PCIBank vs. Court of Appeals

A collecting bank is solely liable for the loss of a crossed check's proceeds when its negligence in guaranteeing endorsements and failing to verify the authority to divert the check is the proximate cause of the loss; however, when both the collecting bank and the drawee bank are negligent in the handling and clearing of crossed checks, the loss is shared equally under the doctrine of comparative negligence, subject to mitigation if the drawer is contributorily negligent.

Ford Philippines, Inc. issued several Citibank checks payable to the Commissioner of Internal Revenue (CIR) to settle its percentage taxes for the third quarter of 1977, second quarter of 1978, and first quarter of 1979. The checks were crossed and marked "Payee's Account Only." Instead of reaching the CIR, the checks were intercepted by an organized syndicate that included Ford's General Ledger Accountant, Godofredo Rivera, his assistant, Alexis Marindo, and PCIBank officers Remberto Castro and Winston Dulay. The syndicate diverted the check proceeds through fictitious accounts and check-switching during the clearing process. Upon discovery that the taxes remained unpaid, the BIR demanded payment from Ford, which was compelled to pay the amounts a second time. Ford subsequently sued the drawee bank (Citibank) and the collecting bank (PCIBank) to recover the value of the embezzled checks.

• Check SN-04867 (Third Quarter 1977 Taxes): Ford issued Citibank Check No. SN-04867 for P4,746,114.41, crossed and marked "Payee's Account Only," payable to the CIR. Godofredo Rivera, Ford's General Ledger Accountant, recalled the check purportedly due to a computation error. Without verifying Rivera's authority with Ford or the BIR, PCIBank accepted the check at its Ermita Branch, stamped it with "all prior indorsements and/or lack of indorsements guaranteed," and sent it for clearing. Citibank paid the face value to PCIBank. PCIBank then replaced the check with two of its Manager's Checks, which were encashed by the syndicate. The CIR never received the payment, prompting Ford to pay the BIR a second time.
• Checks SN-10597 and SN-16508 (Second Quarter 1978 and First Quarter 1979 Taxes): Ford issued Citibank Check No. SN-10597 (P5,851,706.37) and Check No. SN-16508 (P6,311,591.73), both crossed and marked "Payee's Account Only." Rivera and his assistant, Alexis Marindo, passed the checks to Remberto Castro, PCIBank pro-manager. Castro and Winston Dulay, PCIBank assistant manager, opened a fictitious account under "Reynaldo Reyes." They deposited a worthless Bank of America check for the exact amounts of the Ford checks and, during the clearing process, switched the worthless check with the genuine Ford checks. The clearing stamps on the back of the Ford checks bore no initials. Citibank cleared the checks without noticing the absence of initials or the irregularity, and the proceeds were credited to the fictitious account and subsequently withdrawn by the syndicate.

• Imputed Negligence (PCIBank and Citibank): Petitioner banks argued that Ford was remiss in supervising its employees, Rivera and Marindo, who initiated the fraudulent schemes. The employers' negligence should be imputed to Ford, defeating its claim for reimbursement.
• Proximate Cause (PCIBank): PCIBank contended that it merely acted on Ford's instructions regarding Check SN-04867 and that the proximate cause of the damage lay in Ford's own officers and employees who carried out the fraudulent transactions.
• Prescription (PCIBank): PCIBank asserted that Ford's cause of action had prescribed because the negligent act occurred in 1977 but the complaint was filed only in 1983.
• Drawee Bank's Duty (Ford): Ford argued that Citibank, as drawee bank, owed an absolute contractual duty to pay the proceeds of the crossed checks only to the payee, the CIR, and breached this duty.
• Collecting Bank's Negligence (Ford): Ford maintained that PCIBank failed to verify Rivera's authority, guaranteed prior endorsements despite the lack thereof, and was liable under Section 5 of Central Bank Circular No. 580 for theft of items in transit.
• Lack of Gross Negligence (Ford): Ford denied any negligence on its part, arguing there was no evidence of lack of diligence presented before the trial court.

• Reliance on Clearing Stamp (Citibank): Citibank maintained that its payment was made in due course and that it merely relied on PCIBank's clearing stamp guaranteeing "all prior indorsements and/or lack of indorsements."
• Proximate Cause (Citibank): Citibank asserted that the proximate cause of Ford's injury was the gross negligence of PCIBank in endorsing the check without proper verification.
• No Authorization (Ford): Ford countered that Rivera was not authorized to divert the proceeds of the checks and that PCIBank's obligation as collecting bank was solely to deliver the proceeds to the CIR.
• Prescription (Ford): Ford argued that its cause of action had not prescribed, having been filed within the ten-year prescriptive period for actions upon a written contract.

• Imputed Negligence: Whether the negligence of Ford's employees should be imputed to Ford, thereby barring its recovery from the banks.
• Liability for Check SN-04867: Whether PCIBank is solely liable for the loss of the proceeds of Citibank Check No. SN-04867.
• Liability for Checks SN-10597 and SN-16508: Whether PCIBank and Citibank are liable for the loss of the proceeds of Citibank Check Nos. SN-10597 and SN-16508.
• Prescription: Whether Ford's cause of action to recover the value of the checks had prescribed.
• Mitigation of Damages: Whether Ford's failure to detect the fraud seasonably affects the award of damages.

• Imputed Negligence: The negligence of Ford's employees was not the proximate cause of the loss. While the employees initiated the transactions, the banks failed in their duty to scrutinize the crossed checks and verify the authority for diversion. The mere fact that fraud was committed by a drawer's confidential employee does not entitle the banks to shift the loss to the drawer in the absence of estoppel.
• Liability for Check SN-04867: PCIBank was adjudged solely liable. It failed to verify Rivera's authority to negotiate the check, breached its duty as an agent of the BIR to follow only its principal's instructions, and falsely guaranteed prior endorsements. The crossing of the check with the phrase "Payee's Account Only" imposed a duty on the collecting bank to ensure deposit only to the payee's account.
• Liability for Checks SN-10597 and SN-16508: Both PCIBank and Citibank were held equally liable under the doctrine of comparative negligence. PCIBank is liable for the tortious acts of its officers who facilitated the switching scheme within the apparent scope of their employment, and under Section 5 of Central Bank Circular No. 580, which holds the sending bank accountable for theft affecting items in transit. Citibank is liable for breach of its contractual obligation to pay the payee only and for negligence in failing to notice that the clearing stamps on the checks bore no initials, which would have revealed the switching in time.
• Prescription: The action was filed within the prescriptive period. An action upon a written contract prescribes in ten years under Article 1144 of the Civil Code. The cause of action accrued when the checks were returned to Ford as vouchers, and the filing in 1983 was well within the ten-year period from 1977 and 1978.
• Mitigation of Damages: Ford's contributory negligence in failing to examine its passbook and statements of account seasonably mitigated the banks' liability. Pursuant to Articles 1172 and 2214 of the Civil Code, the award of interest was reduced from 12% to 6% per annum.

• Doctrine of Comparative Negligence — When both parties are negligent, the liability for damages is distributed between or among them in proportion to their respective fault. Applied to hold PCIBank and Citibank equally liable for the loss of Checks SN-10597 and SN-16508, as both failed in their respective duties to scrutinize the checks and ensure payment to the designated payee.
• Warranty of Prior Endorsements — A collecting bank that stamps "all prior indorsements and/or lack of indorsements guaranteed" on a check makes an express guarantee of the validity of prior endorsements. If the warranty proves false, the collecting bank is liable for any damage arising out of the falsity of its representation. Applied to hold PCIBank solely liable for Check SN-04867.
• Imputed Negligence in Master-Servant Relationship — If a master is injured by the negligence of a third person and the concurrent contributory negligence of the master's own servant, the servant's negligence is imputed to the master and will defeat the master's action against the third person, provided the contributory negligence was the proximate cause of the injury. Held inapplicable here because the employees' actions were not the proximate cause of the encashment of the crossed checks.
• Fiduciary Duty of Banks — Banking is a business affected with public interest, requiring the highest degree of diligence in the selection and supervision of employees and the treatment of depositors' accounts. A bank's liability as obligor is primary, not merely vicarious, such that the defense of due diligence in the selection and supervision of employees is unavailing.

• "Indeed, the crossing of the check with the phrase 'Payee's Account Only,' is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement 'all prior indorsements and/or lack of indorsement guaranteed'."
• "A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom."
• "Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence."

• Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 157 SCRA 188 (1988) — Followed. Cited for the rule that a collecting bank's clearing stamp guaranteeing prior endorsements constitutes an express warranty, and if proven false, renders the bank liable for damages.
• Gempesaw vs. Court of Appeals, 218 SCRA 682 (1993) — Distinguished. Ford cited this case to argue that a drawer's negligence does not preclude recovery from the drawee bank. The Court used the precedent to emphasize the high standard of diligence required of banks.
• Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360 (1990) — Followed. Cited for the principle that a bank is under obligation to treat the accounts of its depositors with meticulous care, given the fiduciary nature of their relationship.

• Section 55, Negotiable Instruments Law — Defines when the title of a person negotiating an instrument is defective, such as when obtained by fraud or breach of faith. Applied to characterize the syndicate's diversion of the checks as a defective negotiation.
• Section 62, Negotiable Instruments Law — States that the acceptor engages to pay the instrument according to the tenor of his acceptance. Applied to hold Citibank to its duty to pay the crossed checks only to the designated payee.
• Article 1144, Civil Code — Provides that actions upon a written contract must be brought within ten years. Applied to rule that Ford's cause of action was filed within the prescriptive period.
• Article 1172, Civil Code — Provides that responsibility arising from negligence is demandable, but courts may regulate liability according to the circumstances. Applied to mitigate the banks' liability by reducing the interest rate.
• Article 2214, Civil Code — Provides that in quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover. Applied to reduce the award of interest from 12% to 6% due to Ford's failure to detect the fraud seasonably.
• Section 5, Central Bank Circular No. 580 (Series of 1977) — Stipulates that any loss or damage arising from theft affecting items in transit for clearing shall be for the account of the sending bank. Applied to hold PCIBank liable as the sending bank for the switched checks.

Bellosillo, Mendoza, Buena, De Leon, Jr.