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Chapter 10 Checks

Definition of Checks

(under NIL) A bill of exchange drawn on a bank payable of demand (Sec 185) and must be
presented for payment within a reasonable time after its issue or the drawer will be discharged
from liability thereon to the extent of the loss caused by the delay (Sec 186).

NI used between banks and bankers and their customers to facilitate banking operations and is
payable on demand as the contract between the banker and the customer is that the money is
needed on demand.

A check of itself does not operate as an assignment of any part of the funds to the credit of the
drawer with the bank, and the bank is not liable to the holder unless and until it accepts or
certifies the check (Sec 189).

Kinds of Checks

Ordinary Check

Crossed Check

Certified Check

Memorandum Check

Managers or Cashiers Check

Cashiers and Managers Checks

Cashiers check

A bill of exchange drawn by a bank upon itself and is accepted by its issuance.

Bank is both the drawer and the drawee.

Is really the bank's own check, signed by the bank's cashier and may be treated as a
promissory note with the bank as the maker.

Becomes the primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. Exception: Mesina vs IAC, 145 SCRA 497 (1986) where
the Supreme Court considered the purchaser of the check as the drawer.

Managers Check

One that is drawn by a bank's manager upon the bank itself.

Is the bank's own check but it is the bank's manager instead of the cashier who signs the
same for the bank.

Stands on the same footing as a certified check which is deemed to have been accepted
by the bank.

Distinguished from Draft (Republic of the Philippines vs Philippine National Bank, et al. GR
No L-16106, December 1, 1961)

Demand draft is a bill of exchange payable on demand. It is an open letter of request

from, and an order by, one person on another to pay a sum of money therein mentioned
to a third person, on demand or at a future time therein specified.

The term "draft" is often used, and is the common term for all bills of exchange. The
words "draft" and "bill of exchange" are used indiscriminately.

Law requires that drafts or bills of exchange need to be presented either for acceptance
or for payment within a reasonable time after their issuance or after their last negotiation
thereof as the case maybe (Sec 71).

A demand draft is different from a cashier's or manager's check because the latter is a
primary obligation of the bank which issues it and constitutes its written promise to pay
upon demand.

A cashier's check issued by a bank is not an ordinary draft, the latter is a bill of exchange
payable on demand and is an order upon a third party purporting to be drawn upon a
deposit of funds, while a cashier's check is a check of the bank's cashier on his or
another bank. A cashier's check in effect is a bill of exchange drawn by a bank on itself
accepted in advance by the act of its issuance.

Cannot be payable to bearer (in compliance with Anti-Money Laundering Act)


BSP Circular 259, Section 1, Series of 2000 generally disallows the issuance of cashier's,
manager's or certified checks or other similar instruments payable to cash, bearer,
fictitious payee or numbered accounts. A purchase of such instruments from a person
who is not a regular bank client requires the purchaser to present a proof of residence
and photo-bearing proof of identification card. A register for the issuance of said
instruments shall be maintained by the bank.

Exceptions to Circular 259: as provided for by BSP Circular 291, Series of 2001.

Amount of check shall not exceed P10,000

Buyer of check is properly identified as required under Circular 259 dated

September 29

Register of said checks shall be maintained with the following minimum

information: date issued, amount, name of buyer, date paid and if aggregate

instrument was purchased by the same person within any thirty day period
amounts to at least P50,000, the purpose of the buyer should be stated

Banks which issue as well as those which accepts such instruments as deposits
shall take measures as may be necessary to ensure that said instruments are not
being used/resorted to by the buyer or depositor in furtherance of a money
laundering activity

Deposit of said instruments shall be subject to same requirements/scrutiny

applicable to cash deposits

Transactions involving said instruments that have reasonable grounds to suspect

were being used to launder funds of illegitimate origin should be reported to BSP

Certified Checks

Drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies
will be paid when duly presented for payment.

Analogous to a certificate of deposit of a certifying bank.

Certification is similar to acceptance but different in the sense that:

Certification at the instance of the holder discharges while there is no discharge at ordinary

In certification, bank debits the drawer's account at the time of certification and sets aside funds
out of the drawer's control

New Pacific Timber vs Honorable Seneris


Where a check is certified by the bank on which it is drawn, the certification is equivalent
to acceptance.

Implies that the check is drawn upon sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction, and that they shall be so applied whenever the
check is presented for payment.

It is an understanding that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes in circulation, a certificate of deposit
payable to the order of the depositor, or any obligation it can assume.

The object of certifying a check is to enable the holder to use it as money.

The check operates as an assignment of a part of the funds of the creditor when the
holder procures the check to be certified.

The certification legally obligates the drawee bank to honor the certified checks even if the drawer
does not actually have deposits in the drawee bank.

The liability of the certifying bank to a holder in due course is immaterial whether the drawer of a
check had a deposit in the bank, but the bank which had certified a check through mistake or
fraud can revoke its certification if the rights of third parties are not affected and the payee has
not changed his position in reliance of the certification.

Philippine National Bank vs National City Bank of New York


The purpose of procuring a check to be certified is to impart strength and credit to the
paper by obtaining an acknowledgment from the certifying bank that the drawer has
funds therein sufficient to cover the check, and securing the engagement of the bank that
the check will be paid upon presentation.

A certified check has a distinctive character as a species of commercial paper, and

performs important functions in banking and commercial business.

When a check is certified, it ceases to possess the character, or to perform the functions,
of a check, and represents so much money on deposit, payable to the holder on demand.

The check becomes a basis of credit an easy mode of passing money from hand to
hand, and answers the purposes of money.

Ordinarily, the acceptance or certification of a check is performed and evidenced by some

word or mark, usually the words "good", "certified" or "accepted" written upon the check
by the banker or bank officer.

NIL provisions on certified checks


Sec 187 certification is equivalent to acceptance when check is certified by the bank
where it was drawn

Sec 188 drawer and all indorses are discharged from liability when the holder of a
check procures it to be certified or accepted

The theory for such release is that the holder, by requesting such certification
instead of payment, enters into a new contract with the bank, and one not within
the contemplation of the drawer or prior endorser because said drawer and
previous indorsers expects the check to be presented for payment only and not
to be certified by the bank.

Sec 189 (full text of the section is on Definition of Checks bullet point three)

Crossed Check
How done? By writing 2 parallel lines diagonally on the left top portion of the check.
Kinds of crossing:

Special where the name of a bank or a business institution is written between the 2 parallel
lines, which means that the drawee should pay only with the intervention of that company.

General where the words written between 2 parallel lines are and Co. or for payees account
only or no words at all.

Applicable Laws

No provision in NIL for crossed checks but it can be found in the ff:

Code of Commerce

Important note: person on whom it is drawn is not exempt from liability if payment was
incorrectly made.

Bill of Exchange Act of England


Important note: (Allowed acts)

uncrossed check may be crossed

generally crossed check may be crossed specially

crossed check may be marked not negotiable

specially crossed check may again be crossed specially to another banker

if uncrossed or generally crossed check is sent to a banker for the purpose of collection,
the latter may cross it specially to himself

Effects of Crossing
Special Crossing drawee should pay only with the intervention of the bank or company
indicated therein.
General Crossing drawee should not encash but merely accept for depositing.

May legally be negotiated from one person to another as long as the one who encashes it with
the drawee bank is another bank.

It may not be encashed but only deposited in the bank.

May only be negotiated once to one who has an account with the bank.

Crossing of check imposed a duty on the holder to ascertain the indorsers title, not doing so is
gross negligence rendering a holder not to be a holder in due course.

Other Rules from BEA of England

Check crossed specially to more than one banker shall be refused payment.

Drawee bank is liable to the true owner of the crossed check if it is paid incorrectly.

If crossed check bears the word not negotiable, holder is not capable of giving a better title to
the check than that which the person from whom he took it had.

Collecting Banker in good faith and without negligence incurs no liability for receiving a payment
for a customer who has no title or has defective title thereof.

Memorandum and Traveller's Check

Memorandum Check

In the form of and had the same effect of ordinary check.

With the word memorandum, memo or mem across its face.

The word signifies that the drawer engages to pay the bona fide holder absolutely or
without any condition in presentment.

Evidence of debt.

Travelers Check

Purchased from banks, express companies, or the like, in various denominations.

Requires the signature of the purchaser at the time he buys it and at the time he uses it.

Used as cash upon second signature (second signature is for the purpose of comparing it
to the first signature).

Each check has serial numbers which are recorded on the receipt containing the name
and address of the purchaser.

Purchaser also receives a list of the check serial number which is advised to be carried
separately from the checks.

Distinguish Bills of Exchange from Checks

Bills of Exchange
NOT NECESSARILY drawn on a deposit
Death of a drawer with knowledge of bank DOES

Death of drawer with knowledge by bank

NOT REVOKE authority of banker to pay

May be presented for payment within reasonable

REVOKES authority of banker to pay

Must be presented for payment within reasonable

time AFTER LAST NEGOTIATION (if payable on


Drawee may or MAY NOT BE A BANK
Presentment for acceptance NECESSARY for


Presentment for acceptance NOT necessary

certain types
May be payable ON DEMAND OR AT A FIXED

Always payable on DEMAND


Relationship between Payee, Drawee and Drawer

Checks are drawn on bank accounts opened by drawers on drawee banks

Drawer of check is a depositor of the drawee bank

In Sps. Moran v. CA:


Relationship as between bank and depositor = debtor and creditor.

Failure of bank to pay check when deposit is sufficient = claim for substantial damages
even without any proof of actual damages

Bank refused payment on account of insufficient funds = Bank not liable, even if a deposit
may be made later in the day

If Bank refused payment to payee = Not liable to payee for lack of privity

Relationship between drawer and drawee =drawee bank liable to drawer in case of
wrongful dishonor of checks if there are sufficient funds. Basis breach of contract with

Contractual obligation between payee and drawer.

No contractual relationship between drawee and payee

No obligation of drawee to honor a check; Basis Sec. 189 of NIL (check itself does not operate
as assignment of funds to the credit of drawer and bank is not liable unless and until it accepts
and certifies the check)

Payee has no cause of action against drawee even if the dishonor was wrongful

But in HSBC v. Catalan:


Payee may sue based on tort for abuse of right(Art. 19 of Civil Code) if he can prove:

Existence of legal right/duty

Bad faith

Intent to prejudice/injure another

Liability arose from unwarranted failure of drawee bank to pay checks notwithstanding
repeated assurance of drawer as to authenticity of checks and frequent directives to pay
the value thereof to payee, ross inaction despite instruction, failure to inform payee of the
reason for inaction and nonpayment

Death of Drawer = Revocation of bankers authority to pay (Sec. 75, BOE Act of 1882, on notice
of customers death, Natl Int. Rev. Code, on disallowing withdrawal from bank account of
deceased unless taxes are paid to BIR );

Examples of Negligence on part of Drawee-Bank:


Wrongful dishonor of checks

Failure to transfer funds from drawers savings account to his checking account as
previously agreed upon, causing the insufficiency.

Bank teller wrongfully credited the cash deposit in another persons account

Recoverable damages

Moral damages (Art. 2207 of Civil Code). Basis Financial credit of a business man is a
prized asset. Loss or impairment of credit constitutes some material loss. Thus, it must be
recognized and compensated.

Exemplary damages (Art. 2229 of Civil Code). Basis Bank has a sworn profession of
diligence and meticulousness in giving irreproachable service. Serves as warning to bank
and all not to be reckless, as correction for the public good.

Proof of Proximate Cause = Banks negligence or wrongful act or omission is proximate cause of
injury of drawer before award of damages.

Last clear chance doctrine If the person sought to be made liable had a last fair chance
to avoid the injury, the negligence of a person will not preclude recovery of damages.

Mitigation of liability based on contributory negligence. Exception: mistake of depositor in using

wrong deposit slip (Tan v. CA)

Collection of Checks

On due date, a holder may either


Proceed directly to the drawee bank

Present for payment


Deposit it in his account with his bank known as depositary or collecting bank

Bank will make a provisional credit to his account

Check goes for clearing

If check is cleared and collected from the drawee bank, final redit is made in the payeedepositors account.

Clearinghouse an association of banks or other payors for the purpose of settling accounts
with each other on a daily basis.

The BSP is mandated by New Central bank act to establish facilities for interbank
clearing of checks.

The collecting bank acts as an agent of the depositor.


Under the rules of the Phil. Clearing House Corporation, a collecting bank is required to place a
stamp on the check that is sought to be cleared.

The stamp guaranties prior indorsements.

In the absence of stamp, the collecting bank is also deemed to made such warranty in sending
the check for clearing.

Warranties of Collecting bank

(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument or
render it valueless.

Warranties of Payee-Depositor
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument or
render it valueless.

The depositor (payee) is liable to the drawee in case of altered checks because the depositor
warrants that the instrument is genuine and in all respects what it purports to be. (Jai Alai corp. of
the Phils v BPI)

Duty of Care

Highest degree of care

Return of Items

24-hour rule if the drawee bank fails to return a check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability.Checks which contains

Forged or unauthorized signature of drawer(s)

It is drawn against a closed account.

It is drawn against insufficient funds.

Payment has been stopped.

It is postdated or stale-dated.

It is a cashiers/ managers/ treasurers check of the drawee which has been materially

Does not apply to checks bearing forged indorsements and materially altered checks.

For checks bearing forged indorsements and materially altered checks shall be returned within
10years pursuant to Art.1144 of the Civil Code.

Uncollected Deposits

Regulations promulgated by the BSP disallow drawee banks from honoring checks on
uncollected deposits.

Stopping Payment

Check is subject to revocation by the drawer at anytime before it is accepted since it is a mere
order on a bank to pay money from the drawers account.

If the bank pays even after it was ordered by the drawer to stop payment, said bank pays on its
own responsibility.

Ground for Stopping Payment

As a rule, drawer may countermand payment if he has a valid defense against the holder of the

Example: Drawer may countermand a check if the payee failed to deliver the goods that
he was supposed to deliver.

However, even if there is no valid reason to countermand, drawee is still contractually obligated to
dishonor the check on the basis of stop payment order.

Iron Clad Rule

It is a rule which prohibits countermanding of payment of certified checks.

Cashiers check are in the nature of certified check, hence payment cannot be countermanded by
the payee (Republic v. PNB)

Exception: the stop payment order can only defeat the right of a holder not in due course, if
otherwise said order cannot be invoked against him (Mesina v. IAC, 145 SCRA 497, 505).

Crimes Involving Checks


Elements for Estafa (Pacheco et al. v. CA, 116 SCAD 562)


that the offender postdated or issued a check in payment of an obligation contracted at

the time the check was issued.

That such postdating or issuing a check was done when the offender had no funds in the
bank, or his funds deposited therein were not sufficient to cover the amount of the check.

Deceit or damage to the payee thereof.

NOW (negotiable order of withdrawal) was considered by the Court as check for purposes of
applying Article 312 (b) of the RPC (People v. Aloma Reyes G. R. No. 154159).

BP 22 (Bouncing Checks Law)

Two ways of committing the crime under BP 22:


By making or drawing and issuing a check to apply on account or for value knowing at
the time of issue that the check is not sufficiently funded.

making, drawing and issuance of any check to apply for account or for value.

Knowledge of the maker, drawer or issuer that at the time of issue he does not
have sufficient funds in or credit with the drawee bank for the payment of such
check in full upon its presentment.

Subsequent dishonot of the check by the drawee bank for insufficiency of funds
or credit or dishonor for the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.

By having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep
sufficient funds therein or credit with said bank to cover the full amount of the check when
presented to the drawee bank within a period of 90 days.

There must be a written notice of dishonor to the accused. (Domagsang v. CA, 347
SCRA 75).

Check Kiting

Wrongful practice of taking advantage of the float, the time that elapses between the deposit of
the check in one bank and its collection at another (Blacks Law Dictionary).