Associated Bank vs.

Tan
G.R. No. 156940 | December 14, 2004 | Panganiban, J.

Summary: Tan has a UCPB check that has an amount of 101,000. He deposited this in his checking
account with Associated Bank, thereby making his balance a total of 297,000. Without waiting for the
actual clearance of the check by the drawee bank UCPB, Associated Bank informed and instructed Tan
that the check was already clear and backed by sufficient funds. Relying on such instruction, Tan withdrew
240,000. The Bank allowed this even if the check was not really cleared by UCPB. Tan also issued several
checks to his business partners. BUT subsequently, UCPB dishonored the checks! Feeling cheated,
Associated Bank unilaterally debited the amount of 101,000 with the account of Tan without even
informing him. As a result, the checks that Tan issued to his business partners were dishonored for
insufficiency of funds. Tan was puzzled, because he thought that his account is sufficiently funded.
Because of the dishonor, Tan sued Associated Bank for damages. The issue is whether or not the petitioner,
which is acting as a collecting bank, has the right to debit the account of its client for a check deposit which
was dishonored by the drawee bank. The Court answered that the bank may unilaterally debit the amount,
however, such act must be done in a way which will not prejudice the depositor. In this case, the Bank went
against its own rules when it allowed Tan to withdraw a huge amount knowing fully well that the check
was not yet cleared by UCPB. Also, when the bank unilaterally debits the account of the depositor, it has
the duty to inform the depositor about it (see ratio for more).

Facts:
Vicente Henry Tan is a businessman and a regular depositor-creditor of the Associated Bank
(Bank).
He deposited a UCPB postdated check with the Bank in the amount of P101,000.
o It was duly entered in his bank record (a checking account), making his total balance
P297,000.
It was alleged that he was advised by Associated Bank that the check was already cleared and
backed by sufficient funds. (Note: You will learn from the case later on that the UCPB check was
not really cleared/accepted by UCPB yet. They just credited the amount of 101,000 even without
confirmation from UCPB that the check is really funded because Tan is a valued customer).
He then withdrew P240,000, leaving a balance of around 57,000.
Note that his total balance is 57k. But he has certain obligations to his business partners amounting
to a total of around 75,000. Hence, in order to fund the checks that he will issue to his business
partners, he deposited an additional 50,000 pesos with the bank, making his balance around 107k.
Controversy: His business partners went back to him alleging that the checks he issued bounced
for insufficiency of funds. (Note: You will also learn from the case that the check bounced
because the Bank UNILATERALLY DEBITED the amount of 101,000 from the account of Tan
because UCPB DENIED the said checks).
Tan asked the Bank about this incident, because he knows fully well that he has adequate funds to
pay the amount of the checks.
o The Bank did not bother nor offer any apology regarding such incident.
Hence, Tan filed for damages with RTC Cabanatuan City against the Bank.
Tans allegations:
o Maintained that he had sufficient funds to fund the checks
o Because of the incident, his suppliers decreased for lack of trust
o As he has a good reputation in the business community, he suffered embarrassment,
humiliation, sleepless nights, etc
o Continuously lost profits in the amount of 250k.
Associated Banks answer
o Denied the allegations and alleged that no banking institution would give an assurance to
any of its client/depositor that the check deposited by him had already been cleared and
backed up by sufficient funds but it could only presume that the same has been honored
by the drawee bank in view of the lapse of time that ordinarily takes for a check to be
cleared.
 o IMPT: It also alleged that it gave notice to Tan as to the return of his UCPB check
deposit in the amount of 101,000, hence, on even date, he deposited the amount of 50,000
to cover the returned check
o IMPT: Tan has no cause of action because it had the right to debit the account of Tan by
reason of the subsequent dishonor of the check deposited by him which was withdrawn
by him prior to its clearing.
o The Bank also argued that it has no liability because the clearing of checks is undertaken
by the Central Bank, and in accepting the check deposit, it merely obligates itself as
depositors collecting agent subject to actual payment by the drawee bank (UCPB).
RTCs ruling: ruled in favor of Tan, because:
o Tan was not officially informed about the debiting of the 101,000 from his existing
balance;
o The Bank merely allowed him to use the fund prior to clearing merely for
accommodation because he is considered to be a valued client.
o The Bank Manager was negligent in handling the particular checking account of Tan.
CAs ruling: affirmed RTC, because:
o Having authorized the withdrawal of the value of the deposited check prior to its clearing,
the Bank failed in its obligation to treat Tans account with meticulous care.
o Had the 101,000 not been debited, he would have sufficient funds for the checks he had
issued to his business partners.

Issue/Held:
Whether or not the petitioner, which is acting as a collecting bank, has the right to debit the account of its
client for a check deposit which was dishonored by the drawee bank Yes, BUT

Ratio:
Associated Banks Arguments
It insists that its right to debit the amount of the dishonored check from the account of respondent
is clear and unmistakable.
In particular, petitioner argues that the check deposit slip accomplished by respondent on
September 17, 1990, expressly stipulated that the bank was obligating itself merely as the
depositors collecting agent and -- until such time as actual payment would be made to it -- it was
reserving the right to charge against the depositors account any amount previously credited.
Respondent was allowed to withdraw the amount of the check prior to clearing, merely as an act of
accommodation, it added.

SCs Ruling
Preliminary Issue: Right of Set-off
A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals
on the part of a depositor. The right of a collecting bank to debit a clients account for the value of
a dishonored check that has previously been credited has fairly been established by jurisprudence.
Note that Art. 1980 of the Civil Code provides that these situations are governed by simple loan.
Since he relations between banks and depositors are creditor and debtor, legal compensation may
take place if when all the requisites under Art. 1279 have been complied with (See other cases.
But basically, it refers to the following requirements: Obligaors are principally bound to each
other, both debts consist in a sum of money/same kind and quality, both debts are due, liquidated,
and demandable, and that there is no controversy regarding the debt)
Nonetheless, the real issue here is not so much the right of petitioner to debit respondents account
but, rather, the manner in which it exercised such right. The Court has held that even while the
right of setoff is conceded, separate is the question of whether that remedy has properly been
exercised.
o To answer whether or not the bank properly exercised its right of set=off, two issues must
be examined: (1) the role of the bank as depositary bank, and (2) the role of the bank as a
collecting agent for the check.
Obligation as Depositary Bank (Just a rehash of the meticulous care and high degree of diligence
doctrines)
BPI vs. Casa Montessori - the banking business is impressed with public interest. Consequently,
the highest degree of diligence is expected.
Degree of diligence required is more than that of a good father of a family (Phil. Bank of
Commerce vs. CA)
In this case, the Bank did not treat Tans account with the highest degree of care.
o The act of the bank accommodating Tan as a valued client where it allowed the
withdrawal the value of the check prior to its clearing disregarded the clearance
requirement of the banking system.
o Such a practice is unusual, because a check is not legal tender or money; and its value can
properly be transferred to a depositors account only after the check has been cleared by
the drawee bank.
o Under ordinary banking practice, after receiving a check deposit, a bank either
immediately credit the amount to a depositors account; or infuse value to that account
only after the drawee bank shall have paid such amount.23 Before the check shall have
been cleared for deposit, the collecting bank can only "assume" at its own risk -- as herein
petitioner did -- that the check would be cleared and paid out.

Obligation as a Collecting Agent

Indeed, the bank deposit slip expressed this reservation:
o "In receiving items on deposit, this Bank obligates itself only as the Depositors
Collecting agent, assuming no responsibility beyond carefulness in selecting
correspondents, and until such time as actual payments shall have come to its possession,
this Bank reserves the right to charge back to the Depositors account any amounts
previously credited whether or not the deposited item is returned. x x x."
However, this reservation is not enough to insulate the bank from any liability. In the past, we
have expressed doubt about the binding force of such conditions unilaterally imposed by a bank
without the consent of the depositor.
o Moreover, it was held that in signing the deposit slip, the depositor does so only to
identify himself and not to agree to the conditions set forth at the back of the deposit slip.
Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondents agent, consonant with the well-settled rule that the relationship between the payee or
holder of a commercial paper and the collecting bank is that of principal and agent. Under Article
1909 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers
or agents within the course and scope of their employment.
o The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically
admitted that she and the employees under her control had breached bank policies when,
without clearance from the drawee bank, they allowed respondent to withdraw the
amount of the check deposited.
o Santiago testified that respondent "was not officially informed about the debiting of the
P101,000 from his existing balance of P170,000 (balance on a certain day).
Since Santiage acted within the scope of her authority as regards the acts she admitted, the
question now is whether her acts is the proximate cause of Tans injury. We say yes.
o It is undeniable that the banks premature authorization of the withdrawal by Tan of the
240,000 triggered -- in rapid succession and in a natural sequence -- the debiting of his
account, the fall of his account balance to insufficient levels, and the subsequent dishonor
of his own checks for lack of funds.
o Note that without the advice by the Bank that his money was already cleared, Tan would
not withdraw the 240,000, there will be no unilateral debiting of the 101,000, and the
dishonor of the checks issued by Tan to his business partners would not have happened.
The Bank did not inform Tan about the debiting of his account. Nonetheless, it argues that the
giving of notice was discernible from his act of depositing P50,000 on October 2, 1990, to
augment his account and allow the debiting. This argument deserves short shrift.
o First, notice was proper and ought to be expected because as the Bank said, Tan is their
valued client.
o Second, under the provisions of the Negotiable Instruments Law regarding the liability of
a general indorser and the procedure for a notice of dishonor, it was incumbent on the
bank to give proper notice to respondent.
Gullas vs. National Bank - As to a depositor who has funds sufficient to meet
payment of a check drawn by him in favor of a third party, it has been held that
he has a right of action against the bank for its refusal to pay such a check in the
absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him.
o Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully
subscribe to the CAs observations that it was not unusual for a well-reputed businessman
like him, who "ordinarily takes note of the amount of money he takes and releases," to
immediately deposit money in his current account to answer for the postdated checks he
had issued.