Associated Bank v. Court of Appeals, G.R. No.

89802, 07 May 1992

FACTS:
The private respondent (Merle V. Reyes) is engaged in the business of ready-to-wear garments
under the firm name "Melissa's RTW." She deals with, among other customers, Robinson's
Department Store, Payless Department Store, Rempson Department Store, and the Corona
Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW.
When she went to these companies to collect on what she thought were still unpaid accounts, she
was informed of the issuance of the above-listed crossed checks. Further inquiry revealed that
the said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its
branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the private
respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for
recovery of the total value of the checks plus damages.
RTC:
Decided in favor of Melissa’s RTW, ordering the bank to pay the total value of the checks plus
damages.
COA:
Affirmed. The following are pertinent to their decision.
The cause of action of the appellee in the case at bar arose from the illegal, anomalous and
irregular acts of the appellants in violating common banking practices to the damage and
prejudice of the appellees, in allowing to be deposited and encashed as well as paying to
improper parties without the knowledge, consent, authority or endorsement of the appellee which
totalled P15,805.00, the six (6) checks in dispute which were "crossed checks" or "for payee's
account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in
favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an
obligation on the part of the named defendant to respect or not to violate such right; and (3) an
act or omission on the part of such defendant violative of the right of the plaintiff or constituting
a breach thereof. (Republic Planters Bank vs. Intermediate Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great weight. The contents of the said
checks issued by the customers of the appellee had not been questioned. There is no dispute that
the same are crossed checks or for payee's account only, which is Melissa's RTW. The appellee
had clearly shown that she had never authorized anyone to deposit the said checks nor to encash
the same; that the appellants had allowed all said checks to be deposited, cleared and paid to one
Rafael Sayson in violation of the instructions in the said crossed checks that the same were for
payee's account only; and that the appellee maintained a savings account with the Prudential
Bank, Cubao Branch, Quezon City which never cleared the said checks and the appellee had
been damaged by such encashment of the same.
We affirm.
ISSUES:
WON the private respondent has a cause of action against the petitioners for their encashment
and payment to another person of certain crossed checks issued in her favor.
HELD:
YES, the Private Respondent does have cause of action.
The petitioner bank argue that the cause of action for violation of the common instruction
found on the face of the checks exclusively belongs to the issuers thereof and not to the
payee. Moreover, having acted in good faith as they merely facilitated the encashment of
the checks, they cannot be made liable to the private respondent.
This argument will not hold.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW. The
Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements
(were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and
purposes treated the said checks as negotiable instruments and, accordingly, assumed the
warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is collected on the check, the bank can be held 'for
moneys had and received." The proceeds are held for the rightful owner of the payment and may
be recovered by him. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected without indorsement at all. The
act of the bank amounts to conversion of the check.
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As
she had not at any time authorized Rafael Sayson to endorse or encash them, there was
conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to
the endorser, it did so at its peril and became liable to the payee for the value of the checks.
This liability attached whether or not the Bank was aware of the unauthorized
endorsement.
The petitioners were negligent when they permitted the encashment of the checks by Sayson.
The Bank should have first verified his right to endorse the crossed checks, of which he was not
the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason
of the nature of the checks put upon notice that they were issued for deposit only to the private
respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed
to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp., 
"The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with
it, for the purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field, and the law
thus holds it to a high standard of conduct."
The petitioner bank insist that the private respondent has no cause of action against them
because they have no privity of contract with her. They also argue that it was Eddie Reyes,
the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would
still be liable to the private respondent because he was not authorized to make the
endorsements. And even if the endorsements were forged, as alleged, the Bank would still
be liable to the private respondent for not verifying the endorser's authority. There is no
substantial difference between an actual forging of a name to a check as an endorsement by a
person not authorized to make the signature and the affixing of a name to a check as an
endorsement by a person not authorized to endorse it.
The Bank does not deny collecting the money on the endorsement. It was its responsibility to
inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's RTW
upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry was a
breach of duty that made it liable to the private respondent for the amount of the checks.
There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in turn could
go against their respective drawee banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the
illegally encashed checks should be allowed to recover directly from the bank responsible for
such encashment regardless of whether or not the checks were actually delivered to the payee.
We approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment, the Bank had
stamped on the back thereof the words: "All prior endorsements and/or lack of endorsements
guaranteed," and thus made the assurance that it had ascertained the genuineness of all prior
endorsements