G.R. No.

175350

June 13, 2012

EQUITABLE BANKING CORPORATION, INC. Petitioner,

vs.
SPECIAL STEEL PRODUCTS, and AUGUSTO L. PARDO, Respondents.

Ponente: Del Castillo, J.

Doctrine: A crossed check with the notation "account payee only" can only be deposited in
the named payees account. It is gross negligence for a bank to ignore this rule solely on the
basis of a third partys oral representations of having a good title thereto.

SSPI a private domestic corporation sellingsteel products.

Pardo SSPIs President and majority stockholder
Interco regular customer
Uy son-in-law of its majority stockholder
Equitable depository bank of Interco and of Uy
Facts:
SSPI sold welding electrodes to Interco, as evidenced by sales invoices. It is due on
March 16 1991 (for the first sales invoice and May 11 1991 for others). It also provided that
Interco would pay interest at the rate of 36% per annum in case of delay. As payment for
the products, Interco issued 3 checks payable to the order of SSPI. Each check was crossed
with the notation account payee only and was drawn against Equitable.
The records do not identify the signatory for the checks, or explain how Uy came in
possession of these checks. He claimed that he had good title thereto. He demanded the
deposits in his personal accounts in Equitable. The bank did so relying on Uys status as a
valued client and as son-in-law of Intercos majority stockholder.
SSPI reminded Interco of the unpaid welding electrodes, explaining that its immediate
need for payment as it was experiencing some financial crisis of its own. It replied that it has
already issued 3 checks payable to SSPI and drawn against Equitable, which was denied by
SSPI. Later on it was discovered that it was Uy, not SSPI, who received the proceeds of 3
checks. Interco finally paid the value of 3 checks to SSPI plus portion of accrued interests.
Interco refused to pay entire accrued interest on the ground that it was not responsible for
the delay. Hence, Pardo filed a complaint for damages against Uy and Equitable Bank
alleging that the 3 crossed checks, all payable to order of SSPI could be deposited and
encashedby SSPI only.

Trial Court rendered decision in favor of Pardo which was affirmed by CA.
Issues:
What is the nature of crossed check?
Whether SSPI has a cause of action against Equitable for quasi-delict, whereby it can recover
actual damages from Equitable?
Held:
SSPIs cause of action based on quasi-delict.
SSPI does not ask Equitable or Uy to deliever to it theproceeds of the checks as the
rightful payee. The courts below correctly ruled that SSPI has a cause of action forquasidelict.
The checks that Interco issued in favor of SSPI were all crossed, made payable to
SSPIs order and contained thenotation account payee only. This creates a reasonable
expectation that the payee alone would receive the proceeds of the checks and that
diversion of the checks would be averted. This expectation arises from the accepted banking
practice that crossed checks are intended for deposit in the named payees account only
and no other. At the very least, crossed checks should place a bank on notice that it should
exercise more caution or expend more than a cursory inquiry, to ascertain whether the
payee on the check has authorized the holder to deposit the same in different account.
A crossed check with the notation account payee only can only be deposited in the
named payees account. It is gross negligence for a bank to ignore this rule solely on the
basis of a third partys oral representations of having a good title there to.