Associated Bank v.

Vicente Henry Tan

While banks are granted by law the right to set-off or debit the value of a dishonored check from a
depositor’s account, they must do so with the highest degree of care, so as not to prejudice the
depositor unduly. This proceeds from the rule that the deposits therein are governed by the
provisions on simple loan (Art. 1980 NCC); thus, as the relationship between the bank and the
depositor is one of debtor-creditor, respectively, legal compensation may take place when the
requisites under Art. 1278 are present.

“In signing the deposit slip, the depositor does so only to identify himself and not to agree to the
condition set forth at the back of the deposit slip.”

Facts:
Tan is a businessman and a regular depositor-creditor of the Associated Bank (now
Westmont). He deposited a postdated UCPB check in the amount of P101,000 issued by him by a
certain Willy Cheng. The check was duly entered in his bank record. Allegedly upon advice
and instruction of the Bank that the check was already cleared and backed up by sufficient
funds, Tan on the same date, withdrew a certain sum and deposited another making his
existing balance P107,793.45 because he issued several checks to his business partners. However,
these partners went back to him alleging that the checks he issued bounced for insufficiency of
funds. Thus he informed the Bank to take positive steps because he had sufficient funds;
nonetheless, the bank did not bother to apologize. Hence, Tan filed a Complaint for damages
alleging his suppliers decreased in number for lack of trust. Associated, however, contends that
Tan has no cause of action on the ground that Associated has the right to debit the account
of Tan by reason of the dishonor of the check deposited by him which was withdrawn prior
to the clearing.
RTC ruled in favor of Tan on the ground that the Tan was not officially informed about the
debiting of the P101,000 from his existing balance and the Bank merely allowed Tan to use the
fund prior to clearance merely to accommodate him. CA affirmed and ruled that the bank acted
contrary to is obligation to treat Tan’s account with meticulous care.
Issue:
WON it was within the rights of Associated, as a collecting Bank, to debit the account of its
client for a dishonored check; in other words, WON it properly exercised the right of set-off
Ruling and Discussion:
Yes it is within the rights of Associated to debit the account; however, it failed to
exercise the highest degree of diligence in doing so when it: 1) did not act with meticulous care
in allowing Tan to withdraw the amount without proper clearing; and 2) when it failed to give
proper notice to Tan of the debiting of his account. Consequently, it is liable for damages.
It is undisputed — nay, even admitted — that purportedly as an act of accommodation to a
valued client, petitioner allowed the withdrawal of the face value of the deposited check prior to its
clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is
unusual, because a check is not legal tender or money; and its value can properly be transferred to a
depositor's account only after the check has been cleared by the drawee bank. Under ordinary
banking practice, after receiving a check deposit, a bank either immediately credit the amount to a
depositor's account; or infuse value to that account only after the drawee bank shall have paid such
amount. Before the check shall have been cleared for deposit, the collecting bank can only "assume"
at its own risk — as herein petitioner did — that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that Associated should not have
authorized the withdrawal by respondent of P240,000 as this amount was over and above his
outstanding cleared balance of P196,793.45.
Further, the expressed reservation at the back of the slip which states that the bank
reserves the right to debit the account of the depositor does not exculpate it from liability as
such is contrary to its obligations to act in the highest degree of integrity and performance.
Hence, in the instant case, as the bank is liable for damages.