Chapter 10 – Checks

Checks –
 a bill of exchange
 payable on demand
 drawn on demand
 must be presented within reasonable time after its issue
 by itself, does not operate as an assignment of any part of the funds to the credit of the drawer
◦ the bank is not liable to the holder unless and until it accepts or certifies the check
1. Kinds
◦ Cashier's and manager's checks – cashier's check- drawn by the bank upon itself, and is accepted upon its
issuance. The bank is both the drawer and the drawee of the cashier's check. Manager's check – same but it
stands on the same footing as a certified check which is demed to have been accepted by the bank.
▪ Difference from an ordinary draft – also a BE payable on demand but it is an order to a third person
purporting to be drawn on a deposit of funds. Also an ordinary draft may be subject to countermand but
a check is not
▪ Cannot be payable to bearer - BSP Circular No. 259 (2000) disallow checks being payable to bearer.
Circular no. 291 (2001) admits of an exception subject to the following conditions:
 the amount of each check shall not exceed P10,000
 buyer of the check is properly identified
 register of said checks shall be maintained with the following minimum info: 1) Date issued; 2)
amount; 3) name of buyer; 4) date paid: 5) if the aggregate instruments purchased by the same
person within any 30 days period amounts to at least Php 50,000 the purpose of the buyer should be
stated.
▪ The doctrine that the deposit represented by the manager's check automaticlly passes to the payee is
inapplicable because the instrument, although accepted in advance, remains undelivered.
◦ Certified checks – one 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.
▪ It is similar to acceptance but different also in the sense that:
 certification at the instance of the holder discharges while there is no discharge in ordinary
acceptance; 2) in certification, the bank debits the drawer's account at the time of the certification
and sets aside funds out of the drawer's control.
 Certification in effect is the same as though the money had been paid by the bank to the holder and
redeposited by him as his own credit
 Certification obligates the bank to pay the holder in due course and it is immaterial whether the
drawer has deposit or not however if it can be shown that the bank certified the check through
mistake or fraud, it 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
 Sec 187 – certification is equivalent to acceptance
 Certification certifies that the drawer has sufficient funds in the bank. 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
 Object: to enable the holder to use it as money
 Sec 188 – drawer and all indorsers are discharged from liability threon where the holder was the one
who procures the certification or acceptance of the check
◦ Crossed Check – done by writing two parallel lines diagonally in the left top portion of the checks
▪ 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 the payee's account only”;
or two parallel transverse lines simply
▪ Crossing by Drawer or after Issue
 Where a cheque is uncrossed, the holder may cross it generally or specially
 Where a cheque is crossed generally the holder may cross it specially
 Where a check is crossed generally or specially, the holder may add the words “not negotiable”
 Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to
another banker for collection
 Where an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection, he may
cross it specially to himself
▪ Effects of Crossing
 Relates to the mode of its presentment for payment
 Specifically, the effects as enumerated by the Supreme Court are:
 ◦ the check may not be encashed but only deposited in the bank
◦ the check may be negotiated only once- to one who has an account with the bank
◦ the act of crossing serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check purusant to that purpose
 Also applies to manager's checks are plainly crossed checks
▪ Effect on negotiability – none; can still be negotiated as long as the one who encashes the check with the
drawee bank is another bank, or if it is specially crossed, by the bank mentioned between parallel lines
▪ Acceptance will not extinguish the obligation – this is true in situations where a check (previously
dishonored) was replaced by another check that is crossed check it will not extinguish the obligation
▪ Crossing is a material part of the cheque and cannot be erased
▪ Kapag crossed specially sa more than one bank, yung bank against it is drawn shall refuse payment;
 pero pag nagbayad pa rin siya, si bangko liable siya sa totoong owner ng cheque for any loss he may
sustain
 pero kapag during presentment for payment hindi mukhang crossed yung cheque o nacross na before
nabura lang or nabago, tapos si banker nagbayad siya in good faith and without negligence, the
banker won't be liable for anything
 pag nagbayad si banker in good faith and without negligence tas drawn against him yung cheque tas
yung cheque napunta sa kamay ni payee, si drawer entitled siya sa same rights and be placed in the
same position as if the payment of the cheque had been made to the true owner thereof.
◦ Memorandum and Traveller's check
▪ Memo check – form of an ordinary check with the word 'memorandum', 'memo' or 'mem' written across its
face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any
condition concerning its presentment. Such check is an evidence of debt against the drawer. If it
passes to a third person it will be valid in his hands like any other check
▪ Traveeller's check – instruments purchased frombanks, express companies or the like, in various
denominations which can be used like cash upon second signature by the purchaser
2. Checks and ordinary bills of exchange: distinguished

4DPART Bills of Exchange Checks

Deposit 1. Not necessarily drawn on deposit 1. It is necessary that a check is drawn on deposit
Death 2. Death of a drawer of a BOE with the knowledge of 2. Death of the drawer of a check, with the knowledge by
the bank, does not revoke the authority of the banker the bank, revokes the authority of the banker to payE
to pay
RTime 3. May be presented for payment within a reasonable 3. Must be presented for payment within a reasonable time
time after its last negotiation if payable on demand after its issue
Drawee 4. The drawee may or may not be a bank The drawee is always the bank
PA 5. Presentment for acceptance necessarily only in some 5. Not necessary
cases
Demand 6. May be payable on demand or at a fixed or 6. Always payable on demand
determinable future time

3. Relationship between payee, drawee, and drawer

◦ Between the bank & the depositor: debtor-creditor
◦ Between the payee & the depositor: contractual. Drawer issues checks in payment of an obligation to the
payee
◦ Between payee & drawee bank: none. But payee may sue drawee based on tort under Art 19, NCC –
abuse of right: a) there is a legal duty; b) which is exercised in bad faith; 3) for the sole intent of
preudicing or injuring another
◦ What if the drawer-depositor dies? Sec 75 of BEA: The duty and authority of a banker to pay a cheque
drawn on him by his customer are determined by: 1) countermand of payment; 2) notice of customer's
death. In this sense the drawee is like an agent of the drawer
◦ What if the drawee wrongfully dishonors?
▪ Damages – moral as the wrongul dishonor of checks may result in impeachment of the credit of the
drawer.
▪ In culpa contractual, moral damages are recoverable only if the defendant has acted fraudulently ot in
bad faith, or is found guilty of gross negligence amounting to bad faith or in wanton disregard of a
contractual obligation
▪ Exemplary damages – because the business of bank is affected with public interest. These can be
 awarded to serve as a warning to the bank
▪ Proximate cause – proof that the bank's negligence or wrongful act or omission is the proximate of the
injury of the drawer is required before damagers can be awarded in favor of th drawer
 Doctrine of the last clear chance – an antecedent negligence of a person does not preclude the
recovery of damages for the supervening negligence of, or bar a defense against liability sought
by another, if the person sought to be made liable had the last fair chance of avoiding the injury
 Damnum absque injuria (loss without injury) – if kasalanan naman ni drawer
 If nacorrect – bank won't be liable
▪ Mitigation of Liability is possible
▪ Liability of the drawee for wrongfully honoring a check – kapag forged yung signature ni drawer tas
inihonor pa rin ni drawee bank or if joint yung payees tas isa lang ang nakapirma
4. Collection of checks
◦ Honey Joy – check from RCDM – has two choices – 1) encash! Or 2) deposit it in his account with his bank
known as a depositary bank (DB) or collecting bank
◦ Then the DB will make a provisional credit to his account which will undergo clearing through the
clearinghouse. The clearinghouse is defined as an association of banks or other payors for the
purpose of settling accounts with each other on a daily basis.
◦ Here in PH we have the Philippine Clearinghouse Corporation
▪ Greater Manila Clearing
▪ Electronic Clearing (ECCS) – banks deliver their outward clearing demands to PCHC for processing and
the PCHC reads the magnetic ink character recognition (MICR) information encoded on the physical
documens presented for clearing and reconceiles unbalanced batches in order to prove the accuracy
of the clearing work from the banks.
◦ Relationship of the parties
▪ Between depositor and DB – DB agent of depositor
◦ Warranties
▪ DB
 Art 66 as general indorser: he warrants that the instrument is GENUINE and IN ALL RESPECTS
WHAT IT PURPORTS TO BE; that he has GOOD TITLE TO IT; that all prior parties had CAPACITY
TO CONTRACT; that the instrument is, at the time of his indorsement, VALID AND SUBSISTING
 the DB's stamp guarantees all prior indorsements or even in the absence thereof shall be deemed
guaranteed by the presenting bank. Si Drawee Bank not to return the check just because walang
stamp
▪ Depositor
 not a general indorser because the indorsement made by him is restrictive and it is only for
collection only; it does not pass title
◦ Collecting Bank's Liability for Quasi Delict
 if it wrongfully allows one to deposit a crossed check; then allowed for it to be withdrawn—liable
siya to the true payee. The liability of the bank is solideary with the perpetrator of the conversion,
that is, the person who depositeed the crossed check in his account that is payable to another
◦ Return of items
▪ Si Drawee Bank should refuse payment when - 24 hour rule
◦ the check bears the forged or unauthorized signature of the drawee
◦ it is drawn against a closed account; or insufficient funds
◦ payment has been stopped
◦ postdated na or stale-dated
◦ cashier's/manager's/treasurer's check na materially altered dapat ibalik sa PCHC not later
than the next regular clearing date (reglementary period)
 when does the 24 hour rule not apply? Checks bearing forged indorsement and materially altered
checks. Within 10 years as per Art 1144 of NCC
◦ Uncollected Deposits/Uncleared checks
▪ Solutio Indebiti does not apply kapag kasalanan naman ni drawee bank hindi siya naghintay bago
maclear yung check hinayaan niyang maencash. Ginalingan.
▪ DAUD checks – if a check is deposited in a checking account or a demand deposit, the check must be
cleared first before the drawee-depositor can issue a check out of said checking account that will
include the amount of the deposited check.BSP disallow drawee banks from honoring checks on
uncollected deposits.
5. Stopping payment
 Check is a mere order on a bank to pay money from the drawer's account.
 It is subject to revocation. The drawer can countermad payment if he has valid defense therefor.
 But take note of the Iron Clad Rule which states that cashier's checks are in the nature of ccepted or certified
checks and that payment thereon cannot be countermanded by the payee.
◦ But the holder thereof should be a holder in due course
6. Crimes involving checks
 Estafa
 Elements:
a) that the offender postdated or issued a check in payment of an obligation contracted at the time the check was
issued
b) 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
c) deceit or damage to the payee thereof.
1) What is a NOW (Negotiable Order of Withdrawal)? It is an interest bearing deposit accounts that
combine the payale on demand feature of checks and the investment feature of savings account
 BP 22
 Two ways of committing:
1) 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 [to complete the elements: (3) the subsequent dishonor of the check by the
drawe 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]
2) 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.
 Check Kiting
1) Defined. 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
2) What happens is the depositarty bank will honor the checks even if it has not yet been cleared. In
anticipation of the dishonor of the check that was deposited, the conspirators will replace the original chek with
another worthless check.
3) Descrived as a procedure whereby checks written on accounts in separate banks are used to generate short
term purchasing power through the use of the bank's credit. (may inside job dito).