In the case of BDO Unibank, Inc. v. Engr. Selwyn Lao, the Supreme Court addressed the liability of banks in instances of unauthorized check payments. The Court held that while a drawee bank (like BDO) generally bears the initial responsibility for paying a check to the wrong party, it can recover from the collecting bank (like Union Bank) if the latter’s actions, such as guaranteeing prior endorsements, contributed to the loss. However, if the aggrieved party fails to properly implead a party in the appeal process, that party may be absolved of liability, simplifying the proceedings to allow direct recovery from the negligent bank. This decision underscores the importance of due diligence by banks in handling checks and the necessity of correctly identifying and including all relevant parties in legal actions to ensure a fair and efficient resolution.

The Case of the Misrouted Check: Who Pays When Funds Go Astray?

Engineer Selwyn Lao filed a complaint against Equitable Banking Corporation (now BDO), Everlink Pacific Ventures, Inc., and Wu Hsieh, alleging that he issued two Equitable crossed checks payable to Everlink as a down payment for sanitary wares. However, Everlink failed to deliver, and Lao discovered that the checks were deposited into different bank accounts at International Exchange Bank (now Union Bank) belonging to Wu and New Wave Plastic. Lao then amended his complaint, including Union Bank for allowing the deposit of crossed checks into unauthorized accounts. This case hinges on determining which bank bears the responsibility when a crossed check, intended for a specific payee, is deposited into a different account, leading to financial loss for the drawer.

BDO contended that its responsibility as the drawee bank was limited to verifying the genuineness of signatures and ensuring sufficient funds, while Union Bank argued that crossed checks remain negotiable and that it had no obligation to deposit the checks only into the payee’s account. During trial, it was revealed that one check was indeed deposited into Everlink’s account, but the other was credited to New Wave’s account, facilitated by a Deed of Undertaking signed by Willy Antiporda of New Wave. The RTC absolved BDO but held Union Bank liable, a decision which the CA affirmed with modifications, ordering BDO to pay Lao and Union Bank to reimburse BDO. BDO then appealed, arguing that the CA erred in holding it liable since the RTC’s decision regarding its non-liability had become final.

The Supreme Court, in its analysis, reiterated the established sequence of recovery in cases of unauthorized payment of checks. The Court noted that in such cases, the drawee bank (BDO) may be held liable to the drawer (Lao) for violating its duty to charge the drawer’s account only for authorized payables. In turn, the drawee bank can seek reimbursement from the collecting bank (Union Bank), whose liability stems from its guarantees as the last endorser of the check under Section 66 of the Negotiable Instruments Law. According to Section 66, an endorser warrants the genuineness of the instrument, good title, capacity of prior parties, and the instrument’s validity.

Under Section 66 of the Negotiable Instruments Law, an endorser warrants “that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting.”

Building on this principle, the Court highlighted that the collecting bank bears the responsibility of verifying all prior endorsements, and the act of presenting the check for payment implies that the collecting bank has fulfilled this duty. The Court further emphasized that in cases where the collecting bank’s warranties are false, the drawee bank can recover from the collecting bank up to the amount of the check. In this instance, BDO paid Union Bank, which then credited the amount to New Wave’s account, violating Lao’s instructions, as the check was not issued in favor of New Wave and was not even endorsed by Everlink to New Wave.

The Supreme Court acknowledged that Union Bank’s warranty turned out to be false because Union Bank permitted the check to be presented by and deposited in the account of New Wave, despite knowing that it was not the named payee. Moreover, the Court noted the importance of the fact that the subject check was a crossed check. Jurisprudence indicates that crossing a check has several effects, including that the check may only be deposited in a bank, it may only be negotiated once to someone with a bank account, and it serves as a warning that the check was issued for a specific purpose, requiring inquiry if the holder received it pursuant to that purpose. The effects of crossing a check relate to the mode of payment, demonstrating the drawer’s intent for the check to be deposited only by the rightful payee.

The Court, however, recognized that the standard sequence of recovery might be simplified in exceptional circumstances, allowing the aggrieved party to recover directly from the party that caused the loss. Citing Associated Bank v. Court of Appeals, the Court acknowledged that to simplify proceedings, the payee of illegally encashed checks could recover directly from the responsible bank, regardless of whether the checks were actually delivered to the payee. In this case, a critical factor was the finality of the RTC decision regarding BDO’s lack of liability, as neither Lao nor Union Bank appealed this aspect of the RTC’s ruling.

The Supreme Court pointed out that BDO was not made a party in Union Bank’s appeal before the CA. Neither Lao nor Union Bank raised any issue regarding BDO’s liability in their briefs before the appellate court. Consequently, the RTC’s decision became final as to BDO, and it could not be prejudiced by the decision rendered in the appeal. To do so would violate BDO’s constitutional right to due process. In this situation, it was deemed appropriate to allow Lao to recover directly from Union Bank, following the principle established in Associated Bank.

FAQs

What was the key issue in this case?	The key issue was determining which bank, the drawee bank (BDO) or the collecting bank (Union Bank), should bear the loss resulting from the unauthorized deposit of a crossed check into an account other than the payee’s. The case also considered the impact of a prior court decision absolving one of the parties.
What is a crossed check?	A crossed check has two parallel lines drawn across its face, indicating that it can only be deposited into a bank account and not directly encashed. This serves as a warning that the check is meant for deposit only by the rightful payee.
What is the liability of a drawee bank?	A drawee bank is responsible for ensuring that the checks it pays are authorized by the drawer and payable to the correct payee. If the drawee bank pays a check to the wrong party, it may be held liable to the drawer for the unauthorized payment.
What is the liability of a collecting bank?	A collecting bank, as the last endorser of a check, guarantees the genuineness of all prior endorsements. If a prior endorsement is fraudulent or unauthorized, the collecting bank may be held liable for the loss.
What does it mean for a decision to become final?	A court decision becomes final when it is no longer subject to appeal or modification. Once a decision is final, it is binding on the parties involved and cannot be overturned, even if it is later determined to be incorrect.
What is the significance of the phrase “all prior endorsements guaranteed”?	This phrase, often stamped on the back of a check by the collecting bank, signifies that the bank warrants the validity and genuineness of all endorsements made before it. It assures the drawee bank that the check has been properly negotiated.
Why was BDO initially ordered to pay Selwyn Lao?	The Court of Appeals initially ordered BDO to pay Selwyn Lao based on the principle that a drawee bank is liable for paying a check to the wrong party. However, the Supreme Court reversed this decision due to the prior RTC ruling that had absolved BDO.
Why was Union Bank ultimately held liable in this case?	Union Bank was held liable because it breached its warranty as the collecting bank by allowing the crossed check to be deposited into an unauthorized account, and the finality of the ruling absolving BDO led to the simplification of the recovery process, allowing direct recovery from Union Bank.
What is the effect of crossing a check?	The effect of crossing a check serves as instruction that the check cannot be encashed and may only be deposited in the bank, that the check may be negotiated only once to one who has an account with a bank; and it serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose

This case clarifies the liabilities of drawee and collecting banks in check fraud scenarios, emphasizing the importance of due process in legal proceedings and the significance of warranties provided by collecting banks. The decision serves as a reminder for banks to exercise caution and diligence in handling checks, particularly crossed checks, and for litigants to ensure all potentially liable parties are properly included in legal actions.

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: BDO Unibank, Inc. v. Engr. Selwyn Lao, G.R. No. 227005, June 19, 2017