G.R. No. L-33549. January 31, 1978.
BANCO ATLANTICO, petitioner, vs. AUDITOR GENERAL, respondent.

FACTS

The petitioner, Banco Atlantico, a commercial bank in Madrid, Spain, cashed three checks drawn by the Philippine Embassy against its account with the Philippine National Bank (PNB) in New York. The checks, dated October 31 and November 2 and 5, 1968, were signed by Ambassador Luis M. Gonzales and Finance Officer Virginia Boncan. The first was payable to Azucena Pace and endorsed by her and Boncan; the latter two were payable directly to Boncan. Banco Atlantico paid the full face values—US$10,109.10, US$35,000.75, and US$90,000.00—to Boncan without first clearing the instruments with the drawee PNB in New York. Upon presentment, PNB dishonored all checks due to a stop-payment order. Banco Atlantico’s subsequent claim for reimbursement from the Embassy was denied by the Auditor General.
The Auditor General upheld the Embassy’s position that it never maintained an account with Banco Atlantico and that the bank deviated from ordinary banking practice by cashing the checks without prior clearance, especially given the substantial amounts and foreign drawee. The Embassy asserted that the checks had been fraudulently altered by Boncan as to their amounts; the original amounts were far smaller (e.g., US$109.10, US$75.00). The bank’s action was attributed to a special relationship between Boncan and the bank’s officers, constituting negligence.

ISSUE

The primary issue is whether the Philippine Embassy, as drawer of the dishonored checks, is liable to pay Banco Atlantico as a holder in due course.

RULING

The Supreme Court affirmed the Auditor General’s denial of the claim. The Court ruled that Banco Atlantico could not be considered a holder in due course entitled to payment from the drawer. The legal logic centers on the bank’s failure to adhere to standard banking prudence, which vitiated its status. Under the Negotiable Instruments Law, a holder in due course must take the instrument in good faith and without notice of any defect. Here, the bank’s omission to clear the checks with the foreign drawee bank before payment, despite the large sums involved and the absence of any depository relationship with the Embassy, constituted a departure from normal banking practice. This deviation amounted to notice of a potential defect and assumption of risk, negating good faith.
Furthermore, the checks were fraudulently altered by Boncan regarding their amounts. Under Section 23 of the Negotiable Instruments Law, a fraudulently altered instrument is wholly inoperative unless ratified. The Embassy did not ratify the alterations. Consequently, no right to enforce payment could arise against any party, including the drawer. The loss resulted from the bank’s own negligence in granting special treatment to Boncan, and it must bear the consequences. The Embassy, having issued checks for legitimate but much smaller amounts, could not be held liable for the fraudulently inflated sums.