G.R. No. 141001 & G.R. No. 141018; May 21, 2009
BANK OF AMERICA, NT & SA, Petitioner, vs. ASSOCIATED CITIZENS BANK, et al., Respondents.

(Consolidated with ASSOCIATED CITIZENS BANK, Petitioner, vs. BA-FINANCE CORPORATION, et al., Respondents.)

FACTS

BA-Finance Corporation granted Miller Offset Press, Inc. a credit line. Miller, through its officers (Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng), assigned trade receivables to BA-Finance. In payment, BA-Finance issued four crossed checks payable to “Order of Miller Offset Press, Inc.” with the notation “For Payee’s Account Only.” The checks were drawn against Bank of America. Ching Uy Seng deposited these checks into a joint personal account he held with Uy Chung Guan Seng at Associated Citizens Bank. Associated Bank stamped the checks with a guarantee of “all prior endorsements and/or lack of endorsements” and presented them for clearing. Bank of America paid the checks. Miller failed to account for the proceeds to BA-Finance.
BA-Finance sued Miller and its officers for collection. It later amended its complaint to implead Bank of America for paying the checks to someone other than the named payee. Bank of America filed a third-party complaint against Associated Bank. The trial court held Bank of America liable to BA-Finance and ordered Associated Bank to reimburse Bank of America. The Court of Appeals affirmed with modifications, also ordering Ching Uy Seng and/or Uy Chung Guan Seng to pay Associated Bank.

ISSUE

Whether the Court of Appeals erred in holding: (1) Bank of America liable to BA-Finance; (2) Associated Bank liable to reimburse Bank of America; and (3) Ching Uy Seng and/or Uy Chung Guan Seng liable to Associated Bank.

RULING

The Supreme Court denied the petitions and affirmed the appellate court’s decision. On the first issue, Bank of America was correctly held liable to BA-Finance. The checks were specially crossed, payable only to the named payee’s account. A crossing is a warning to the drawee bank to pay only to the rightful holder. By paying the proceeds to Associated Bank for credit to a personal account not belonging to the corporate payee, Bank of America violated its duty as drawee and the instructions of its drawer, BA-Finance. Its defense of relying on Associated Bank’s guarantee stamps is unavailing; the drawee bank’s primary duty is to the drawer.
On the second issue, Associated Bank was properly held liable to reimburse Bank of America. As the collecting bank, Associated Bank presented the checks and guaranteed all prior endorsements. It indorsed the checks for clearing despite the patent irregularity of depositing corporate checks into a personal account, which constituted a breach of its warranty as an indorser. Therefore, it must bear the loss and reimburse the drawee bank.
On the third issue, the liability of Ching Uy Seng and Uy Chung Guan Seng to Associated Bank was correctly sustained. They, particularly Ching Uy Seng who made the deposit, were unjustly enriched at the expense of Associated Bank, which is now liable to reimburse Bank of America. The principle of solutio indebiti applies, obliging them to return the amount to Associated Bank.