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Fall 2006-05 Autoridad de Energa Elctrica v. Las Amricas Trust

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Number 65
Fall 2006
from our archives: 1989

P.E.G. endorsement enforced

In the case of Autoridad de Energía Eléctrica v. Las Américas Trust, 123 D.P.R. 834 (1989), the Supreme Court of Puerto Rico considered the legal consequences of the "P.E.G."("Prior Endorsements Guaranteed") initials that financial institutions stamp on the reverse of checks. The Court found them to constitute an express guaranty that a check is genuine and has not been altered.

The reason behind P.E.G.

The Uniform Negotiable Instruments Law, which used to regulate check negotiations in Puerto Rico prior to the adoption of the Uniform Commercial Code, did not cover the subject of inter-bank collections. That omission resulted in a somewhat confusing state of the law regarding the point of endorsement guaranties: did endorsements in inter-bank check collections warrant the validity of prior transfers? Some courts in the United States had ruled that at that stage of the collection process the check was not being "negotiated," and as a result no guaranty was offered. Others, to the contrary, had found the endorsing bank to be liable, based on a number of different legal theories. To set aside doubts and assure the reliability of the clearing process, banks started explicitly to guaranty the validity of previous endorsements by so stating on the checks themselves. Thus was born the banking practice that has survived to this day.

Extent of the guaranty

But even after the adoption of the P.E.G. practice, some doubts concerning the extent of the guaranty remained. An area particularly plagued was that of alterations other than forged endorsements. The enactment of the U.C.C. set the record straight. The U.C.C., however, had not been adopted by the Puerto Rico legislature when Las Américas Trust was resolved.

Alteration

A check drawn by the Electric Power Authority in favor of John Grazel, Inc. was altered by deleting Grazel's name and in its place inserting that of Héctor Rivera. Rivera endorsed the instrument and deposited it to his account at Las Américas Trust Company. Las Américas in turn endorsed it to Royal Bank de Puerto Rico and added the P.E.G. initials. Royal presented the item to Citibank, the drawee, who honored it. The Power Authority sued both Las Américas and Citibank; Citibank then brought Royal into the case.

Liability chain

The Supreme Court adopted the legal doctrine proposed by Royal Bank. Citibank, the Court found, was liable to the Power Authority for honoring the altered check. Royal, in turn, had to answer to Citibank, and Las Américas to Royal, on account of the respective P.E.G. stamps. Thus, the first bank to receive the item and stamp it "Prior Endorsements Guaranteed" was made ultimately responsible.

"The P.E.G. stamp employed by banks stands for 'Prior endorsements guaranteed.' While the Uniform Commercial Code, as will be seen, frequently fails to provide clear answers to questions in the area of negotiable instruments, it is unequivocal in its insistence that that indorsement is to be spelled with the letter 'i.' Bankers, who claim to know much of such weighty matters, may insist on beginning with 'e,' but this practice could be attributed to the bankers' understandable reluctance to stamp 'Pay any Bank PIG' on the backs of the checks they handle.'"

- Perini Corp. v. First Nat. Bank of Habersham County, 553 F.2d 398, 401 (5th Cir. 1977)


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