Commercial Law

Hongkong & Shanghai Banking Corporation vs Peoples Bank & Trust Company

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G.R. No. L-28226 – 35 SCRA 140 – Mercantile Law – Negotiable Instruments Law – Notice of Dishonor – 24 Hour Clearing House Rule

On 8 March 1965, the Philippine Long Distance Telephone Company (PLDT) drew a check against its account with the Hongkong and Shanghai Banking Corporation (HSBC) for P14,608.05. The check was also made payable to HSBC. PLDT mailed the check to HSBC but somehow the check wound up in the hands of one Florentino Changco. Changco managed to erase HSBC as the payee and replaced the payee’s name with his own name. He then made a check deposit with Peoples Bank and Trust Company on 16 March 1965. The check was presented by the Peoples Bank for clearing wherein the Peoples Bank made the following indorsement:

For clearance, clearing office. All prior endorsements and/or lack of endorsements guaranteed.

–  Peoples Bank and Trust Company.”

The check was cleared on 17 March 1965 and Changco was able to withdraw all the money. On 31 March 1965, he closed his account with Peoples Bank.

The alteration was subsequently discovered and on 12 April 1965 or 27 days after the clearing, HSBC notified Peoples Bank that the check was altered (hence in effect being dishonored). HSBC was asking for a refund but Peoples Bank refused as it invoked the “24 hour clearing house rule” issued by the Central Bank. HSBC argued that the Peoples Bank is liable to refund them the amount of the check because of the guarantee that Peoples Bank made in indorsing the check to HSBC.

ISSUE: Whether or not Peoples Bank should refund the amount of the check to HSBC.

HELD: No. The 24 hour clearing house rule applies. This rule mandates banks that after a clearing, all cleared items must be returned not later than 3:00 PM of the following business day. Therefore, when HSBC was sending its notice [of dishonor] to the Peoples Bank, it was already 27 days late. Further, it is a settled rule that a person who presents for payment checks guarantees the genuineness of the check, and the drawee bank need concern itself with nothing but the genuineness of the signature, and the state of the account with it of the drawee. HSBC should go after Changco and not after the Peoples Bank.

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