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Equitable Banking Corp. v.

Special Steel Products and Pardo

SSPI a private domestic corporation selling steel products. Pardo SSPIs President and majority stockholder Interco regular customer Uy son-in-law of its majority stockholder Equitable depository bank of Interco and of Uy

Facts: SSPI sold welding electrodes to Interco, as evidenced by sales invoices. It is due on March 16 1991 (for the first sales invoice_ and May 11 1991 (for others). It also provided that Interco would pay interest at the rate of 36% per annum in case of delay. In payment of for the products, Interco issued 3 checks payable to the order of SSPI. Each check was crossed with the notation account payee only and was drawn against Equitable. The records do not identify the signatory for the checks, or explain how Uy came in possession of these checks. He claimed that he had good title thereto. He demanded the deposits in his personal accounts in Equitable. The bank did so relying on Uys status as a valued client and as son-in-law of Intercos majority stockholder. SSPI reminded Interco of the unpaid welding electrodes, explaining that its immediate need for payment as it was experiencing some financial crisis of its own. It replied that it has already issued 3 checks payable to SSPI and drawn against Equitable, which was denied by SSPI. Later on it was discovered that it was Uy, not SSPI, who received the proceeds of 3 checks. Interco finally paid the value of 3 checks to SSPI plus portion of accrued interests. Interco refused to pay entire accrued interest on the ground that it was not responsible for the delay. Hence, Pardo filed a complaint for damages against Uy and Equitable Bank alleging that the 3 crossed checks, all payable to order of SSPI could be deposited and encashed by SSPI only. Trial Court rendered decision in favor of Pardo which was affirmed by CA. Issue: What is the nature of crossed check? Whether SSPI has a cause of action against Equitable for quasi-delict, whereby it can recover actual damages from Equitable? Held: SSPIs cause of action based on quasi-delist. SSPI does not ask Equitable or Uy to deliever to it the proceeds of the checks as the rightful payee. The courts below correctly ruled that SSPI has a cause of action for quasi-delict. The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPIs order and contained the notation account payee only. This creates a reasonable expectation that the payee alone would receive the proceeds of the checks and that diversion of the checks would be averted. This expectation arises from the accepted banking practice that crossed checks are intended for deposit in the named payees account only and no other. At the very least, crossed checks should place a bank on notice that it should exercise more caution or expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized the holder to deposit the same in different account. A crossed check with the notation account payee only can only be deposited in the named payees account. It is gross negligence for a bank to ignore this rule solely on the basis of a third partys oral representations of having a good title there to.