Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-55079 November 19, 1982

MELENCIO-HERRERA, J.: virtual law library

This is a Petition for Review on certiorari of the Decision of the Court of Appeals in CA-G.R.
No. 57129-R entitled, First National City Bank vs. Metropolitan Bank and Trust Company,
which affirmed in toto the Decision of the Court of First Instance of Manila, Branch VIII, in
Civil Case No. 61488, ordering petitioner herein, Metropolitan Bank, to reimburse respondent
First National City Bank the amount of P50,000.00, with legal rate of interest from June 25,
1965, and to pay attorney's fees of P5,000.00 and costs. virtualawlibrary virtual law library

The controversy arose from the following facts: virtual law library

On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH,
drawn by Joaquin Cunanan & Company on First National City Bank (FNCB for brevity) was
deposited with Metropolitan Bank and Trust Company (Metro Bank for short) by a certain
Salvador Sales. Earlier that day, Sales had opened a current account with Metro Bank depositing
P500.00 in cash. 1 Metro Bank immediately sent the cash check to the Clearing House of the
Central Bank with the following words stamped at the back of the check: virtual law library

Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or
Lack of endorsements Guaranteed. 2

The check was cleared the same day. Private respondent paid petitioner through clearing the
amount of P50,000.00, and Sales was credited with the said amount in his deposit with Metro
Bank.virtualawlibrary virtual law library

On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On
August 28, 1964, he withdrew P32,100.00. Then on August 31, 1964, he withdrew the balance of
P17,920.00 and closed his account with Metro Bank. virtualawlibrary virtual law library

On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to
drawer Joaquin Cunanan & Company, together with the monthly statement of the company's
account with FNCB. That same day, the company notified FNCB that the check had been
altered. The actual amount of P50.00 was raised to P50,000.00, and over the name of the payee,
Manila Polo Club, was superimposed the word CASH. virtualawlibrary virtual law library
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a
letter, which was received by Metro Bank on the following day, September 4, 1964. virtualawlibrary virtual law library

On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of
P50,000.00. The latter did not oblige, so that FNCB reiterated its request on September 29, 1964.
Metro Bank was adamant in its refusal. virtualawlibrary virtual law library

On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case
No. 61488 against Metro Bank for recovery of the amount of P50,000.00. virtualawlibrary virtual law library

On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse
FNCB the amount of P50,000.00 with legal rate of interest from June 25, 1965 until fully paid, to
pay attorney's fees of P5,000.00, and costs. virtualawlibrary virtual law library

Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No. 57129-R). On August
29, 1980, respondent Appellate Court 3 affirmed in toto the judgment of the Trial Court. virtualawlibrary virtual law library

Petitioner came to this instance on appeal by Certiorari, alleging: virtual law library

I virtual law library

The Respondent Court of Appeals erred in completely ignoring and disregarding the 24-hour
clearing house rule provided for under Central Bank Circular No. 9, as amended, although: virtual law library

1. The 24-hour regulation of the Central Bank in clearing house operations is valid and banks are
subject to and are bound by the same; and virtual law library

2. The 24-hour clearing house rule applies to the present case of the petitioner and the private
respondent. virtualawlibrary virtual law library

II virtual law library

The Respondent Court of Appeals erred in relying heavily on its decision in Gallaites, et al. vs.
RCA, etc., promulgated on October 23, 1950 for the same is not controlling and is not applicable
to the present case. virtualawlibrary virtual law library

III virtual law library

The Respondent Court of Appeals erred in disregarding and in not applying the doctrines in the
cases of Republic of the Philippines vs. Equitable Banking Corporation (10 SCRA 8) and
Hongkong & Shanghai Banking Corporation vs. People's Bank and Trust Company (35 SCRA
140) for the same are controlling and apply four square to the present case. virtualawlibrary virtual law library

IV virtual law library

The material facts of the case are not disputed. The issue for resolution is, which bank is liable
for the payment of the altered check, the drawee bank (FNCB) or the collecting bank (Metro
Bank)? virtual law library

The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17,
1949) as amended by Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30,
1964). Section 4 of said Circular, as amended, states: virtual law library

Section 4. Clearing Procedures. virtualawlibrary virtual law library

(c) Procedures for Returned Items virtual law library

Items which should be returned for any reason whatsoever shall be delivered to and received
through the clearing Office in the special red envelopes and shall be considered and accounted as
debits to the banks to which the items are returned. Nothing in this section shall prevent the
returned items from being settled by reinbursement to the bank, institution or entity returning the
items. All items cleared on a particular clearing shall be returned not later than 3:30 P.M. on the
following business day.

xxx xxx xxx virtual law library

The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank
receiving the check for clearing from the Central Bank Clearing House must return the check to
the collecting bank within the 24-hour period if the check is defective for any reason. virtualawlibrary virtual law library

Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the
other hand, relies on the guarantee of all previous indorsements made by Metro Bank which
guarantee had allegedly misled FNCB into believing that the check in question was regular and
the payee's indorsements genuine; as well as on "the general rule of law founded on equity and
justice that a drawee or payor bank which in good faith pays the amount of materially altered
check to the holder thereof is entitled to recover its payment from the said holder, even if he be
an innocent holder. 4 virtual law library

The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic
vs. Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are
part of our banking system, and both are subject to the regulations of the Central Bank, they are
bound by the 24-hour clearing house rule of the Central Bank. virtualawlibrary virtual law library

In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing
house period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of
Metro Bank to the alteration of the check in question until after the lapse of nine days, negates
whatever right it might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank, but against the party responsible for the
changing the name of the payee 5 and the amount on the face of the check. virtualawlibrary virtual law library

FNCB contends that the stamp reading, virtual law library

Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or
Lack of endorsements Guaranteed. 6

made by Metro Bank is an unqualified representation that the endorsement on the check was that
of the true payee, and that the amount thereon was the correct amount. In that connection, this
Court in the Hongkong & Shanghai Bank case, supra, ruled: virtual law library

.. But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing
house operations. The indorsement, itself, is very clear when it begins with words 'For clearance,
clearing office **** In other words, such an indorsement must be read together with the 24-hour
regulation on clearing House Operations of the Central Bank. Once that 24- hour period is over,
the liability on such an indorsement has ceased. This being so, Plaintiff Bank has not made out a
case for relief. 7 virtual law library

Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered
check.virtualawlibrary virtual law library

Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the
withdrawal of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and
first verified, through its Assistant Cashier Federico Uy, the regularity and genuineness of the
check deposit from Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank)
attention was called by the fast movement of the account. Only upon being assured that the same
is not unusual' did Metro Bank allow the withdrawal of the balance. virtualawlibrary virtual law library

Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No.
3805, October 23, 1950, by stating: virtual law library

... The laxity of appellant in its dealing with customers, particularly in cases where the Identity of
the person is new to them (as in the case at bar) and in the obvious carelessness of the appellant
in handling checks which can easily be forged or altered boil down to one conclusion-negligence
in the first order. This negligence enabled a swindler to succeed in fraudulently encashing the
chock in question thereby defrauding drawee bank (appellee) in the amount thereof.

is misplaced not only because the factual milieu is not four square with this case but more so
because it cannot prevail over the doctrine laid down by this Court in the Hongkong & Shanghai
Bank case which is more in point and, hence, controlling: virtual law library

WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is
hereby set aside, and Civil Case No. 61488 is hereby dismissed. virtualawlibrary virtual law library

Costs against private respondent The First National City Bank. virtualawlibrary virtual law library
SO ORDERED.

REPUBLIC V. EQUITABLE BANK

FACTS:
The corporation had acquired 24 treasury warrants by accommodating its former trusted
employee who asked the corporation to cash the warrants, alleging  it  was  difficulty  to  do 
directly  with  the  government  and  that  his wife expected a sort of commission for the
encashment.   The corporation
acceded  to  the  request  provided  that  it  be  first  cleared  and  that  the corporation would
receive the amount before paying for it.  The warrants were then cleared but later on, at different
periods of time, the treasurer returned 24 warrants to the CB on the ground that they have
forged.  The bank refused to return the cash.  
 
The  clearing  of  the  checks,  it  should  be  noted,  was  in  accordance  to  the 24-hour clearing
rule by the CB.
 

HELD:
The  warrants  were  cleared  and  paid  by  the  Treasurer,  in  view  of  which Equitable   and  
PI   bank   credited   the   corresponding   amounts   to   the respective depositors of the warrants
and then honored the checks for said amounts.    Thus,  the  treasury  had  not  been  only 
negligent  in  clearing  its own  warrants  but  had  already  thereby  induced  the  banks  to  pay 
the amounts thereof to said depositors.  This gross negligence becomes more apparent  when 
each  of  the  warrants  were  valued  for  more  than  the authority of the treasurer to approve.