Metropolitan Bank and Trust Company vs. Wilfred N. Chiok

Manager's checks and cashier's checks are pre-accepted primary obligations of the issuing bank, regarded as substantially equivalent to cash, and cannot be countermanded or subjected to stop payment orders based solely on the purchaser's allegation of the payee's breach of a separate underlying contract; rescission under Article 1191 of the Civil Code operates only between the parties to the contract and cannot affect non-party issuing banks.

Wilfred N. Chiok engaged in dollar trading with Gonzalo B. Nuguid for several years, with transactions running into millions of pesos. Chiok maintained accounts with Metropolitan Bank and Trust Company (Metrobank) and Asian Banking Corporation (now Global Business Bank, Inc.). On July 5, 1995, Chiok purchased from Global Bank two manager's checks totaling ₱18,455,350.00 and from Metrobank one cashier's check for ₱7,613,000.00, all payable to "Gonzalo Bernardo" (Nuguid). Chiok deposited these checks in Nuguid's account with Far East Bank & Trust Company (FEBTC, now Bank of the Philippine Islands) as payment for US$1,022,288.50 that Nuguid was to deliver the same day. Nuguid failed to deliver the dollars.

The Dollar Trading Transaction: Respondent Wilfred N. Chiok had engaged in dollar trading with Gonzalo B. Nuguid for six to eight years. On July 5, 1995, Chiok purchased from Global Bank (then Asian Bank) Manager's Check Nos. 025935 (₱7,550,000.00) and 025939 (₱10,905,350.00), and from Metrobank Cashier's Check No. 003380 (₱7,613,000.00), all payable to "Gonzalo Bernardo" (Nuguid). The aggregate value was ₱26,068,350.00, representing payment for US$1,022,288.50 that Nuguid was to deliver on the same day.

Deposit and Failure of Delivery: Chiok deposited the three checks in Nuguid's account with FEBTC (predecessor-in-interest of BPI). Nuguid failed to deliver the dollars as agreed. Chiok immediately contacted his lawyer and the issuing banks to inquire about stop payment procedures.

Legal Proceedings: On July 6, 1995, Chiok filed a complaint for damages with application for TRO and injunction. The RTC issued a TRO and later a writ of preliminary prohibitory injunction. FEBTC filed a complaint-in-intervention claiming it had allowed Nuguid to withdraw the proceeds immediately upon deposit.

Lower Court Rulings: The RTC ruled that manager's and cashier's checks could be subject to stop payment orders based on the payee's contractual breach, and ordered Global Bank and Metrobank to return the proceeds to Chiok. The Court of Appeals affirmed, treating the action as one for rescission under Article 1191 of the Civil Code, rescinding the contract between Chiok and Nuguid and ordering the checks cancelled.

Procedural Incident: During the pendency before the Supreme Court, Metrobank, Global Bank, and Chiok filed a Joint Manifestation and Motion to settle and terminate the proceedings, which was opposed by BPI and Chiok's counsel of record. The Court denied the motion for lack of proper authority and failure to meet requirements for a judicial compromise.

• Nature of Manager's and Cashier's Checks: Metrobank argued that manager's and cashier's checks are pre-accepted obligations of the issuing bank, equivalent to cash, and cannot be countermanded based on the payee's alleged breach of a separate contract with the purchaser. It maintained that the Court of Appeals erred in allowing rescission to affect the banks who were not parties to the underlying contract.

• Lack of Knowledge of Breach: Metrobank contended that it had no knowledge of circumstances that would defeat Nuguid's title to the check, and that the payment to FEBTC was made in accordance with banking regulations, not in defiance of the TRO.

• BPI's Standing: BPI argued that the Court of Appeals erred in dismissing its complaint-in-intervention, contending that as collecting bank, it had paid the value of the checks to Nuguid and had rights as a holder or equitable assignee.

• Enforceability of Bills Purchase Agreement: Global Bank argued that under the Bills Purchase Line Agreement with Chiok, the latter was liable for recourse in case of dishonor, and that the Court of Appeals erred in making it liable for interest when Chiok had not prayed for such relief.

• Rescission and Failure of Consideration: Chiok maintained that the contract to buy foreign currency was rescissible under Article 1191 due to Nuguid's failure to deliver the dollars, constituting a failure of consideration. He argued that the checks were inextricably linked to the contract and their cancellation was necessary to effect rescission.

• Availability of Injunctive Relief: Chiok argued that injunctive relief was proper to prevent the payment of checks where the payee had no valid title due to failure of consideration, and that equity justified the deviation from general banking principles.

• Breach of Fiduciary Duty: Chiok contended that the banks were obligated to treat his account with meticulous care given the fiduciary nature of the relationship, and should not have allowed the dissipation of his funds.

• Nature of Manager's and Cashier's Checks: Whether manager's and cashier's checks may be subject to stop payment orders or injunctive relief based on the purchaser's allegation of the payee's breach of a separate underlying contract.

• Effect of Rescission on Non-Party Banks: Whether rescission under Article 1191 of the Civil Code can affect issuing banks who are not parties to the contract between the purchaser and payee.

• Rights of Collecting Bank: Whether BPI, as collecting bank, is entitled to recover the proceeds of the manager's checks from Global Bank.

• Nature of Manager's and Cashier's Checks: Manager's and cashier's checks are pre-accepted by the issuing bank upon issuance and are regarded as substantially equivalent to cash. While subject to clearing to detect material alterations or counterfeiting, they cannot be countermanded based on reasons such as failure of consideration or breach of contract between the purchaser and payee, as these do not appear on the face of the check. The principle of ejusdem generis limits "long standing and accepted banking practices" under PCHC rules to causes similar to those enumerated (e.g., material alteration), which do not include breach of a separate contract.

• Effect of Rescission on Non-Party Banks: Rescission under Article 1191 operates only between the parties to the reciprocal contract and cannot prejudice third parties who are not privy thereto. Under Article 1311 of the Civil Code (relativity of contracts), Metrobank and Global Bank, as non-parties to the dollar purchase contract between Chiok and Nuguid, cannot be bound by the rescission thereof or required to return the proceeds of the checks. Chiok's remedy lies solely against Nuguid for damages for breach of contract.

• Injunctive Relief: The writ of preliminary prohibitory injunction was improperly granted. Injunction should not issue when an action for damages would adequately compensate the injury. Chiok could have proceeded directly against Nuguid and garnished the latter's bank account rather than enjoining the banks from honoring their primary obligations.

• Rights of Collecting Bank: BPI is entitled to recover from Global Bank. Nuguid's judicial admission in his pleadings that FEBTC (BPI's predecessor) had paid him the value of the checks constitutes a judicial admission under Section 4, Rule 129 of the Rules of Court. While BPI is not a holder in due course (checks were not indorsed), it is an equitable assignee for value under Section 49 of the Negotiable Instruments Law, acquiring the rights of the transferor (Nuguid) against the drawer (Global Bank). Global Bank is primarily liable on the manager's checks and must pay BPI the aggregate face value of ₱18,455,350.00 with interest based on savings deposit rates from July 7, 1995 until finality, and 6% per annum thereafter.

• Nature of Manager's and Cashier's Checks — Manager's checks and cashier's checks are primary obligations of the issuing bank, accepted in advance by the mere issuance thereof. By their peculiar character and general use in commerce, they are regarded substantially to be as good as the money they represent. They are orders of the bank to pay drawn upon itself, committing its total resources, integrity, and honor behind their issuance.

• Pre-acceptance and Countermand — While manager's and cashier's checks are subject to clearing to ensure they have not been materially altered or counterfeited, they are pre-accepted by the issuing bank and cannot be countermanded for reasons such as being drawn against a closed account, insufficient funds, or conditions not appearing on the face of the check, including alleged failure of consideration between the purchaser and payee.

• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns and heirs. They cannot favor or prejudice a third person who is not a party thereto, even if he is aware of such contract. Rescission under Article 1191 operates only between the parties to the reciprocal obligation and cannot affect non-parties such as issuing banks in a check transaction.

• Judicial Admissions (Section 4, Rule 129, Rules of Court) — An admission, verbal or written, made by a party in the course of the proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no such admission was made.

• Rights of Equitable Assignee (Section 49, Negotiable Instruments Law) — Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. The transferee acquires the instrument subject to defenses and equities available among prior parties.

• "A manager’s check, like a cashier’s check, is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity, and honor behind its issuance. By its peculiar character and general use in commerce, a manager’s check or a cashier’s check is regarded substantially to be as good as the money it represents."

• "While manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of the check. Long standing and accepted banking practices do not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to comply with its obligations towards the purchaser."

• "The right to rescind under Article 1191 of the Civil Code can only be exercised in accordance with the principle of relativity of contracts under Article 1311 of the same code... Metrobank and Global Bank are not parties to the contract to buy foreign currency between Chiok and Nuguid. Therefore, they are not bound by such contract and cannot be prejudiced by the failure of Nuguid to comply with the terms thereof."

• "As an equitable assignee, BPI acquires the instrument subject to defenses and equities available among prior parties and, in addition, the right to have the indorsement of Nuguid. Since the checks in question are manager’s checks, the drawer and the drawee thereof are both Global Bank. Respondent Chiok cannot be considered a prior party as he is not the check’s drawer, drawee, indorser, payee or indorsee. Global Bank is consequently primarily liable upon the instrument, and cannot hide behind respondent Chiok’s defenses."

• New Pacific Timber & Supply Company, Inc. v. Hon. Seneris, 189 Phil. 516 (1980) — Cited for the principle that a cashier's check is deemed as cash and that certification is equivalent to acceptance, creating an unconditional credit.

• Tan v. Court of Appeals, G.R. No. 108555, December 20, 1994, 239 SCRA 310 — Cited for the rule that a cashier's check is a primary obligation of the issuing bank accepted in advance by its mere issuance.

• Mesina v. Intermediate Appellate Court, 229 Phil. 495 (1986) — Distinguished; held that deviation from general principles on cashier's checks is justified only when the bank is aware of facts that would prevent the payee from collecting, such as when the check was stolen while in the bank's possession. The Court found no comparable peculiar circumstances in the instant case.

• Security Bank and Trust Company v. Rizal Commercial Banking Corporation, 597 Phil. 402 (2009) — Applied to hold that the collecting bank (BPI) relied on the integrity of the manager's checks and that the drawee bank (Global Bank) remains primarily liable despite a stop payment order.

• Santana-Cruz v. Court of Appeals, 414 Phil. 47 (2001) — Cited for the requisites of valid substitution of counsel.

• Rañola v. Spouses Rañola, 612 Phil. 307 (2009) — Cited regarding judicial compromise agreements and their effect as res judicata.

• Article 1191, Civil Code — Provides for the power to rescind reciprocal obligations when one obligor fails to comply with what is incumbent upon him. Interpreted to operate only between parties to the contract.

• Article 1311, Civil Code — Establishes the principle of relativity of contracts: contracts take effect only between the parties, their assigns and heirs, except where the rights and obligations are not transmissible by nature, stipulation, or law.

• Article 1385, Civil Code — Provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest.

• Section 49, Negotiable Instruments Law (Act No. 2031) — Governs transfer without indorsement, vesting in the transferee the title of the transferor and the right to have the indorsement.

• Section 4, Rule 129, Rules of Court — Provides that judicial admissions made by a party in the course of proceedings do not require proof.

• Section 60, Republic Act No. 7653 (New Central Bank Act) — States that checks representing demand deposits do not have legal tender power, but a check cleared and credited to the account of the creditor is equivalent to delivery of cash.

Maria Lourdes P. A. Sereno (Chief Justice, Chairperson), Antonio T. Carpio, Jose P. Perez, and Francis H. Jardeleza.