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METROPOLITAN BANK v. RENATO D. CABILZO

FACTS:

The case is about a dispute between petitioner Metropolitan Bank and Trust Company (Metrobank) and respondent Renato D. Cabilzo (Cabilzo) regarding a check issued by Cabilzo. Cabilzo issued a Metrobank Check No. 985988, payable to "CASH" and postdated on 24 November 1994 in the amount of One Thousand Pesos (P1,000.00). The check was paid by Cabilzo to a certain Mr. Marquez as his sales commission. Subsequently, the check was presented to Westmont Bank for payment, and Westmont Bank indorsed the check to Metrobank for clearing. Metrobank examined the check and cleared it for encashment. However, on 16 November 1994, Cabilzo's representative was asked by a bank personnel if Cabilzo had issued a check in the amount of P91,000.00, to which Cabilzo replied in the negative. Cabilzo later discovered that the check he issued was altered to P91,000.00 and the date was changed to 14 November 1994. Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account, but Metrobank refused. Cabilzo then filed a civil action for damages against Metrobank, seeking reimbursement and additional damages. Metrobank claimed that it should not be held liable and that Westmont Bank should be held liable instead. Metrobank also demanded payment of attorney's fees from Cabilzo. Metrobank later filed a Third-Party Complaint against Westmont Bank, but the trial court dismissed it due to another pending case. The trial court ruled in favor of Cabilzo, ordering Metrobank to pay P90,000.00, the amount of the original check minus the original value of P1,000.00.

In this case, respondent Renato Cabilzo deposited a crossed check in the amount of P1,000.00 with petitioner Metropolitan Bank and Trust Company (Metrobank). The check was payable to the order of "Vicente Soriano III." After the check was deposited, it was forwarded for clearing to Westmont Bank, which indorsed the check without any qualification. The check was then presented for payment to the drawee bank, Metrobank. However, it was discovered that the check had been altered, with the amount increased to P91,000.00 and the date changed. Metrobank refused payment and returned the check to Cabilzo. In view of Metrobank's refusal to honor the check, Cabilzo filed a complaint for sum of money and damages against Metrobank. The trial court ruled in favor of Cabilzo and ordered Metrobank to pay him the amount of the check, as well as exemplary damages, attorney's fees, and costs of the suit. Metrobank appealed the decision to the Court of Appeals, arguing that as the last indorser, Westmont Bank should bear the loss caused by the fraudulent alteration of the check. The Court of Appeals affirmed the trial court's decision, with the modification of deleting the award for exemplary damages and attorney's fees. Metrobank filed a petition for review before the Supreme Court, raising the sole issue of whether Metrobank, as the drawee bank, should be held liable for the alterations on the check.

ISSUES:

  1. Whether the alteration of the check constituted a material alteration under the Negotiable Instruments Law.

  2. What is the effect of a materially altered instrument and the rights and obligations of the parties thereunder.

  3. Whether Metrobank was negligent in failing to detect the material alterations on the check.

  4. Whether Metrobank violated its duty as the drawee bank to pay the check in accordance with the drawer's instructions and is therefore liable for the erroneous payment.

  5. Whether Metrobank can be held liable for the alteration of the check and the subsequent unauthorized payment.

  6. Whether Metrobank's reliance on the indorsement of the collecting bank is a valid defense.

RULING:

  1. The alteration of the check, changing the amount and date, constituted a material alteration under the Negotiable Instruments Law.

  2. A materially altered instrument is avoided, except as against a party who has himself made, authorized, and assented to the alteration and subsequent indorsers. However, when the instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce the payment thereof according to its original tenor.

  3. Metrobank was negligent in failing to detect the material alterations on the check. The Court found that the alterations were visible to the naked eye and could not have escaped the attention of Metrobank's employees. Metrobank violated its duty to treat the accounts of its depositors with meticulous care and failed to exercise the high degree of diligence expected of a bank affected with public interest.

  4. Metrobank is liable for the erroneous payment because it violated its duty as the drawee bank to pay the check in accordance with the drawer's instructions. Payment made under a materially altered instrument is not payment done in accordance with the instruction of the drawer. The drawee bank, in this case, Metrobank, has no right to claim reimbursement from the drawer or deduct the erroneous payment from the drawer's account.

  5. Metrobank can be held liable for the alteration of the check and the subsequent unauthorized payment. The Court held that under the law, a bank is required to exercise the highest degree of diligence, if not utmost diligence, in dealing with the accounts of its own clients. Thus, Metrobank has the duty to protect the funds of its clients and should not lightly rely on the judgment of other banks. The Court found that Metrobank's failure to immediately re-credit the amount to the client's account and its initiation of a full-blown litigation instead were evidences of ineptness and wanton negligence, warranting the imposition of exemplary damages.

  6. Metrobank's reliance on the indorsement of the collecting bank is not a valid defense. The Court held that Metrobank's reliance on the strength of the collecting bank's indorsement is inconsistent with the requirement of exercising the highest degree of diligence. The Court emphasized that a bank's liability for such indorsement, if any, is separate and independent from its liability to its own client. Therefore, Metrobank cannot evade liability by relying on the indorsement of the collecting bank.

PRINCIPLES:

  • Under the Negotiable Instruments Law, any alteration that changes the date, sum payable, time or place of payment, number or relation of the parties, medium or currency of payment, or adds a place of payment where none is specified, or any other change that alters the effect of the instrument, constitutes a material alteration. (Section 125)

  • A materially altered instrument is avoided, except as against a party who has himself made, authorized, and assented to the alteration and subsequent indorsers. (Section 124)

  • The degree of diligence required of a reasonable person in the exercise of tasks and performance of duties must be faithfully complied with to prevent loss or injury.

  • Negligence is not presumed but must be proven by the one who alleges it.

  • The doctrine of equitable estoppel provides that when one of two innocent parties, each guiltless of any intentional or moral wrong, must suffer a loss, it must be borne by the one whose erroneous conduct was the cause of injury.

  • Banks are under obligation to treat the accounts of their depositors with meticulous care due to the fiduciary nature of their relationship.

  • Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.

  • The drawee bank is under strict liability to pay to the order of the payee in accordance with the drawer's instructions as reflected on the face and by the terms of the check.

  • Payment made under a materially altered check violates the terms of the check and the drawee bank's duty to charge its client's account only for bona fide disbursements.

  • Banks are required to exercise the highest degree of diligence, if not utmost diligence, in dealing with the accounts of their own clients.

  • A bank's liability for an indorsement, if any, is separate and independent from its liability to its own client.

  • Ineptness and wanton negligence of a bank may warrant the imposition of exemplary damages.

  • The confidence of the public in the banking system is of paramount importance.