This Supreme Court decision clarifies the responsibilities of banks when handling crossed checks marked “account payee only.” It establishes that a bank acts with gross negligence when it allows such a check to be deposited into an account other than the named payee’s, based solely on the word of a third party. This ruling underscores the high degree of diligence expected of banking institutions and protects businesses from financial losses resulting from the mishandling of their payments.

Whose Account Is It Anyway? Bank Negligence and Check Diversion

Special Steel Products, Inc. (SSPI), a steel vendor, was a regular supplier to International Copra Export Corporation (Interco). Jose Isidoro Uy, an Interco employee and relative of a major stockholder, was in charge of purchasing. Interco issued three crossed checks payable to SSPI, marked “account payee only,” drawn against Equitable Banking Corporation (Equitable). Uy, however, presented these checks to Equitable, requesting they be deposited into his personal accounts. Equitable, without verifying Uy’s authority with SSPI, allowed the deposits, and Uy promptly withdrew the funds. When SSPI inquired about the unpaid invoices, Interco revealed the checks had been issued. SSPI then sued Equitable and Uy for damages, alleging negligence and fraudulent diversion of funds. This case highlights the legal duties of banks in processing checks with specific payment instructions and the consequences of failing to uphold those duties.

The central legal issue revolved around whether Equitable, as the drawee bank, could be held liable for quasi-delict due to its handling of the crossed checks. Equitable argued that SSPI, not being the recipient of the checks directly, had no cause of action against the bank based on the Negotiable Instruments Law. The Supreme Court disagreed, clarifying that SSPI’s claim was rooted in quasi-delict, an act or omission causing damage to another through fault or negligence, even without a contractual relationship.

Building on this principle, the Court emphasized the significance of the “account payee only” notation on the checks. Such a notation serves as a clear instruction that the check’s proceeds should be deposited only into the account of the named payee, in this case, SSPI. By allowing Uy to deposit the checks into his personal account, Equitable disregarded this explicit instruction, breaching its duty of care to ensure the funds reached the intended recipient. The Court cited Associated Bank v. Court of Appeals, stating that crossed checks are intended for deposit in the named payee’s account only. This practice aims to prevent the diversion of funds and ensures that the payment reaches the correct party.

The Court underscored the high standard of diligence required of banks, stating:

“The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society… Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are required of it.”

Equitable’s defense rested on the assumption that Uy, due to his relationship with Interco’s majority stockholder, had the authority to countermand the check’s original order. The Court dismissed this argument as a demonstration of the bank’s lack of caution. Equitable failed to verify Uy’s representation with Interco, even though Interco was a valued client. This failure to conduct even a cursory inquiry constituted gross negligence. It is important to note, the banking system relies on trust, but this trust must be balanced with diligence and prudence. Blind faith and empty promises cannot substitute for proper verification and adherence to established banking practices.

Regarding the damages awarded, the Court addressed the issue of actual damages, which SSPI claimed based on the stipulated 36% per annum interest in its contract with Interco. The Court found the application of this rate erroneous, as SSPI did not recover these interest payments from Interco, and Equitable was not a party to the contract between SSPI and Interco, and is not bound by its terms. Nonetheless, the Court acknowledged that SSPI was deprived of the use of its money for two years. Therefore, SSPI was entitled to recover the profits it failed to obtain, calculated at the legal interest rate of 6% per annum, applicable to damages based on quasi-delict. The legal rate of interest is provided in Article 2209 of the Civil Code.

The Court also considered the award of moral damages to Pardo, SSPI’s president, who claimed to have suffered anxiety and sleepless nights due to fears of potential legal repercussions. While acknowledging Pardo’s distress, the Court found the initial award of P3 million excessive and reduced it to P50,000. Moral damages are intended to assuage suffering, not to punish the defendant, and the reduced amount was deemed reasonable under the circumstances.

Furthermore, the Court addressed Equitable’s cross-claim against Uy, arguing that Uy, having been unjustly enriched by the scheme, should reimburse the bank for any amounts it was ordered to pay. The Court agreed, recognizing that Uy’s fraudulent actions allowed him to improperly receive and profit from the check proceeds. Equitable, though negligent, was an unwitting instrument in Uy’s scheme. Allowing Uy to retain the benefits of his fraud at Equitable’s expense would constitute unjust enrichment. Therefore, the Court allowed Equitable’s cross-claim against Uy.

Finally, the Court examined Equitable’s counterclaim for wrongful preliminary attachment. Equitable argued that SSPI’s application for attachment, based on allegations of fraud, was unjustified. The Court concurred, finding that SSPI’s affidavit and complaint lacked specific and definite allegations of fraud against Equitable. The Court held that the preliminary attachment was wrongful, as it was based on abstractions of fraud rather than concrete factual circumstances. As a result, the Court ordered SSPI to pay Equitable actual damages of P30,204.36, representing the premiums the bank paid for the counter-bond to lift the attachment.

FAQs

What was the key issue in this case?	The key issue was whether Equitable Bank was liable for damages due to its negligent handling of crossed checks payable to Special Steel Products, Inc. The checks were deposited into the account of a third party, Jose Isidoro Uy, without proper verification.
What is a crossed check?	A crossed check is a check that has two parallel lines drawn across its face, indicating that it must be deposited into a bank account rather than cashed over the counter. This is a security measure to ensure payment is made to the intended recipient.
What does “account payee only” mean on a check?	The notation “account payee only” on a check specifies that the check can only be deposited into the account of the named payee. This restriction further limits negotiability and aims to prevent fraudulent endorsements or diversions.
Why was Equitable Bank found liable?	Equitable Bank was found liable because it failed to exercise due diligence in ensuring that the crossed checks, marked “account payee only,” were deposited into the correct account. The bank’s reliance on the representations of a third party without verifying his authority constituted gross negligence.
What is quasi-delict?	Quasi-delict is an act or omission that causes damage to another through fault or negligence, even without a pre-existing contractual relationship. It is a legal basis for claiming damages when someone’s actions (or inactions) result in harm.
How did the Court calculate actual damages?	The Court calculated actual damages based on the legal interest rate of 6% per annum on the value of the checks for the period during which Special Steel Products, Inc. was deprived of their use (July 1991 to June 1993). This differed from the contract rate between SSPI and Interco, which was not applicable to Equitable.
Why was the award of moral damages reduced?	The award of moral damages to Augusto L. Pardo was reduced because the initial amount of P3 million was deemed excessive. The Court held that moral damages should be proportionate to the suffering experienced and not serve as a punishment.
What is unjust enrichment?	Unjust enrichment occurs when one person benefits at the expense of another without any legal justification. In this case, Jose Isidoro Uy was unjustly enriched by fraudulently obtaining the proceeds of the checks.
What was the result of the wrongful preliminary attachment?	The Court found that the preliminary attachment of Equitable Bank’s properties was wrongful because it was based on insufficient evidence of fraud. Special Steel Products, Inc. was ordered to pay Equitable Bank actual damages for the expenses incurred in lifting the attachment.

In conclusion, this case serves as a reminder of the critical role banks play in ensuring the integrity of financial transactions. The ruling emphasizes the need for banks to exercise a high degree of diligence, especially when dealing with checks bearing restrictive endorsements. Failure to do so can result in significant liability for damages arising from negligence or fraudulent schemes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: EQUITABLE BANKING CORPORATION VS. SPECIAL STEEL PRODUCTS, INC. AND AUGUSTO L. PARDO, G.R. No. 175350, June 13, 2012