REPUBLIC OF THE PHILIPPINES, PLAINTIFF AND APPELLANT. VS. PHILIPPINE NATIONAL BANK, ET AL., DEFENDANTS, THE FIRST NATIONAL CITY BANK OF NEW YORK, DEFENDANT AND APPELLEE.

Republic versus Philippine National Bank

The Case

This is an escheat case. The Republic of the Philippines sued several banks, among them the First National City Bank of New York, to recover unclaimed bank balances under Act Number 3936, the old escheat law for unclaimed balances. The bank admitted that most of its dormant accounts were subject to escheat, but asked that certain items be excluded because they were not, properly speaking, credits or deposits. The Supreme Court had to draw the line between three banking instruments: the demand draft, the cashier's or manager's check, and the telegraphic transfer payment order. The case matters because it fixes what counts as a "credit" or "deposit" that the State may escheat, and it teaches the negotiable instruments rule that a bill of exchange does not by itself assign funds in the hands of the drawee.

Procedural History

The Republic filed its complaint for escheat before the Court of First Instance of Manila. After hearing, the trial court held that cashier's or manager's checks and demand drafts fall within the purview of Act Number 3936, but that telegraphic transfer payment orders belong to a different category, and it dismissed the complaint as to the latter. On the bank's motion for reconsideration, the trial court changed its view and held that even the demand drafts do not come within the Act, and it amended its decision accordingly. The Republic appealed, and the case reached the Supreme Court on that appeal.

Facts

On September 25, 1957, the Republic of the Philippines filed a complaint for escheat of certain unclaimed bank deposit balances under Act Number 3936 against several banks, among them the First National City Bank of New York. The complaint alleged that, pursuant to Section 2 of the Act, the defendant banks had forwarded to the Treasurer of the Philippines sworn statements of all credits and deposits held by them in favor of persons known to be dead, or who had not made further deposits or withdrawals for ten years or more. The Republic prayed that these credits and deposits be escheated to it and that the banks be ordered to deposit them to its credit with the Treasurer.

In its answer, the First National City Bank of New York admitted that various savings deposits, pre-war inactive accounts, and sundry accounts in its report, totalling more than 100,000 pesos and dormant for ten years or more, were subject to escheat. It claimed, however, that it had inadvertently included certain items which were not credits or deposits within the contemplation of Act Number 3936, and it prayed that these be excluded from the Republic's claim.

The trial court first ruled that cashier's or manager's checks and demand drafts came within the Act, but not telegraphic transfer payment orders, and dismissed the complaint as to the latter. On the bank's motion for reconsideration, the court changed its view and held that even the demand drafts did not come within the Act, and amended its decision. The Republic appealed.

Issues

• Whether or not demand drafts come within the meaning of the terms "credits" or "deposits" in Act Number 3936 and are therefore subject to escheat.
• Whether or not telegraphic transfer payment orders come within the meaning of those same terms and are therefore subject to escheat.

Applicable Provisions

Section 1 of Act Number 3936 defines the unclaimed balances subject to escheat:

SECTION 1. "Unclaimed balances" within the meaning of this Act shall include credits or deposits of moneys, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a period of ten years or more. Such unclaimed balances, together with the increase and proceeds thereof, shall be deposited with the Insular Treasurer, to the credit of the Government of the Philippine Islands to be used as the Philippine Legislature may direct.

The whole case turns on whether the instruments in question are "credits or deposits" in favor of a person unheard from for ten years or more.

Section 127 of the Negotiable Instruments Law governs the effect of a bill of exchange on funds in the drawee's hands:

A bill of exchange of itself, does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the drawee is not liable, on the bill unless and until he accepts the same.

This is the key to the demand draft: without acceptance, the drawee bank owes the payee nothing, so there is no credit to escheat.

Ruling

On the first issue, the Court held that demand drafts are not credits or deposits under the law. A demand draft is a bill of exchange payable on demand, an open letter of request from, and an order by, one person on another to pay a sum of money to a third person. Under Section 127 of the Negotiable Instruments Law, such a bill does not of itself operate as an assignment of funds in the drawee's hands, and the drawee is not liable until he accepts it. Since the demand drafts involved were never presented for acceptance or for payment, the bank never had a chance to accept or reject them, never became a debtor of the payee, and the drafts cannot be considered credits subject to escheat.

The Court distinguished the cashier's or manager's check. Quoting an American decision, it characterized such a check as "the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand." It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of its issuance. A demand draft, drawn on a third party, is not of the same category.

On the second issue, the Court held that telegraphic transfer payment orders are subject to escheat. The purchase of a telegraphic transfer is a purchase and sale transaction; the purchaser completes it upon payment, and the drawer bank has already been paid the value of the order, otherwise it would not have transmitted it. The amounts appear on the bank's books in the names of the respective payees, who could demand payment at any time. It would be absurd to say the drawer banks remain the owners. These items, listed under paragraph 3 of the bank's answer, are therefore credits in favor of the payees and must be escheated.

Doctrine

First, the terms "credits" and "deposits" in the escheat law presuppose a creditor and debtor relationship. A credit is a sum credited on the books of a company to a person who appears entitled to it, and a bank deposit creates that same relationship between depositor and bank.

Second, a demand draft is a bill of exchange payable on demand. Under Section 127 of the Negotiable Instruments Law, it does not operate as an assignment of funds in the drawee's hands, and the drawee is not liable until acceptance. Absent presentment and acceptance, no creditor and debtor relationship arises, and there is no credit to escheat.

Third, a cashier's or manager's check is the bank's primary obligation and its written promise to pay on demand, accepted in advance by the act of issuance, and so it falls within the escheat law.

Fourth, a telegraphic transfer payment order, once the drawer bank has been paid its value and the amount stands on the remitting bank's books in the payee's name, is a credit in favor of the payee and is subject to escheat.

Disposition

The Republic won in part: the Supreme Court modified the trial court's decision by ordering that the telegraphic transfer payment orders listed under paragraph 3 of the bank's answer be escheated in favor of the Republic of the Philippines, without costs.

Remember This

Memorize the line: a demand draft is a bill of exchange that does not assign funds until acceptance, so it is no credit to escheat, while a cashier's check is the bank's own accepted promise to pay and a telegraphic transfer is a completed credit in the payee's name. Examiners use this case in negotiable instruments, on the effect of acceptance and the nature of cashier's checks, and in special proceedings, on what may be escheated under the unclaimed balances law.