REPUBLIC BANK, PETITIONER, VS. COURT OF APPEALS AND FIRST NATIONAL CITY BANK, RESPONDENTS.

Republic Bank versus Court of Appeals and First National City Bank

The Case

This is a petition for review brought by Republic Bank against the Court of Appeals and the First National City Bank. The dispute is a classic banking question: when a check has been materially altered, and the drawee bank pays it and later seeks to recover the money from the collecting bank, who bears the loss? Republic Bank, the collecting bank, had endorsed the check and received payment from the First National City Bank, the drawee. When the alteration was discovered, the drawee demanded a refund. The case matters because it fixes the boundary between the general rule that a collecting bank answers for its endorsement and the regulatory duty of the drawee bank to return a bad item within the clearing period. It teaches when the collecting bank is absolved and when the drawee must swallow the loss.

Procedural History

The First National City Bank sued Republic Bank in the trial court to recover the amount it had paid on the altered check. The trial court rendered judgment in favor of the First National City Bank, ordering Republic Bank to pay the sum with interest, plus attorney's fees and costs. Republic Bank appealed to the Court of Appeals. The Court of Appeals affirmed the decision but reduced the award of attorney's fees, without pronouncement as to costs. Republic Bank then came to the Supreme Court by petition for review, raising the single question of whether the twenty-four hour clearing house rule protected it from liability.

Facts

On January 25, 1966, San Miguel Corporation drew a dividend check for 240 pesos on its account with the First National City Bank in favor of a stockholder, J. Roberto C. Delgado. After the check was delivered to Delgado, its amount was fraudulently altered, without the drawer's authority, from 240 pesos to 9,240 pesos. On March 14, 1966, Delgado indorsed and deposited the check in his account with Republic Bank. Republic Bank accepted the deposit without ascertaining the check's genuineness and regularity.

Republic Bank then endorsed the check to the First National City Bank, stamping on its back a guarantee of all prior indorsements and of any lack of indorsement, and presented it for payment through the Central Bank Clearing House. Believing the check genuine, and relying on Republic Bank's guaranty and endorsement, the First National City Bank paid 9,240 pesos to Republic Bank through the clearing house on March 15, 1966.

On April 19, 1966, San Miguel Corporation notified the First National City Bank of the alteration, and the bank promptly recredited the 9,240 pesos to the drawer. On May 19, 1966, the drawee bank informed Republic Bank in writing of the alteration and of the forgery of Delgado's endorsement. By then, Delgado had already withdrawn his account from Republic Bank. On August 15, 1966, the drawee demanded a refund, and Republic Bank refused, raising delay in notice, its own lack of negligence, the drawer's manner of drawing the check, and the drawee's supposed absolution from liability to the drawer.

Issues

• Whether or not Republic Bank, as the collecting bank, is protected by the twenty-four hour clearing house rule from liability to refund the amount paid by the First National City Bank as drawee.
• Whether or not the unqualified endorsement of the collecting bank on the check should be read together with the twenty-four hour regulation on clearing house operations.
• Whether or not the loss for the payment of the altered check should fall on the drawee bank that failed to detect the alteration and to return the item within the clearing period.

Applicable Provisions

Section 4(c) of Central Bank Circular No. 9, as amended, provides:

Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity from which the item was received. For this purpose, the Receipt for Returned Checks (Cash Form No. 9) should be used. The original and duplicate copies of said Receipt shall be given to the Bank, institution or entity which returned the items and the triplicate copy should be retained by the bank, institution or entity whose demand is being returned. At the following clearing, the original of the Receipt for Returned Checks shall be presented through the Clearing Office as a demand against the bank, institution or entity whose item has been returned. Nothing in this section shall prevent the returned items from being settled by direct reimbursement to the bank, institution or entity returning the items. All items cleared at 11:00 o'clock A.M. shall be returned not later than 2:00 o'clock P.M. on the same day and all items cleared at 3:00 o'clock P.M. shall be returned not later than 8:30 A.M. of the following business day except for items cleared on Saturday which may be returned not later than 8:30 A.M. of the following day.

This is the twenty-four hour clearing house rule, and it bears on the case because the drawee bank failed to return the altered check within the period it fixes, which the Court holds cuts off its recourse against the collecting bank.

Ruling

On the first issue, the Court ruled that the twenty-four hour clearing house rule is a valid rule applicable to commercial banks, and that Republic Bank is protected by it. The rule had been upheld in earlier decisions, and since both banks are part of the banking system and subject to Central Bank regulations, both are bound by it.

On the second issue, the Court held that while, as a general rule, the collecting bank or last endorser bears the loss when an endorsement is forged, the unqualified endorsement of the collecting bank must be read together with the twenty-four hour regulation on clearing house operations. The Court stated the consequence plainly:

Thus, when the drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.

The Court found persuasive its earlier rulings, where a drawee that waited twenty-seven days, and another that waited nine days, to give notice of alteration lost its right of recourse, because once the twenty-four hour period is over, the liability on the endorsement has ceased.

On the third issue, the Court placed the loss on the drawee bank. A bank that issues checks should be able to detect alterations, for the instruments are prepared and issued by itself and it is familiar with the drawer's signature. Unless the alteration is attributable to the drawer's own fault or negligence, the remedy of a drawee that negligently clears a forged or altered check is against the party responsible for the alteration; otherwise, the drawee bears the loss. It may not charge the amount to a blameless drawer, nor recover it from the collecting bank if the latter made payment after proper clearance from the drawee. The Court quoted with approval the rule that payment by a drawee that had the opportunity to ascertain the check's character is payment in neglect of duty, and the result of its negligence must rest upon it. Where a loss must be borne by one of two parties alike innocent of forgery, it is reasonable that it be borne by the one through whose means it succeeded.

Doctrine

A Bar candidate should retain these rules. First, the twenty-four hour clearing house rule under Central Bank Circular No. 9 is valid and binds all commercial banks. Second, although the collecting bank or last endorser generally bears the loss when an endorsement is forged, its unqualified endorsement is read together with the clearing regulation. Third, when the drawee bank fails to return a forged or altered check to the collecting bank within the twenty-four hour clearing period, the collecting bank is absolved from liability. Fourth, the drawee bank bears the loss for negligently clearing an altered check, and its remedy lies against the party responsible for the alteration, not against the collecting bank, unless the alteration is attributable to the drawer's own fault or negligence.

Disposition

The petition for review was granted; the decision of the Court of Appeals was reversed and set aside, and Republic Bank was absolved from liability to refund the 9,240 pesos to the First National City Bank, with no costs.

Remember This

Memorize this line: when the drawee bank fails to return a forged or altered check to the collecting bank within the twenty-four hour clearing period, the collecting bank is absolved from liability. Examiners use this case to test the conflict between the collecting bank's endorsement liability and the drawee's duty to return items within the clearing period, and to ask who bears the loss for a negligently cleared altered check.