G.R. No. 156294, 29 November 2006, 508 SCRA 459

FACTS:

A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta against the drawee bank Wilshire Center Bank, N.A., of Los Angeles, California, U.S.A., and payable to Gonzales’ mother, defendant Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations to its employees to receive the check’s value without awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez, Gonzales then received its peso equivalent of ₱155,270.85.

RCBC then tried to collect the amount of the check with the drawee bank by the latter through its correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check because of “END. IRREG” or irregular indorsement. Insisting, RCBC again sent the check to the drawee bank, but this time the check was returned due to “account closed”. Unable to collect, RCBC demanded from Gonzales the payment of the peso equivalent of the check that she received. Gonzales settled the matter by agreeing that payment be made thru salary deduction.

The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive any response from Alviar. Taking further action to collect, RCBC then conveyed the matter to its counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to settle her obligation as assured in her said letter. On July 1988 Gonzales resigned from RCBC. What had been deducted from her salary was only ₱12,822.20 covering ten months.

It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales and the latter’s husband Gino Gonzales. The spouses Gonzales filed an Answer with Counterclaim praying for the dismissal of the complaint as well as payment of ₱10,822.20 as actual damages, ₱20,000.00 as moral damages, ₱20,000.00 as exemplary damages, and ₱20,000.00 as attorney’s fees and litigation expenses. Defendant Eva Alviar, on the other hand, was declared in default for having filed her Answer out of time.

ISSUE:

Whether or not Gomez should be held liable.

RULING:

No. The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical Group (U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored because of “End. Irregular,” i.e., an irregular endorsement. While the foreign drawee bank did not specifically state which among the four signatures found on the dorsal portion of the check made the check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an RCBC employee, was a qualified endorsement because of the phrase “up to ₱17,500.00 only.” There can be no other acceptable explanation for the dishonor of the foreign check than this signature of Olivia Gomez with the phrase “up to ₱17,500.00 only” accompanying it. This Court definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the check had it not been for this signature of Gomez with the same phrase written by her.

The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia Gomez. It is, therefore, a useless piece of paper if returned in that state to its original payee, Eva Alviar.

There is no doubt in the mind of the Court that a subsequent party which caused the defect in the instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviar’s and the petitioner’s liability to subsequent holders of the foreign check is governed by the Negotiable Instruments Law as follows:

Sec. 66. Liability of general indorser. – Every indorser who indorses without qualification, warrants to all subsequent holders in due course;

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following:

(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in favor of subsequent endorsers extend only to the state of the instrument at the time of their endorsements, specifically, that the instrument is genuine and in all respects what it purports to be; that they have good title thereto; that all prior parties had capacity to contract; and that the instrument, at the time of their endorsements, is valid and subsisting. This provision, however, cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument because it results in the absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It cannot be over-stressed that had it not been for the qualified endorsement (“up to ₱17,500.00 only”) of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor of the check, and full payment by drawee bank therefor would have taken place as a matter of course.

*Case digest Claudette Anne G. Sayson, JD-IV, Andres Bonifacio Law School, SY 2019-2020