G.R. No.

179952 December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK

CORPORATION), Petitioner,
vs.
BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC.,
Respondents.

DECISION

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA

Finance) a ₱329,2801 loan to secure which, he mortgaged his car to respondent BA
Finance.2 The mortgage contained the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the property(ies)
hereinabove mortgaged to be insured against loss or damage by accident, theft and fire
for a period of one year from date hereof with an insurance company or companies
acceptable to the MORTGAGEE in an amount not less than the outstanding balance of
mortgage obligations and that he/it will make all loss, if any, under such policy or
policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x. 3
(emphasis and underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc.
(Malayan Insurance)4 which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is
hereby expressly understood that this policy or any renewal thereof, shall not be
cancelled without prior notification and conformity by BA FINANCE CORPORATION. 5
(emphasis and underscoring supplied)

The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check payable to the
order of "B.A. Finance Corporation and Lamberto Bitanga" for ₱224,500, drawn against
China Banking Corporation (China Bank). The check was crossed with the notation "For
Deposit Payees’ Account Only."6

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the
check to his account with the Asianbank Corporation (Asianbank), now merged with
herein petitioner Metropolitan Bank and Trust Company (Metrobank). Bitanga
subsequently withdrew the entire proceeds of the check.

In the meantime, Bitanga’s loan became past due, but despite demands, he failed to settle
it.

BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance
of a crossed check payable to it and Bitanga, and of Bitanga’s depositing it in his account
at Asianbank and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank 7
but to no avail, prompting it to file a complaint before the Regional Trial Court (RTC) of
Makati for sum of money and damages against Asianbank and Bitanga,8 alleging that,
inter alia, it is entitled to the entire proceeds of the check.

In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the]
complaint in bad faith to coerce [it] into paying the whole amount of the CHECK
knowing fully well that its rightful claim, if any, is against Malayan [Insurance]."10

Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently

induced its personnel to release to him the full amount of the check; and that on being
later informed that the entire amount of the check did not belong to Bitanga, it took steps
to get in touch with him but he had changed residence without leaving any forwarding
address.12

And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that
Malayan Insurance was grossly negligent in issuing the check payable to both Bitanga
and BA Finance and delivering it to Bitanga without the consent of BA Finance.14

Bitanga was declared in default in Asianbank’s cross-claim.15

Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the
contract between BA Finance and Bitanga, and noting the claim of Malayan Insurance
that it is its policy to issue checks to both the insured and the financing company, held
that Malayan Insurance cannot be faulted for negligence for issuing the check payable to
both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the
check to his account and to withdraw the proceeds thereof, without his co-payee BA
Finance having either indorsed it or authorized him to indorse it in its behalf, 16 found
Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of
the Negotiable Instruments Law and Associated Bank v. Court of Appeals.17

Thus the trial court disposed:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants

Asian Bank Corporation and Lamberto Bitanga:

1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon
at the rate of 12% from September 25, 1992 until fully paid;

2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as

actual damages; P30,000.00 as attorney’s fee; and
 3) To pay the costs of suit.

Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party defendant
Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan
attorney’s fee of P50,000.00 and a per appearance fee of P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is

ordered to pay the former the amounts the latter is ordered to pay the plaintiff in
Nos. 1, 2 and 3 above-mentioned.

SO ORDERED.18 (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the following
issues for consideration:

3.01.1.1 Whether BA Finance has a cause of action against Asianbank.

3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from
Asianbank more than one-half of the value of the check considering that it is a mere co-
payee or joint payee of the check?

3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages
for wrongfully bringing the case to court.

3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money
which this Honorable Court may award to BA Finance in this case. 19 (underscoring
supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal right and
title to the check considering that the check was not delivered to BA Finance. Hence,
BA Finance is not a holder thereof under the Negotiable Instruments Law.

B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity

of contract between them.

C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the

intermediary between the payee and the drawee Chinabank, it merely acted on the
instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence,
the consequent damage to BA Finance was due to the negligence of Chinabank.

D. Malayan’s act of issuing and delivering the check solely to Bitanga in violation of
the "loss payee" clause in the Policy, is the proximate cause of the alleged damage to
 BA Finance.

E. Assuming Asianbank is liable, BA Finance can claim only his proportionate

interest on the check as it is a joint payee thereof.

F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust
enrichment or solutio indebiti.

G. BA Finance is liable to pay Asianbank actual and exemplary damages.20

(underscoring supplied)

The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to
be "whether…BA Finance has a cause of action against [it] even if the subject check had
not been delivered to…BA Finance by the issuer itself," held in the affirmative and
accordingly affirmed the trial court’s decision but deleted the award of ₱20,000 as actual
damages.21

Hence, the present Petition for Review on Certiorari 22 filed by Metrobank (hereafter
petitioner) to which Asianbank was, as earlier stated, merged, faulting the appellate court

I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence

of factual similarity and of the legal relationships necessary for the application of the
desirable shortcut rule. x x x

II. x x x in not finding that x x x the general rule that the payee has no cause of action
against the collecting bank absent delivery to him must be applied.

III. x x x in finding that all the elements of a cause of action by BA Finance

Corporation against Asianbank Corporation are present.

IV. x x x in finding that Article 1208 of the Civil Code is not applicable.

V. x x x in awarding of exemplary damages even in the absence of moral, temperate,

liquidated or compensatory damages and a finding of fact that Asianbank acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner.

xxxx

VII. x x x in dismissing Asianbank’s counterclaim and Third Party complaint [against

Malayan Insurance].23 (italics in the original; underscoring supplied)

Petitioner proffers the following arguments against the application of Associated Bank v.
CA to the case:

x x x [T]he rule established in the Associated Bank case has provided a speedier remedy
for the payee to recover from erring collecting banks despite the absence of delivery of
the negotiable instrument. However, the application of the rule demands careful
consideration of the factual settings and issues raised in the case x x x.

One of the relevant circumstances raised in Associated Bank is the existence of forgery or
unauthorized indorsement. x x x

xxxx

In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as
one of the payees. Moreover, his signature is not a forgery nor has he or anyone forged
the signature of the representative of BA Finance Corporation. No unauthorized
indorsement appears on the check.

xxxx

Absent the indispensable fact of forgery or unauthorized indorsement, the desirable

shortcut rule cannot be applied,24 (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or indorsees who are
not partners, all must indorse unless the one indorsing has authority to indorse for the
others. (emphasis and underscoring supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release
of the proceeds thereof, despite the absence of authority of Bitanga’s co-payee BA
Finance to endorse it on its behalf.25

Denying any irregularity in accepting the check, petitioner maintains that it followed
normal banking procedure. The testimony of Imelda Cruz, Asianbank’s then accounting
head, shows otherwise, however, viz:

Q Now, could you be familiar with a particular policy of the bank with respect to
checks with joined (sic) payees?

A Yes, sir.

Q And what would be the particular policy of the bank regarding this transaction?

A The bank policy and procedure regarding the joint checks. Once it is
deposited to a single account, we are not accepting joint checks for single
account, depositing to a single account (sic).

Q What happened to the bank employee who allowed this particular transaction to
 occur?

A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.

Q What do you mean by the branch personnel being held liable?

A Because since (sic) the bank policy, we are not supposed to accept joint checks
to a [single] account, so we mean that personnel would be held liable in the sense
that (sic) once it is withdrawn or encashed, it will not be allowed.

Q In your experience, have you encountered any bank employee who was subjected
to disciplinary action by not following bank policies?

A The one that happened in that case, since I really don’t know who that personnel is,
he is no longer connected with the bank.

Q What about in general, do you know of any disciplinary action, Madam

witness?

A Since there’s a negligence on the part of the bank personnel, it will be a

ground for his separation [from] the bank.26 (emphasis, italics and underscoring
supplied)

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in
Bitanga’s account.

Petitioner’s argument that since there was neither forgery, nor unauthorized indorsement
because Bitanga was a co-payee in the subject check, the dictum in Associated Bank v.
CA does not apply in the present case fails. The payment of an instrument over a missing
indorsement is the equivalent of payment on a forged indorsement27 or an unauthorized
indorsement in itself in the case of joint payees.28

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the
crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that
the check did not, it bears repeating, carry the indorsement of BA Finance.29

As has been repeatedly emphasized, the banking business is imbued with public interest
such that the highest degree of diligence and highest standards of integrity and
performance are expected of banks in order to maintain the trust and confidence of the
public in general in the banking sector. 30 Undoubtedly, BA Finance has a cause of action
against petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be one-half of
the amount covered by the check as there is no indication in the check that Bitanga and
BA Finance are solidary creditors to thus make them presumptively joint creditors under
Articles 1207 and 1208 of the Civil Code which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and
the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestations.
There is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which the
preceding article refers to the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors, the
debts or credits being considered distinct from one another, subject to the Rules of Court
governing the multiplicity of suits.

Petitioner’s argument is flawed.

The provisions of the Negotiable Instruments Law and underlying jurisprudential

teachings on the black-letter law provide definitive justification for petitioner’s full
liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and
which indorses the check upon presentment with the drawee bank, is an indorser. [31] This
is because in indorsing a check to the drawee bank, a collecting bank stamps the back of
the check with the phrase "all prior endorsements and/or lack of endorsement
guaranteed"32 and, for all intents and purposes, treats the check as a negotiable
instrument, hence, assumes the warranty of an indorser.33 Without Asianbank’s warranty,
the drawee bank (China Bank in this case) would not have paid the value of the subject
check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has
the duty to ascertain the genuineness of all prior indorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of prior indorsements.34

Accordingly, one who credits the proceeds of a check to the account of the indorsing
payee is liable in conversion to the non-indorsing payee for the entire amount of the
check.35

It bears noting that in petitioner’s cross-claim against Bitanga, the trial court ordered
Bitanga to return to petitioner the entire value of the check ─ ₱224,500.00 ─ with interest
as well as damages and cost of suit. Petitioner never questioned this aspect of the trial
court’s disposition, yet it now prays for the modification of its liability to BA Finance to
only one-half of said amount. To pander to petitioner’s supplication would certainly
amount to unjust enrichment at BA Finance’s expense. Petitioner’s remedy—which is the
reimbursement for the full amount of the check from the perpetrator of the irregularity —
lies with Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these
are completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to
answer for an underlying contractual obligation (payment of insurance proceeds). The
obligation is merely reflected in the instrument and whether the payees would jointly
share in the proceeds or not is beside the point.

Moreover, granting petitioner’s appeal for partial liability would run counter to the
existing principles on the liabilities of parties on negotiable instruments, particularly on
Section 68 of the Negotiable Instruments Law which instructs that joint payees who
indorse are deemed to indorse jointly and severally.36 Recall that when the maker
dishonors the instrument, the holder thereof can turn to those secondarily liable — the
indorser — for recovery.37 And since the law explicitly mandates a solidary liability on
the part of the joint payees who indorse the instrument, the holder thereof (assuming the
check was further negotiated) can turn to either Bitanga or BA Finance for full
recompense.

Respecting petitioner’s challenge to the award by the appellate court of exemplary

damages to BA Finance, the same fails. Contrary to petitioner’s claim that no moral,
temperate, liquidated or compensatory damages were awarded by the trial court,38 the
RTC did in fact award compensatory or actual damages of ₱224,500, the value of the
check, plus interest thereon.

Petitioner argues, however, that assuming arguendo that compensatory damages had been
awarded, the same contravened Article 2232 of the Civil Code which provides that in
contracts or quasi-contracts, the court may award exemplary damages only if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Since, so petitioner concludes, there was no finding that it acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner,39 it is not liable for exemplary damages.

The argument fails. To reiterate, petitioner’s liability is based not on contract or quasi-
contract but on quasi-delict since there is no pre-existing contractual relation between the
parties.40 Article 2231 of the Civil Code, which provides that in quasi-delict, exemplary
damages may be granted if the defendant acted with gross negligence, thus applies. For
"gross negligence" implies a want or absence of or failure to exercise even slight care or
diligence, or the entire absence of care,41 evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.42

x x x The law allows the grant of exemplary damages to set an example for the public
good. The business of a bank is affected with public interest; thus it makes a sworn
profession of diligence and meticulousness in giving irreproachable service. For this
reason, the bank should guard against in injury attributable to negligence or bad faith on
its part. The award of exemplary damages is proper as a warning to [the petitioner] and
all concerned not to recklessly disregard their obligation to exercise the highest and
strictest diligence in serving their depositors.43 (Italics and underscoring supplied)
As for the dismissal by the appellate court of petitioner’s third-party complaint against
Malayan Insurance, the same is well-taken. Petitioner based its third-party complaint on
Malayan Insurance’s alleged gross negligence in issuing the check payable to both BA
Finance and Bitanga, despite the stipulation in the mortgage and in the insurance policy
that liability for loss shall be payable to BA Finance. 44 Malayan Insurance countered,
however, that it

x x x paid the amount of ₱224,500 to ‘BA Finance Corporation and Lamberto Bitanga’ in
compliance with the decision in the case of "Lamberto Bitanga versus Malayan Insurance
Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the
Supreme Court [3rd Division], G.R. no. 101964, April 8, 1992 x x x. 45 (underscoring
supplied)

It is noted that Malayan Insurance, which stated that it was a matter of company policy to
issue checks in the name of the insured and the financing company, presented a witness to
rebut its supposed negligence. 46 Perforce, it thus wrote a crossed check with joint payees
so as to serve warning that the check was issued for a definite purpose.47 Petitioner never
ever disputed these assertions.

The Court takes exception, however, to the appellate court’s affirmance of the trial court’s
grant of legal interest of 12% per annum on the value of the check. For the obligation in
this case did not arise out of a loan or forbearance of money, goods or credit. While
Article 1980 of the Civil Code provides that:

Fixed savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan,

said provision does not find application in this case since the nature of the relationship
between BA Finance and petitioner is one of agency whereby petitioner, as collecting
bank, is to collect for BA Finance the corresponding proceeds from the check.48 Not being
a loan or forbearance of money, the interest should be 6% per annum computed from the
date of extrajudicial demand on September 25, 1992 until finality of judgment; and 12%
per annum from finality of judgment until payment, conformably with Eastern Shipping
Lines, Inc. v. Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED
with MODIFICATION in that the rate of interest on the judgment obligation of ₱224,500
should be 6% per annum, computed from the time of extrajudicial demand on September
25, 1992 until its full payment before finality of judgment; thereafter, if the amount
adjudged remains unpaid, the interest rate shall be 12% per annum computed from the
time the judgment becomes final and executory until fully satisfied.

Costs against petitioner.

SO ORDERED.