Equitable Banking Corporation v.

Intermediate Appelate Court

G.R. No. 74451
Facts: Sometime in 1975, Liberato Casals went to Edward J. Nell Company (EJNC) and told its
senior sales engineer, Amado Claustro that he was interested in buying one of the garret skidders
of EJNC since it was a dealer of machineries, equipment, and supplies. Casals stated that he was
a majority stockholder, president, and general manager of Casville Enterprises, Inc (CEI), a firm
engaged in the large scale production, procurement, and processing of logs and lumber products.
After talking to Amado, Casals was referred to the executive vice-president, Apolonio Javier, for
negotiations on the manner of payment. Instead of cash payment, Casals informed Javier that his
corporation, CEI, had a credit line with Equitable Banking Corporation (EBC). Impressed, Javier
agreed to be paid by way of a domestic letter of credit, which Casals promised to open in EJNC’s
favor.
CEI, through Casals, bought 2 units of garret skidders for a total of Php 970,000.00.
Casals requested for one of the units to be delivered to Cagayan de Oro, stating that an
irrevocable Domestic Letter of Credit would be opened in EJNC’s favor on or before June 30,
1976. EJNC shipped one of the units to CDO on May 3 and paid the shipping cost of Php
10,640.00. Casals gave EJNC a postdated check with the amount of Php300,000.00 on July 15.
This was followed by another check of the same post-date. CEI informed EJNC that their
application for a letter of credit for the payment had been approved by EBC but that CEI needed
Php 300,000.00 to stand as collateral or marginal deposit in favor of EBC and an additional Php
100,000.00 in favor of EBC to clear the title of the Estrada property belonging to Casals which
had been approved as security for the trust receipts to be issued by the bank, covering the
skidders.
Even if the marginal deposit was supposed to be produced by CEI, EJNC agreed to
advance the necessary amount in order to facilitate the transaction. EJNC issued a check in the
amount of Php 400,000.00 payable to EBC. Severino Santos, executive vice-president of EBC
did not accept the checks and a covering letter because the terms and conditions for the opening
of the letter of credit has not yet been agreed on. Casals wrote to EBC again to apply for two
letters of credit to cover its purchase from EJNC. EBC replied to this, stating that it was ready to
open the letters of credit upon CEI’s payment of 30% cash margin deposit and giving of
securities, among other terms and conditions. CEI sent EJNC a copy of the foregoing letter,
enclosing therein three postdated checks. In said letter, CEI informed EJNC of the required 30%
marginal deposit, as well as the additional P100, 000.00 to clean up the Estrada property to be
given as security.
It also instructed EJNC that the check covering the said amounts should be made payable
in the following manner: "to the Order of EQUITABLE BANKING CORPORATION for the
account of Casville Enterprises Inc." CEI also stated that the three enclosed postdated checks
were intended as replacement of the checks that were previously issued by CEI to EJNC. Also,
Casals delivered to EJNC TCT’s covering two pieces of real estate properties as security. EJNC
acceded to this and issued a check (SECOND CHECK) for P427, 300.00, payable to the “order
of EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC.” Unlike
the FIRST CHECK, this SECOND CHECK did NOT contain the notation or memorandum of
the FIRST CHECK, but the substance of the same was reproduced in a covering letter that went
with the check. Both the check and the covering letter were sent to EBC through Casals, because
EJNC believed that no one, including Casals, could encash the same as it was made payable to
the EBC alone. However, upon receiving the check for P427, 300.00 entrusted to him by EJNC,
Casals immediately deposited it with EBC and the bank teller accepted the same for deposit in
CEI’s checking account.
After depositing said check, CEI, acting through defendant Casals, then withdrew all the
amount deposited. Meanwhile, the three checks that CEI gave to EJNC as collateral were all
dishonored for having been drawn against a closed account. Also, the real estate covered by the
TCT’s given to EJNC were foreclosed and sold at public auction because of CEI’s failure to pay
its obligation to EBC. Subsequently, EJNC learned that no letters of credit were opened by EBC
in its favor, and that CEI had withdrawn the entire amount of P427, 300.00, without paying its
obligation to EBC. Thus, EJNC instituted the present action, in which both the trial court and
IAC ruled in its favor against Casals, CEI and EBC. Basically, the lower courts faulted EBC for
erroneously crediting the amount of the check issued by EJNC to the account of CEI, when it
should’ve been for the account of EBC, in order to facilitate the opening of the letters of credit.
They also found that the check was originally issued as non-negotiable, since the EBC teller
stamped therein the words “NONNEGOTIABLE For Payee's Account Only” and “NON-
NEGOTIABLE TELLER NO. 4, August 17, 1976 EQUITABLE BANKING CORPORATION.”
Note that Casals and CEI did not dispute their liability. Thus, only EBC’ liability to EJNC, if
any, is at issue.
JUDGE: May we ask first, the counsel of EBC, Mr./Ms. ____, the issue on whether they should
be held liable for the value of the second check issued by EJNC.
COUNSEL for EBC: As counsel for EBC, EBC is not liable for the value of the second check.
According to Article 8 of the Negotiable Instruments law, it provides:
“Sec. 8. When payable to order. - The instrument is payable to order where it is
drawn payable to the order of a specified person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
 (e) One or some of several payees; or
(f)  The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.”
Due to the wording of this law, it may be accepted that the check may be deposited to the
account indicated after the symbol “A/C.”
JUDGE: May we now call the counsel of IAC and EJNC, Mr./Ms. ____, please proceed with
your contentions on whether EBC should be held liable for the value of the second check issued
by EJNC.
COUNSEL for IAC and EJNC: As counsel for IAC and EJNC, EBC should be liable for the
value of the second check.
The check in question was payable only to the defendant bank and to no one else.
Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the check
after or under the name of defendant bank, the payee was still the latter. The addition of said
words did not in any way make Casville Enterprises, Inc. the Payee of the instrument for the
words merely indicated for whose account or in connection with what account the check was
issued by the plaintiff.
The teller should have exercised more prudence in the handling of Id check because it
was not made out in the usual manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and he should have clarified the
matter with his superiors. Instead of doing so, however, the teller decided to rely on his own
judgment and at the risk of making a wrong decision, credited the entire amount in the name of
defendant Casville although the latter was not the payee named in the check. Such mistake was
crucial and was, without doubt, the proximate cause of plaintiffs defraudation.
Indeed, the bank teller who received it was fully aware that the check was not negotiable
since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and
"NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING
CORPORATION.
EJNC made the subject check payable to EBC’s order, for the account of Casville
Enterprises, Inc. In the light of the other facts, the directive was for the EBC to apply the value of
the check as payment for the letter of credit which Casville Enterprises, Inc. had previously
applied for in favor of the EJNC. The issuance of the subject check was precisely to meet the
bank's prior requirement of payment before issuing the letter of credit previously applied for by
Casville Enterprises in favor of the EJNC.
JUDGE’S RESOLUTION: In resolving the issue at hand, this Court rules in favor of Equitable
Banking Corporation. They should not be held liable for the value of the second check in favor
of EJNC.
The subject check was equivocal and patently ambiguous. By making the check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the
Negotiable Instruments Law. As worded, it could be accepted as deposit to the account of the
party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for
Casville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed against NELL who caused the ambiguity and could
have also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code,
provides:
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.
Contrary to the finding of respondent Appellate Court, the subject check was, initially,
not non-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face
of the subject check of the words "Non-negotiable for Payee's Account Only" between two (2)
parallel lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made
only by the Bank teller in accordance with customary bank practice, and not by NELL as the
drawer of the check, and simply meant that thereafter the same check could no longer be
negotiated.