Crossed Checks and Collecting Banks: Who Bears the Loss for Wrong Endorsement?

When a check is crossed with the phrase "for payee's account only," it carries a clear instruction: only the named payee may deposit it. But what happens when a collecting bank accepts such a check from someone other than the payee and credits the proceeds to that person's personal account? The Supreme Court's 2007 decision in Metropolitan Bank and Trust Company v. Philippine Bank of Communications clarifies that the collecting bank bears the loss.

The Facts of the Case

In 1978, Pipe Master Corporation applied for check discounting with Filipinas Orient Finance Corporation. The corporation's board authorized its president, Yu Kio, and vice-president, Tan Juan Lian, to handle transactions with Filipinas Orient. Tan Juan Lian also executed a continuing guaranty covering Pipe Master's obligations up to P1,000,000.00.

On April 9, 1980, Yu Kio sold four Metropolitan Bank and Trust Company (Metro Bank) checks worth P1,000,000.00 to Filipinas Orient under their discounting agreement. In exchange, Filipinas Orient issued four Philippine Bank of Communications (PBCom) crossed checks totaling P964,303.62, payable to Pipe Master and marked "for payee's account only."

Instead of depositing these checks into Pipe Master's account, Yu Kio deposited three checks worth P721,596.95 into his personal account at Metro Bank and the remaining check worth P242,706.67 into his personal account at Solid Bank. Both banks credited the amounts to Yu Kio's personal accounts and guaranteed the prior endorsements.

When Filipinas Orient later presented the four Metro Bank checks, they were dishonored. Pipe Master refused to pay, claiming it never received the proceeds of the PBCom checks. Filipinas Orient then sought recovery from PBCom, which in turn sought reimbursement from the collecting banks.

The Issue

The central question was whether Metro Bank and Solid Bank, as collecting banks, were liable to Filipinas Orient for accepting crossed checks payable to Pipe Master and allowing them to be deposited into Yu Kio's personal accounts.

The Ruling

The Supreme Court ruled against the collecting banks, affirming their liability. The Court noted that while the Negotiable Instruments Law is silent on crossed checks, judicial practice recognizes that a check with two parallel lines means it can only be deposited, not converted into cash. When a check is crossed with "Payee's Account Only," it warns that the check should be deposited only in the payee's account.

The Court emphasized that the collecting bank has a duty to scrutinize the check and know its depositors before making the clearing endorsement guaranteeing all prior endorsements. By stamping this guarantee, the collecting banks became general endorsers. Under Section 66 of the Negotiable Instruments Law, an endorser warrants that the instrument is genuine, that the endorser has good title, and that all prior parties had capacity to contract.

The Court cited Associated Bank v. Court of Appeals, holding that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements and is privy to the depositor who negotiated the check. PBCom, as the drawee bank, could not be held liable because it relied on the collecting banks' express guarantee of all prior endorsements.

The Court also referenced Jai-Alai Corp. of the Phil. v. Bank of the Phil. Islands, ruling that one who accepts and encashes a check from an individual knowing that the payee is a corporation does so at his peril.

Practical Takeaways

• Collecting banks act as guarantors. When a bank guarantees all prior endorsements, it becomes a general endorser and warrants the genuineness of all prior endorsements under Section 66 of the Negotiable Instruments Law.
• Crossed checks are restrictive. A check crossed with "for payee's account only" may only be deposited into the named payee's account. Accepting it from anyone else is done at the bank's peril.
• Banks must verify depositors. Collecting banks have a duty to scrutinize checks and know their depositors before clearing them, especially when the payee is a corporation and the depositor is an individual.
• Drawee banks are protected. A drawee bank that relies on the collecting bank's guarantee of prior endorsements may not be held liable for the loss.
• The collecting bank bears the loss. Where the collecting bank's negligence is the direct cause of misappropriation, it must answer for the loss, though it may file an action against the wrongdoer.

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