Under their check discounting agreement Filipinas Orient Finance Corporation (Filipinas Orient) issued four (4) Philippine Bank of Communications (PBCom) crossed checks to Yu Kio, president of Pipe Master Corporation (Pipe Master), in exchange of four (4) Metropolitan Bank and Trust Company (MetroBank) checks. The PBCom checks were payable to Pipe Master and marked “For Payee’s Account Only.” He indorsed and deposited the PBCom checks in his personal accounts with MetroBank and Solid Bank Corporation (Solid Bank) account. PBCom paid MetroBank and Solid Bank the amounts of the checks and the proceeds were credited to Yu Kio’s personal accounts.
Whether or not petitioner banks were liable to respondent Filipinas Orient for accepting the PBCom crossed checks payable to Pipe Master.
YES. Petitioner banks have the obligation to ensure that the PBCom checks were deposited in accordance with the instructions stated in the checks. The four PBCom checks in question had been crossed and issued “for payee’s account only.” This could only mean that the drawer, Filipinas Orient, intended the same for deposit only by the payee, Pipe Master. The effect of crossing a check means that the drawer had intended the check for deposit only by the rightful person, the payee named therein. But petitioner banks accommodated Yu Kio, accepted the crossed checks, and stamped at the back thereof that “all prior indorsements and/or lack of indorsements are guaranteed.” In so doing, they became general endorsers. 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 a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting.” Clearly, petitioner banks, being endorsers, cannot deny liability.