the loss where it finds it, supports this result. The drawee bank is generally in a better position to verify with the drawer the matters stated in the instrument; LBP had the most convenient means to correspond with UOB but did not verify the amount before clearing and paying, while Gold Palace had no facility to ascertain with UOB Malaysia the true amount and relied on LBP's representations. The common law view allowing a drawee bank to recover as for money paid by mistake was not applied because no compelling reason existed. The UCC presentment warranties were also not applied absent a similar provision in Philippine law. Because Gold Palace was protected by Section 62, Far East, its collecting agent, should not have debited the money paid by the drawee bank from Gold Palace's account. When Gold Palace deposited the check with Far East, Far East became an agent for collection. The subsequent payment by the drawee bank and collection by the collecting bank closed the transaction insofar as the drawee and the holder or his agent were concerned, converted the check into a mere voucher, and foreclosed recovery by the drawee of the amount paid. This closure is a matter of course; otherwise, uncertainty, delay, and annoyance would arise if a bank could later call on the payee to return money paid on a check. As the transaction had closed and the principal-agent relationship between the payee and the collecting bank had ceased, Far East, in returning the amount to the drawee bank, acted on its own and was responsible for its own actions. Far East could not be considered the representative of the drawee bank when it debited Gold Palace's account because the drawee bank had no right to recover what it paid.
• Indorser's Warranties: Far East could not invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. The indorsement was only for purposes of collection and, under Section 36 of the NIL, was a restrictive indorsement. It did not transfer title to the instrument to the collecting bank. Far East did not own the draft; it merely presented it for payment. The warranties of a general indorser under Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course. These warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank could not debit Gold Palace's account for the amount it refunded to the drawee bank. Far East's remedy under the law is not against Gold Palace but against the drawee bank or the person responsible for the alteration.
• Damages and Attorney's Fees: The Court of Appeals awarded exemplary damages and attorney's fees, but these were deleted. Gold Palace had not shown that it was entitled to moral, temperate, or compensatory damages. Far East was not impelled by malice or bad faith in debiting Gold Palace's account and in pursuing its cause; it was honestly convinced of the propriety of the debit. The award of attorney's fees was also deleted because it is not sound public policy to place a premium on the right to litigate. No damages can be charged to those who exercise that right in good faith, even if done erroneously. The actual damages awarded by the Court of Appeals—P168,053.36 plus 12% legal interest from July 20, 1998—were affirmed to the extent that Far East could not debit Gold Palace's account and must return what it had erroneously taken.

• Acceptor's Liability and Payment by Drawee (NIL, Sec. 62) — The acceptor, by accepting a negotiable instrument, engages to pay it according to the tenor of his acceptance. The same rule applies when the drawee pays a bill without prior acceptance; actual payment is greater than acceptance and includes it. The tenor of acceptance is determined by the terms of the bill at the time the drawee accepts. In this case, LBP's clearance and payment of the altered draft bound it to pay according to the raised amount and foreclosed recovery from Gold Palace, a holder in due course.
• Holder in Due Course (NIL, Sec. 52) — A holder in due course is one who takes the instrument complete and regular on its face, before it is overdue and without notice of prior dishonor, in good faith and for value, and without notice of any infirmity in the instrument or defect in the title of the person negotiating it. Gold Palace satisfied these requisites and was therefore protected against the drawee bank's attempt to recover the payment.
• Restrictive Indorsement for Collection (NIL, Sec. 36) — An indorsement is restrictive when it constitutes the indorsee the agent of the indorser. Such an indorsement does not transfer title to the instrument. Gold Palace's indorsement to Far East was for deposit and collection only, making Far East an agent and not an owner or holder in due course.
• General Indorser's Warranties (NIL, Sec. 66) — The warranties of a general indorser are based upon a transfer of title and are available only to holders in due course. Because Gold Palace's indorsement was restrictive and did not transfer title, these warranties did not attach, and Far East could not invoke them to shift its loss to Gold Palace.
• Collecting Bank as Agent and Closure of Transaction — A collecting bank that receives a check for deposit and collection acts as the agent of the depositor. Once the drawee bank pays and the collecting bank collects the amount, the transaction is closed, the check becomes a mere voucher, and the drawee bank's right to recover the payment is foreclosed. The collecting bank cannot later debit the depositor's account to refund the drawee bank after the agency has ceased.
• Loss Allocation Between Innocent Parties / Commercial Policy — Where one of two innocent parties must suffer a loss, the law leaves the loss where it finds it. Commercial policy favors protecting a holder who, in due course, changes position in reliance on the drawee bank's clearance and payment. The drawee bank is generally better situated to verify the instrument with the drawer and can protect itself by qualifying its acceptance or certification, by forgery insurance, or by using special paper that makes alterations obvious.
• Exemplary Damages and Attorney's Fees — The Court deleted exemplary damages because respondents had not shown entitlement to moral, temperate, or compensatory damages, and deleted attorney's fees because it is not sound public policy to place a premium on the right to litigate; no damages can be charged to those who exercise that right in good faith, even if erroneously.

• "Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance." — This passage states the ratio for treating the drawee bank's payment as binding it to the tenor of the instrument, making its payment equivalent to or greater than acceptance under the NIL.
• "Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount. Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder." — This is the core holding that the drawee bank could not recover the amount it paid on the altered draft from Gold Palace.
• "Having relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee bank's clearance and payment of a check or draft." — This passage explains why Gold Palace, as a holder in due course, was protected and why commercial policy supports the ruling.
• "As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be responsible for its own actions." — This passage establishes that Far East could not justify the debit after the collection transaction had closed and its agency had ended.

• Philippine National Bank vs. Court of Appeals, 134 Phil. 829 (1968) — Cited to support the rule that actual payment by the drawee is greater than acceptance and that payment of a check includes its acceptance.
• Wells Fargo Bank & Union Trust Co. vs. Bank of Italy, et al., 214 Cal. 156 (1931) — Cited for the rule that the tenor of acceptance is determined by the terms of the bill at the time of acceptance, and for the commercial policy of protecting a holder who relies on the drawee bank's clearance and payment.
• Kansas Bankers Surety Company vs. Ford County State Bank, 184 Kan. 529 (1959) — Cited in connection with the rule that payment includes acceptance and with the warranties attaching to negotiable instruments.
• Jai-Alai Corporation vs. Bank of the Philippine Islands, 66 SCRA 29 (1975) — Cited for the principle that a collecting bank acts as the agent of the depositor for the collection of the amount in the draft.
• Citizens National Bank vs. First National Bank, 347 So.2d 964 (1977) — Cited for the closure of the transaction upon payment and collection, and for the policy against later recovery that would cause uncertainty, delay, and annoyance.
• National City Bank of Chicago vs. National Bank of the Republic of Chicago, 300 Ill. 103 (1921) — Cited for the principle that where one of two innocent parties must suffer a loss, the law leaves the loss where it finds it.
• ABS-CBN Broadcasting Corporation vs. Court of Appeals, 361 Phil. 499 (1999) — Cited to support the finding that Far East was not impelled by malice or bad faith in debiting Gold Palace's account and pursuing its cause.
• Republic vs. Lorenzo Shipping Corp., 450 SCRA 550 (2005); Pajuyo vs. Court of Appeals, 430 SCRA 492 (2004); Alonso vs. Cebu Country Club, Inc., 426 Phil. 61 (2002); Orosa vs. Court of Appeals, 386 Phil. 94 (2000); "J" Marketing Corporation vs. Sia, Jr., 349 Phil. 513 (1998) — Cited collectively for the rule that attorney's fees are not awarded as a premium on the right to litigate and cannot be charged against those who exercise that right in good faith.

• Section 62, Negotiable Instruments Law (Act No. 2031) — Provides that the acceptor, by accepting the instrument, engages to pay it according to the tenor of his acceptance. Applied to LBP, the drawee bank, whose clearance and payment of the altered draft bound it to pay according to the raised amount and barred recovery from Gold Palace.
• Section 52, Negotiable Instruments Law — Defines a holder in due course. Applied to Gold Palace, which received the draft complete and regular on its face, before overdue, without notice of dishonor, in good faith and for value, and without notice of infirmity or defect.
• Section 36, Negotiable Instruments Law — Defines a restrictive indorsement, including one that constitutes the indorsee the agent of the indorser. Applied to Gold Palace's indorsement for collection, which made Far East an agent and did not transfer title.
• Section 66, Negotiable Instruments Law — Provides the warranties of a general indorser. Applied to hold that those warranties did not attach to Gold Palace's restrictive indorsement for collection and could not be invoked by Far East.
• Article 2234, Civil Code — Cited in relation to exemplary damages. Applied to delete the award of exemplary damages because Gold Palace had not shown entitlement to moral, temperate, or compensatory damages.
• Uniform Commercial Code Section 3-417(a) (United States) — Cited for presentment warranties that a draft has not been altered. Not applied because Philippine law has no similar provision extending such preferential treatment to the paying bank.

Ynares-Santiago (Chairperson), Austria-Martinez, Chico-Nazario, and Reyes, JJ., concur.