In Cesar V. Areza and Lolita B. Areza v. Express Savings Bank, Inc. and Michael Potenciano, the Supreme Court ruled on liability for altered checks. The Court held that a collecting bank is responsible for losses stemming from materially altered checks because it has the duty to ascertain the genuineness of all prior endorsements. This decision clarifies the responsibilities of banks and depositors when dealing with fraudulent instruments, emphasizing the bank’s role in ensuring the integrity of check transactions to protect its clients.

From Cars to Court: When Altered Checks Trigger Bank Responsibility

Cesar and Lolita Areza, car dealers, accepted nine checks from Gerry Mambuay totaling P1.8 million for vehicles. The checks, drawn against the Philippine Veterans Bank (PVB), were deposited in their Express Savings Bank (ESB) account. ESB’s branch manager, Michael Potenciano, allegedly facilitated the transaction. The checks were initially honored, but later, PVB claimed the checks were altered from P4,000 to P200,000 each. PVB debited ESB’s account, and ESB, in turn, debited the Arezas’ account without their consent. The Arezas sued ESB and Potenciano for unlawfully withdrawing the funds. The central legal question is: Who bears the loss when altered checks are deposited and initially cleared by the bank?

The Regional Trial Court (RTC) initially favored the Arezas, but this was reversed upon reconsideration. The Court of Appeals (CA) affirmed the reversal, finding the bank had the right to debit the Arezas’ account. The Supreme Court, however, reversed the CA decision. It stated that collecting banks have a duty to verify the genuineness of checks. The Court emphasized that, under Section 66 of the Negotiable Instruments Law, an endorser (such as the collecting bank) warrants that the instrument is genuine and valid. This warranty holds the collecting bank responsible for ensuring the check has not been altered.

The Supreme Court addressed the liability of the drawee bank. Quoting Section 63 of the Negotiable Instruments Law, the Court noted that an acceptor (drawee) agrees to pay the instrument according to the tenor of his acceptance. However, in the case of altered checks, the court highlighted conflicting views regarding whether the drawee is liable for the original or altered amount. The Court leaned towards the view that the drawee could recover its losses from the collecting bank. In this case, PVB debited Equitable-PCI Bank, ESB’s depositary bank, for the altered amount, passing the liability to the collecting bank.

The decision also discussed the roles and responsibilities of depositary and collecting banks. ESB acted as both a depositary and collecting bank when the Arezas deposited the checks. The Court reiterated that a collecting bank, upon presenting a check for payment, asserts that it has verified the genuineness of all prior endorsements. If this warranty is false, the drawee bank can recover from the collecting bank. This principle reinforces the need for banks to diligently scrutinize checks to prevent fraud. The law imposes a duty of diligence on the collecting bank to determine the genuineness and regularity of checks deposited with it. In essence, the Court found both ESB and Equitable-PCI Bank liable for the altered checks.

The Court clarified that the 24-hour clearing rule did not apply in this case. The rule generally requires a drawee bank to return a forged or altered check to the collecting bank within 24 hours; failure to do so absolves the collecting bank from liability. However, Section 21 of the Philippine Clearing House Rules and Regulations provides an exception for materially altered items. Such items can be returned by direct presentation to the presenting bank within the period prescribed by law for filing a legal action. In other words, the 24-hour rule does not shield a collecting bank from liability for altered checks if the discrepancy is discovered later.

Regarding the Arezas’ liability, the Supreme Court cited Far East Bank & Trust Company v. Gold Palace Jewellery Co., stating that a collecting bank should not debit the payee’s account if the drawee bank has already paid the check. When the Arezas deposited the checks with ESB, ESB acted as their agent for collection. Once the drawee bank paid and the collecting bank collected the amount, the transaction was considered closed. The collecting bank cannot later debit the payee’s account for amounts refunded to the drawee bank. The Court noted that the collecting bank’s warranty applies only to holders in due course, not to indorsements for deposit and collection. Therefore, ESB had no legal right to debit the Arezas’ account.

The Court further explained that legal compensation could not occur in this case. Legal compensation requires that both parties are principal creditors and debtors of each other. In a typical bank-depositor relationship, the bank is a debtor to the depositor. However, since the Arezas were not liable for the altered checks, they had no debt to ESB. Thus, ESB could not set off the amount it paid to Equitable-PCI Bank against the Arezas’ savings account. Finally, the Court addressed damages, noting ESB’s delay in informing the Arezas of the dishonored checks. This delay constituted negligence, entitling the Arezas to compensatory damages, representing the amount debited from their account. However, the Court deleted the award of moral damages and attorney’s fees, finding no evidence of fraud or bad faith on the part of ESB.

FAQs

What was the key issue in this case?	The central issue was determining who should bear the loss when altered checks were deposited, initially cleared by the bank, and later dishonored due to material alterations. The court needed to determine liability among the drawee bank, collecting bank, and the depositor.
What is the liability of the drawee bank for altered checks?	The drawee bank is liable only to the extent of the check’s original tenor prior to alteration. If the drawee bank pays the altered amount, it can recover the excess from the collecting bank.
What is the role of a collecting bank?	A collecting bank handles an item (like a check) for collection, except the bank on which the check is drawn. They act as agents for depositors, and are responsible for ensuring the validity of the checks they process.
What duty does the collecting bank owe the depositor?	The collecting bank owes a duty of diligence to scrutinize checks deposited for genuineness and regularity. By presenting the check, the collecting bank warrants it has taken steps to ascertain the validity of endorsements.
Does the 24-hour clearing rule apply to altered checks?	No, the 24-hour clearing rule does not strictly apply to altered checks. Altered checks can be returned beyond the 24-hour period, within the prescriptive period for legal action, allowing more time for discovery of alterations.
Can a collecting bank debit a depositor’s account for altered checks?	Generally, a collecting bank cannot debit a depositor’s account for altered checks, especially if the alteration was not due to the depositor’s negligence. The collecting bank bears the loss.
What is the significance of Section 66 of the Negotiable Instruments Law?	Section 66 states that an endorser warrants that the instrument is genuine, valid, and what it purports to be. This provision places responsibility on the collecting bank to ensure checks are not fraudulent.
What type of damages were awarded in this case?	The Supreme Court awarded actual or compensatory damages, representing the amount the bank had unlawfully debited from the petitioners’ account due to the altered checks. Moral damages and attorney’s fees were not awarded.

The Supreme Court’s decision in Areza v. Express Savings Bank reinforces the critical role of collecting banks in safeguarding financial transactions and upholding the integrity of the banking system. By placing the onus on banks to diligently verify the validity of checks, the ruling aims to protect depositors from losses due to fraudulent alterations. This case provides a clear framework for determining liability and promotes greater vigilance in banking practices.

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: Cesar V. Areza and Lolita B. Areza, vs. Express Savings Bank, Inc. and Michael Potenciano, G.R. No. 176697, September 10, 2014