Acceptance Over Refusal When Depositing A Check Establishes Tender OF Payment

A check is not legal tender, and a creditor may ordinarily refuse it. But when a bank accepts a fully funded check presented to settle a debt—and even converts it into money—it cannot later claim the tender was ineffective. This was the Supreme Court's ruling in Far East Bank & Trust Company v. Diaz Realty, Inc. (G.R. No. 138588, August 23, 2001), a case that clarifies how tender of payment works when a check is involved.

The Dispute

Diaz Realty had an outstanding loan with Pacific Banking Corporation (PaBC), secured by a real estate mortgage over two Davao City properties. In December 1986, Far East Bank & Trust Company (FEBTC) purchased Diaz's credit from PaBC, but Diaz was only informed of this transfer on March 23, 1988.

When Diaz's president asked about the loan balance, the bank said it was P1,447,142.03. On November 14, 1988, Diaz tendered an Interbank check for P1,450,000—more than the amount due—with the notation "Re: Full Payment of Pacific Bank Account now turned over to Far East Bank." The check was fully funded and was honored by the drawee bank.

The problem: FEBTC did not treat the check as payment. Instead, it asked Diaz to deposit the amount with its Davao branch, allegedly pending approval from the Central Bank liquidator. Later, the bank told Diaz to convert the deposit into a money market placement, which he did. When the placement matured and the bank still would not acknowledge the tender, Diaz sued to compel the bank to accept payment and cancel the mortgage.

The Issue

The central question was whether Diaz had made a valid tender of payment. FEBTC argued that a check cannot constitute legal tender and that, in any case, tender of payment requires a definitive offer that the creditor refused—which did not happen here because the bank merely treated the amount as a deposit.

The Ruling

The Supreme Court denied FEBTC's petition and ruled in favor of Diaz.

A creditor may accept or refuse a check. The Court acknowledged the general rule that a check is not legal tender and a creditor may validly refuse it. However, this does not prevent a creditor from accepting a check as payment. The creditor has the option and discretion to refuse or accept.

Acceptance is presumed from conduct. FEBTC did not refuse Diaz's check. It accepted it, converted it into money, and kept the funds for several months. The check was fully funded and was honored by the drawee bank. By accepting the tendered check and converting it into money, the bank is presumed to have accepted it as payment.

The bank could not treat it as a deposit. The Court was emphatic: the tender was made to settle the obligation, and the bank did not have the right to accept and treat it as a deposit. To hold otherwise would be inequitable and unfair to the obligor.

No consignation was required. Under the Civil Code, consignation—depositing the amount with the court—is only necessary when the creditor refuses without just cause to accept payment. The decision cites Article 1256 of the Civil Code for this principle. Here, the bank accepted the check, so consignation was unnecessary.

Tender of payment requires intent, ability, and capability. Citing Roman Catholic Bishop of Malolos, Inc. v. Intermediate Appellate Court, the Court explained that tender of payment is the definitive act of offering the creditor what is due, with a demand that the creditor accept it. There must be a fusion of intent, ability, and capability to make good the offer, which must be absolute and cover the amount due. Diaz satisfied all these elements: it tendered more than the computed balance, with a clear notation of full payment, and the check was fully funded.

Other Rulings

The Court also addressed related issues:

• Assignment of credit. The transfer of Diaz's account from PaBC to FEBTC was an assignment of credit, not a novation. FEBTC acquired all of PaBC's rights against Diaz, subject to the original terms of the promissory note.

• Interest rate. The stipulated 20 percent per annum interest applied until the valid tender of payment on November 14, 1988. After that date, interest was computed at 12 percent per annum until full payment, since the tender stopped the accrual of the higher stipulated rate.

• Mortgage status. The real estate mortgage and the lease contract provision on rent application subsisted until full settlement of the obligation, after which the parties were free to negotiate.

Practical Takeaways

• A check can be effective payment if accepted. While a check is not legal tender, a creditor who accepts a fully funded check tendered as payment cannot later claim it was merely a deposit.

• Conduct matters. How a creditor handles a tendered check—accepting it, depositing it, converting it into other instruments—can establish acceptance as payment.

• Tender stops interest. A valid tender of payment stops the accrual of the stipulated interest rate from the date of tender.

• Consignation is not always required. Consignation is only necessary when the creditor refuses without just cause to accept payment. If the creditor accepts, the obligation may be extinguished without court deposit.

• Document the purpose of payment. Notations on checks and written communications clarifying that a payment is for full settlement of an obligation are crucial evidence.

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This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.