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G.R. No.

L-53194 March 14, 1988


PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S. GOZON
II, respondents.

GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went
to the bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the
bank. When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00,
forged the signature of Gozon, and thereafter he encashed the check in the bank on the same day. The account of Gozon was
debited the said amount. Upon receipt of the statement of account from the bank, Gozon asked that the said amount of
P5,000.00 should be returned to his account as his signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the police authorities and upon
investigation he admitted that he stole the check of Gozon, forged his signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorney's fees and costs
against the bank in the Court of First Instance of Rizal. After the issues were joined and the trial on the merits ensued, a decision
was rendered on February 4, 1980, the dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby condemned to
return to plaintiff the amount of P5,000.00 which it had unlawfully withheld from the latter, with interest at the
legal rate from September 22, 1972 until the amount is fully delivered. The defendant is further condemned
to pay plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole legal issue that
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK CONTAINING THE
CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE
CAUSE OF THE LOSS, THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY
OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO.
3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered
as making the payment out of its own funds, and cannot ordinarily change the amount so paid to the account
of the depositor whose name was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed
negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. ... There
is nothing inequitable in such a rule. If the paper comes to the drawee in the regular course of business, and
he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a
question of payment under mistake, but payment in neglect of duty which the commercial law places upon
him, and the result of his negligence must rest upon him (12 ALR 1901, citing many cases found in I
Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance with the accepted
norms of banking practice when it accepted and paid Exhibit "A". It presented evidence that the check had to
pass scrutiny by a signature verifier as well as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with plaintiffs exemplar
signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A would immediately show the negligence of
the employees of the defendant bank. Even a not too careful comparison would immediately arrest one's
attention and direct it to the graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B".

The formation of the first letter "F" in the exemplars, which could be regarded as artistic, is completely
different from the way the same letter is formed in Exhibit "A-l". That alone should have alerted a more
careful and prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being
encashed. 1 It is expected to use reasonable business prudence in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature on the
forged check and the sample signatures of private respondent show marked differences as the graceful lines in the sample
signature which is completely different from those of the signature on the forged check. Indeed the NBI handwriting expert
Estelita Santiago Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked differences
between the signature of private respondent on the sample signatures and the questioned signature. Notwithstanding the
testimony of Col. Fernandez, witness for petitioner, advancing the opinion that the questioned signature appears to be genuine,
the trial court by merely examining the pictorial report presented by said witness, found a marked difference in the second "c" in
Francisco as written on the questioned signature as compared to the sample signatures, and the separation between the "s" and
the "c" in the questioned signature while they are connected in the sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows
marked variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that is the cause of the loss which he
suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went out for a short while can not be
considered negligence sufficient to excuse the defendant bank from its own negligence. It should be home in
mind that when defendant left his car, Ernesto Santos, a long time classmate and friend remained in the
same. Defendant could not have been expected to know that the said Ernesto Santos would remove a check
from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the
latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he left
his personal belongings in the car. Santos however removed and stole a check from his cheek book without the knowledge and
consent of private respondent. No doubt private respondent cannot be considered negligent under the circumstances of the
case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.
G.R. No. L-43596

October 31, 1936

PHILIPPINE
NATIONAL
vs.
THE NATIONAL CITY BANK OF NEW YORK, and
MOTOR SERVICE COMPANY, INC., appellant.
L.
D.
Camus and Delgado for appellee.

Lockwood

BANK, plaintiff-appellee,
MOTOR

SERVICE

for

COMPANY,

INC., defendants.

appellant.

RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a special act of the Philippine
Legislature, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the
defendant National City Bank of New York is a foreign banking corporation with a branch office duly authorized and
licensed to carry and engage in banking business in the Philippine Islands, with branch office and place of business in
the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor Service Company, Inc., is a corporation

organized and existing under and by virtue of the general corporation law of the Philippine Islands, with office and
principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged in the purchase and sale of automobile
spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service Company, Inc.,
the checks marked as Exhibits A and A-1, respectively, which are made parts of the stipulation, in payment for
automobile tires purchased from said defendant's stores, purporting to have been issued by the "Pangasinan
Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank and in favor of the
International Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed by said unknown persons in
the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the time that the signature of J. L.
Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company, Inc, at the
National City Bank of New York and the former was accordingly credited with the amounts thereof, or P144.50 and
P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National Bank
credited the National City Bank of New York for the amounts thereof, believing at the time that the signatures of the
drawer were genuine, that the payee is an existing entity and the endorsement at the back thereof regular and
genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as Manager and Treasurer of
the Pangasinan Transportation Company, Inc., in said Exhibits A and A-1 were forged when so informed by the said
Company, and it accordingly demanded from the defendants the reimbursement of the amounts for which it credited
the National City Bank of New York at the clearing house and for which the latter credited the Motor Service Co., but
the defendants refused, and continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming part of
the record of the present case, are admitted by the parties as genuine and are made part of this stipulation as well as
Exhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of New York. a decision was
thereafter rendered giving plaintiff judgment for the total amount of P360.25, with interest and costs. From this decision the
instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the municipal court
of Manila where this case originated, became perfected because of plaintiff's failure to attach to the record within 15 days from
receipt of notice of said decision, the certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not
disputed that both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time. The
issue is whether the mere failure to file the official receipt showing that such deposit was made within the said period is a
sufficient ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of Blanco vs. Bernabe and
lawyers Cooperative Publishing Co. (page 124,ante), and no further consideration. No error was committed in allowing said
appeal.
We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee has the
right to recover from the appellant, under the circumstances of this case, the value of the checks on which the signatures of the
drawer were forged. The appellant maintains that the question should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an "acceptance",
and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to indorse.

This contention is without merit. A check is a bill of exchange payable on demand and only the rules governing bills of exchange
payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that
acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the
provisions relative to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent negotiation of the
instrument, which is not true in case of the payment of a check because from the moment a check is paid it is withdrawn from
circulation. The warranty established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee
bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders
who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, "acceptance"
means "an acceptance completed by delivery or notification" and this concept is entirely incompatible with payment, because
when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party
receiving the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.)
There can be no such thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and on
demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand
from the bank anything but payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. (5
R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business calls for acceptance. The holder
can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on Banks and
Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are
paid, in which case we have a "certification" equivalent to "acceptance" according to section 187, which provides that "where a
check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the
warranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the
order of the drawer, which must not express that the drawee will perform his promise by any other means than the payment of
money. (Sec. 132.) When the holder of a check procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the check operates as an assignment of a part of the funds to the credit of
the drawer with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically precludes its acceptance, in
like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is
frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the
obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will
imperatively imply such valid promise or undertaking. The most ordinary form which such an act assumes is the acceptance by
the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898,
899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this
is not an "acceptance" of the check in the true sense of that term. Although a check does not call for acceptance, and the holder
can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking,
and its effects and consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and
certified, enter largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment
of debts, the purchase of property, and in the transfer of balances from one house and one bank to another. In the great
commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and an
almost indispensable office. The purpose of procuring a check to be certified is to impart strength and credit to the paper by
obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and
securing the engagement of the bank that the check will be paid upon presentation. A certified check has a distinctive character
as a species of commercial paper, and performs important functions in banking and commercial business. 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. The check becomes a basis of credit an easy mode of passing money from hand to hand,
and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law
merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or
any other obligation it can assume. The object of certifying a check, as regards both parties is to enable the holder to use it as
money. The transferee takes it with the same readiness and sense of security that he would take the notes of the bank. It is
available also to him for all the purposes of money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank
intended these consequences, and it is liable accordingly. To hold otherwise would render these important securities only a snare
and a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-regulated banks
the practice is at once to charge the check to the account of the drawer, to credit it in a certified check account, and, when the
check is paid, to debit that account with the amount. Nothing can be simpler or safer than this process. (Merchants'
Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)

Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words
"good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay
it. We will pay it now if you will receive it. The holder says, No, I will not take the money; you may certify the check and retain the
money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to
be left with the bank for the accommodation of the holder without discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive the pay, and for his own convenience has the money appropriated to
that check subject to its future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact that they take the word
"acceptance" in its ordinary meaning and not in the technical sense in which it is used in the Negotiable Instruments Law.
Appellant says that when payment is made, such payment amounts to an acceptance, because he who pays accepts. This is
true in common parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant case there was payment but no acceptatance, or what
is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere promise to pay a
check is binding on a bank, why should not the absolute payment of the check have the same effect? In response, it is submitted
that the two things, that is acceptance and payment, are entirely different. If the drawee accepts the paper after seeing it,
and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up
forgery to defeat liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of the conflicting arguments which have been advanced by the
courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be confounded
with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability only of
the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by the
negotiator if the check is discharged by acceptance, certification, or payment. But clearly the statute does not say that
the contract of warranty of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an acceptance so as to
make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited,
Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to
render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8;
Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more
definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of
the Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check,
and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which
extinguishes a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National
Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an
acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7
L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time
when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States
seems more logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this
statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the account of the drawer, do not
constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg.
Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R.
Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R.,
pp. 989, 991, 992.)

Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on
unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S. E.,
860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the
stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.
W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49;
143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain. This
suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of the United
States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the opinion in
that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and
there would be an end to the claim against it. The bank supposed that it had paid the check, but this was an error. The
money it paid was upon a pretended and not a real indorsement of the name of the payee. . . . We cannot recognize
the argument that payment of the amount of the check or sight draft under such circumstances amounts to an
acceptance creating a privity of contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual may be
ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future
time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The
difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance of the
check so as to authorize an action by the real owner to recover its amount from the drawee bank. (Michie on Banks
and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found in a footnote to the
foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable
length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and did not write anything else
except the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as
indorser and passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been
presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank
had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be illogical and unsound to say that the payment of a check by the
drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel correctly states that the theory upon which the numerous courts
hold that the payment of a check creates privity between the holder of the check and the drawee bank is tantamount to apro
tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be
done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites
the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that
the acceptance of a check was necessary in order to give the holder thereof a right of action thereon against the bank, and
further held in a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a right of
action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the amount to the
drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National Bank
of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having such a
case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer
and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of
justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. ( SeeNational Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would be inequitable and

unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby
lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of
the check, and proceeded to hold that no particular kind of writing was necessary to constitute an acceptance and that it became
a question of fact, and the bank became liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in
support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am.
Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from the
Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92
Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called
attention to the fact that the Dodge case was no longer the law, and proceeded to announce that, whatever might have
been the law before the passage of the Negotiable Instrument Act in that state, it was no longer the law; that the rule
announced in the Dodge case had been "discarded." The court, in the latter case, expressed its doubts that the courts
of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra, in the face of
the Negotiable Instrument Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case of
First National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any
knowledge that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the
payment the privity of contract existing between the drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and
there would be an end of the claim against it. The bank supposed that it had paid the check; but this was an error. The
money it paid was upon a pretended and not a real indorsement of the name of the payee. The real indorsement of the
payee was as necessary to a valid payment as the real signature of the drawer; and in law the check remains unpaid.
Its pretended payment did not diminish the funds of the drawer in the bank, or put money in the pocket of the person
entitled to the payment. The state of the account was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to construe a payment as an
acceptance under any circumstances. The two things are essentially different. One is a promise to perform an act, the
other an actual performance. A banker or an individual may be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference between the transactions is essential and
inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of the amount
thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases cited hold that it is in
compliance with the Negotiable Instruments Act; paying the check and stamping same is not the equivalent of
accepting the check in writing signed by the drawee. The cases holding that payment as indicated above constituted
acceptance were rendered prior to the adoption of the Negotiable Instruments Act in the particular state, and these
decisions are divided into two classes: the one holding that the check delivered by the drawer to the holder and
presented to the bank or drawee constitutes an assignment pro tanto; the other holding that the payment of the check
and the charging of same to the drawee although paid to an unauthorized person creates privity of contract between
the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory, and since the adoption of
the Negotiable Instrument Act by this state we are compelled to say that payment of a check is not equivalent to
accepting a check in writing and signing the name of the acceptor thereon. Payment of the check and the charging of
same to the drawer does not constitute an acceptance. Payment of the check is the end of the voyage; acceptance of
the check is to fuel the vessel and strengthen it for continued operation on the commercial sea. What we have said
applies to the holder and not to the drawer of the check. On this question we conclude that the general rule is that an
action cannot be maintained by a payee of the check against the bank on which is draw unless the check has been
certified or accepted by the bank in compliance with the statute, even though at the time the check is that an action
cannot be maintained by a payee of the drawer of the check out of which the check is legally payable; and that the
payment of the check by the bank on which it is drawn, even though paid on the unauthorized indorsement of the name
of the holder (without notice of the defect by the bank), does not constitute a certification thereof, neither is it an
acceptance thereof; and without acceptance or certification, as provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check. Neither is there an assignment pro tanto of the funds
where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a particular
fund. The above rule as stated seems to have been the rule in the majority of the states even before the passage of
the uniform Negotiable Instruments Act in the several states.

The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12,
13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co.vs. Levin (143 N. E., 816,
817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The
payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a payment
has all the efficacy of an acceptance, is founded upon the principle that the greater includes the less." We are unable
to agree with this statement as there is no similarity between acceptance and payment; payment discharges the
instrument, and no one else is expected to advance anything on the faith of it; acceptance, contemplates further
circulation, induced by the fact of acceptance. The rule that the acceptor made certain admissions which will inure to
the benefit of subsequent holders, has no applicability to payment of the instrument where subsequent holders can
never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover money paid
upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery and it must bear the
consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in misconception of the
fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the
purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank money paid
under a mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This doctrine has been freely
criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to effectuate
justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354), elicited the
following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of Dedham
National Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an impression of convenience
rather than for any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to
payments under a mistake of fact by the assumption that a holder who simply presents negotiable paper for payment makes no
representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in the case
of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180),
it was held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation that the signature of
the drawer is genuine", and in Lisbon First National Bank vs. Wyndmere Bank (15 N. D., 299), it was also held that "the drawee
of a forged check who has paid the same without detecting the forgery, may upon discovery of the forgery, recover the money
paid from the party who received the money, even though the latter was a good faith holder, provided the latter has not been
misled or prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's
name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the
bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper
before he received it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to
know the drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he
should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the
holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a worse position by according
such privilege to him. This view has been applied in a well considered case, and is intimidated in another; and is forcibly
presented by Mr. Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent's
handwriting, "unless some bona fide holder has purchased the paper on the faith of such an act." Negligence in making payment
under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why any exception should be made to the
principle, which would apply as well as to release an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 15371539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has
paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair
to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902],
56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's signature,
is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead
the drawee. (National Bank of America vs.Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra;
De Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N.

S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not
doing something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one, he
is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs. First
Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb.,
769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188;
B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A.
[N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of
Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to
retain the money obtained he must be able to show that the whole responsibility of determining the validity of the signature was
upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution which, from his
implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio
Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of
Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs.People's Bank of Orangeburg, supra.) The recovery
is permitted in such case, because, although the drawee was constructively negligent in failing to detect the forgery, yet if the
purchaser had performed his duty, the forgery would in all probability have been detected and the fraud defeated. (First National
Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery
from one who took the check under circumstances of suspicion without proper precaution, or whose conduct has been such as to
mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud.
(National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and
Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss,
which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is
unreasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded.
(Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, supra; B. B. Ford
& Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the check or
draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his suspicions the indorser
according to the reasoning of some courts will be held liable to the drawee upon his implied warranty that the instrument is
genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294;
38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound to satisfy himself that
the paper is genuine; and that by indorsing it or presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on his part, paid the forged
demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs. Wyndmere Bank, supra.)
Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault. ( See also 5 R. C. L.,
pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover
the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check
which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself
given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bankvs. Bank of Albany, 1 Hill, 287;
Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A
holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the drawee to commit. . . . The
holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by
misleading him. . . . If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that
he has failed to detect the forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then he is not
precluded from recovery from a holder whose conduct has been such as to mislead the drawee or induce him to pay the check
or bill of exchange without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if
the holder was negligent in not making due inquiry concerning the validity of the check before he took it, and if the drawee can be
said to have been excused from making inquiry before taking the check because of having had a right to, presume that the
holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is genuine should
not be allowed to retain the proceeds of the draft or check from the drawee, whose sole fault was that he did not discover the
forgery before he paid the draft or check, has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank
[1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it, generally, and
presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its mistake in having failed to

detect the forgery, since its mistake, did not mislead the purchaser or bring about a change in position. (Security Commercial &
Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited
by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had
paid the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check,
and was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it
was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery,
from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and
payee without making any inquiry as to who he was although he was a stranger, after which the check reached, and was paid by,
the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting
the check in circulation, was not discharged by payment of the check by the drawee (First National Bank), nor was the Brule
National Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its indorsement and delivery
warranted its own identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National
Bank was such as to assign the title to the check to its assignee, the Whitbeck National Bank, and the amount was credited to
the indorser. The check bore no indication that it was deposited for collection, and was not in any manner restricted so as to
constitute the indorsee the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in
trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the
warrant of genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the
statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36
N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's
Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully
examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule
of Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance, and that a bank drawee paying
a check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable Instruments Act.
Moreover in a more recent decision, that of Louisa National Bankvs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided
in 1931, the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to know the
signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check sufficient attention
and examination to enable it to discover instantly the forgery. The appellant, when the check was presented to it by
Banfield, failed to make an inquiry of or about him and did not cause or have him to be identified. Its act in so paying to
him the check is a degree of negligence on its part equivalent to positive negligence. It indorsed the check, and, while
such indorsement may not be regarded within the meaning of the Negotiable Instrument Law as amounting to a
warranty to appellant of that which it indorsed, it at least substantially served as a representation to it that it had
exercised ordinary care and had complied with the rules and customs of prudent banking. Its indorsement was
calculated, if it did not in fact do so, to lull the drawee bank into indifference as to the drawer's signature to it when
paying the check and charging it to its customer's account and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be had
of the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule
may be more accurately stated that, where the drawee pays the money, he cannot recover it back from a holder in
good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had by the
drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to cause or
to have him identified before it parted with its money on the forged check, may be regarded as the primary and
proximate cause of the loss. Its negligence in this respect reached in its effect the appellee, and induced incaution on
its part. In comparison of the degrees of the negligence of the two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently made a mistake, doubtless due to a hurry incident to business.
The first and most grievous one was made by the appellant , amounting to its disregard of the duty, it owed itself as
well as the duty it owed to the appellee, and it cannot on account thereof retain as against the appellee the money
which it so received. It cannot shift the loss to the appellee, for such disregard of its duty inevitably contributed to
induce the appellee to omit its duty critically to examine the signature of Armstrong, even if it did not know it instantly at
the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)

10

IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give
the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was not itself negligent,
except for its constructive fault in not knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number 637020D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is however,
issued on a later date. This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A is
indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co., Inc., made
no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said once that
"any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must
abide by the consequences if the agent who indorses the same is without authority" (Insular Drug Co. vs. National
Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop is
crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning that
the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180;
Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for
merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated the
following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every month in
payment of their account. The two checks in question seem to be exactly similar to the checks which we received from
the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may be
considered as an omission in good faith because of the similarity stated in the letter, then the same consideration
applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the
Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank
and the holder, and that they are governed by the authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that
of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker. The courts
have shown a steadily increasing disposition to extend the application of this rule over the new conditions of fact which
from time to time arise, until it can now rarely happen that the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake. Without any actual change in the abstract doctrines of
the law, which are clear, just, and simple enough, the gradual but sure tendency and effect of the decisions have been
to put as heavy a burden of responsibility upon the payee as upon the drawee, contrary to the original custom. . . . (2
Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the concurring
opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not rest upon
a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless
defendant could show some equitable reason, such as changed condition since, and relying upon, payment by plaintiff.
In the Wyndmere Case, the North Dakota court holds that this rule giving right to recover money paid under mistake
should extend to negotiable paper, and it rejects in its entirety the theory of estoppel and puts a case of this kind on
exactly the same basis as the ordinary case of payment under mistake. But the great weight of authority, and that
based on the better reasoning, holds that the exigencies of business demand a different rule in relation to negotiable

11

paper. What is that rule? Is it an absolute estoppel against the drawee in favor of a holder, no matter how negligent
such holder has been? It surely is not. The correct rule recognizes the fact that, in case of payment without a prior
acceptance or certification, the holder takes the paper upon the of the prior indorsers and the credit of the drawer, and
not upon the credit of the drawee, in making payment, has a right to rely upon the assumption that the payee used due
diligence, especially where such payee negotiated the bill or check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the maker that it was willing to warrant as relates thereto to all
subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to recover when the
holder was without fault or when there has been some change of position calling for equitable relief. When a holder of
a bill of exchange uses all due care in the taking of bill or check and the drawee thereafter pays same, the transaction
is absolutely closed modern business could not be done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by which the great bulk of business is carried on,
checks and drafts, upon the other hand it encourages and demands prudent business methods upon the part of those
receiving such mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N.
S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294;
36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761;
Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express
Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers'
& Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took this check from a strangerwithout
other identification than that given by another stranger; its cashier witnessed the mark of such stranger thus vouching
for the identity and signature of the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard.
Defendant could not but have known, when negotiating such check and putting it into the channel through which it
would finally be presented to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it to do,
would have to rely solely upon the apparent faith and credit that defendant had placed in the drawer. From the very
circumstances of this case plaintiff had to act on the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good conscience"
plaintiff should not recover it says it did not pay over any money to the forger until after plaintiff had paid the check.
There would be merit in such contention if defendant had indorsed the check for "collection," thus advising plaintiff that
it was relying on plaintiff and not on the drawer. It stands in court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent, misled or
deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results of his
own carelessness by asserting that the drawee was bound in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the
person whose signature it purports to be, is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by its
acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not be said that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's signature may recover
the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in
if the discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
Forgeries often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse than if the
drawee had refused the payment of these checks upon their presentation. The appellant has lost nothing by anything which the
drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any
representation made to it by the drawee. It purchased them from unknown persons and under suspicious circumstances. It had
no valid title to them, because the persons from whom it received them did not have such title. The appellant could not have
compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the forgery. By
making a refund, the appellant would only returning what it had received without any title or right. And when appellant pays back
the money it had received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why

12

the accidental payment made by the appellant should inure to the benefit of the appellant. If there were injury to the appellant
said injury was caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the
genuineness of the drawer's signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot
recover from a holder who did not participate in the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in section
62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover
from a holder in due course not chargeable with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the
duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the
holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher,
the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the
drawer and detecting the forgery will nor preclude his recovery from one who took the check under circumstances of
suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to
pay the check without the usual scrutiny or other precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it
or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his
duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder the
circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts
and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving
such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the
knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the appellant as
of the appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its
depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from
unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and
indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the
forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of
position as to the injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is hereby, affirmed, with costs
against the appellant. So ordered.
G.R. No. L-37467

December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant,


vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendants-appellees.

13

Gibbs and McDonough and Roman Ozaeta for appellant.


Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in business in the Philippine
Islands, and maintains its main office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general power of attorney with
authority of substitution. The principal employee in the Manila office was one Joseph L. Wilson, to whom had been given a
general power of attorney but without power of substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of
attorney to Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the Bank of the
Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in plaintiff's Manila office, sent a
cable gram in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation of Manila of
$100,00. The money was transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of P201,000, which was then the
current rate of exchange. On this contract was forged the name of Newland Baldwin and typed on the body of the contract was a
note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling Company or order was
receipted for by Dolores. On the same date, September 28, 1927, the manger's check was deposited with the Bank of the
Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of P201,000 and passed the
cashier's check in the ordinary course of business through the clearing house, where it was paid by the China Banking
Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be signed by Newland Baldwin,
directing that P200,000 in bills of various denominations, named in the letter, be packed for shipment and delivery the next day.
The next day, Dolores witnessed the counting and packing of the money, and shortly afterwards returned with the check for the
sum of P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine Islands but never in so large an
amount, and according to the record, never under the sole supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he left the bank and
shortly afterwards returned with another check for P1, purporting to be signed by Newland Baldwin. Whereupon the money was
turned over to Dolores, who took it to plaintiff's office, where he turned the money over to Wilson and received as his share,
P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff with the amount withdrawn
by the two forged checks of P200,000 and P1, suit was brought against the Bank of the Philippine Islands, and finally on the
suggestion of the defendant bank, an amended complaint was filed by plaintiff against both the Bank of the Philippine Islands
and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of the plaintiff company, that the
check had been endorsed for deposit, and that as the prior endorsement had in law been guaranteed by the Bank of the

14

Philippine Islands, when they presented the cashier's check to it for payment, the China Banking Corporation was absolved even
if the endorsement of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main their contentions were that they had been
guilty of no negligence, that they had dealt with the accredited representatives of the company in the due course of business,
and that the loss was due to the dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there was employed a woman
stenographer and cashier. The agent did not keep in his personal possession either the code-book or the blank checks of either
the Bank of the Philippine Islands or the China Banking Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the Bank of the Philippine
Islands being the result of a forged endorsement, the relation of depositor and banker did not exist, but the bank was only a
gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in the ordinary course of its business, was not guilty
of negligence, and therefore under article 1902 of the Civil Code which should control the case, plaintiff could not recover; and
that as the cause of loss was the criminal actions of Wilson and Dolores, employees of plaintiff, and as Newland Baldwin, the
agent, had not exercised adequate supervision over plaintiff's Manila office, therefore plaintiff was guilty of negligence, which
ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes nine assignments of error
which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland Baldwin were genuine and
that he had been in the habit of signing checks in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond reasonable doubt, nor is it believed
that Baldwin signed checks in blank and turned them over to Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of plaintiff and delivered it to
plaintiff's agent who was authorized to receive it. A bank that cashes a check must know to whom it pays. In connection with the
cashier's check, this duty was therefore upon the Bank of the Philippine Islands, and the China Banking Corporation was not
bound to inspect and verify all endorsements of the check, even if some of them were also those of depositors in that bank. It
had a right to rely upon the endorsement of the Bank of the Philippine Islands when it gave the latter bank credit for its own
cashier's check. Even if we would treat the China Banking Corporation's cashier's check the same as the check of a depositor
and attempt to apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation and
National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we would at the same time have to
hold that the Bank of the Philippine Islands was indebted to the China Banking Corporation in the same amount. As, however,
the money was in fact paid to plaintiff corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff
nor to the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China Banking Corporation
from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now consider the effect of the deposit of
P201,000. It must be noted that this was not a presenting of the check for cash payment but for deposit only. It is a matter of
general knowledge that most endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank
would have been justified in accepting the check for deposit even with only a typed endorsement. It accepted the check and duly
credited plaintiff's account with the amount on the face of the check. Plaintiff was not harmed by the transaction as the only result
was the removal of that sum of money from a bank from which Wilson could have drawn it out in his own name to a bank where
Wilson would not have authority to draw checks and where funds could only be drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one
thousand (P201,000) pesos, together with interest thereon at the agreed rate of 3 per cent per annum on daily
balances of our credit in account current with your bank to this date. In the event of your refusal to pay, we shall claim
interest at the legal rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw and
make use of the money." Such language might well be treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is absolutely contrary to what the
bank did. It did not take it up as a separate account but it transferred the credit to plaintiff's current account as a depositor of that
bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain,

15

and they solicit deposits in order that they can use the money for that very purpose. In this case the action was neither gratuitous
nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Islands was an intermeddling bank.
In the many cases cited by plaintiff where the bank that cashed the forged endorsement was held as an intermeddler, in none
was the claimant a regular depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is
therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000 was that of
depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the sum of P201,000, on two checks on which
the name of Baldwin was forged as drawer. As above stated, the fact that these signatures were forged is beyond question. It is
an elementary principle both of banking and of the Negotiable Instruments Law that
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making
the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled into a false sense of security,
it was by the effrontery of Dolores, the messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never
questioned at the time its employees should have used care. In fact, even today the bank represents that it has a relief that they
are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in
honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a judgment entered in favor of
plaintiff-appellant and against the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal interest
thereon from December 23,1928, until payment, together with costs in both instances. So ordered.
G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,


vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,


vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting
bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of
Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:

16

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial
funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial
Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said
government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion
Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the
hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then
discovered that the hospital did not receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were
issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial
Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on
February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or
helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash the first
check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the
check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was
cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for
the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various
amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the
checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for
certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts
debited from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as
third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB),
ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos
with legal interest thereon from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against
third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of
Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981
until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourthparty defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as
against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby
ordered dismissed for lack of merit.

17

SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability
when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was
then already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as
between two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated
Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged
liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB)
solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular
No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are
merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements
against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a
mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no
clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now
estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the
primary duty to verify the genuineness of payee's indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss
because it cleared and paid the forged checks.
xxx

xxx

xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly
issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the
payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were
order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the
drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature
unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument
through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which
allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a
forged indorsement does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from
setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this

18

defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the
instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due
course. 21
The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a
forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful
holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has
a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and
subsisting." 23 He cannot interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the
payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is
not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the
check and violates its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank
did not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general
rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The
risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed
to the making of the forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from
the forgery can be apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No
drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the
drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is
its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the
drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the
collection chain to the party who took from the forger and, of course, to the forger himself, if available. 28 In other words, the
drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically, the
latter can demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who took
the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will
necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's
indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must
necessarily return the money paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, a
collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will
be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting
bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement.

19

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee
is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of
any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement
because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him,
his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect
forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays
in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac
because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point
of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawerProvince of Tarlac were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed
the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from
the forger, it forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore,
share the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government
service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks
were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was
still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the
others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an
unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed.
There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent
dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to
Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital
is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also
authorized to help in the release of these checks and we were apparently misled because they accepted the
representation of Pangilinan that he was helping them in the release of the checks and besides according to them they
were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts and according to
them since this is a government check and believed that it will eventually go to the hospital following the standard
procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco. 34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence.
Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks.

20

The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability
and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with
the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be
negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to
deposit the proceeds of the checks to his own account. The Bank was by reason of the nature of the checks put upon
notice that they were issued for deposit only to the private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the
collecting bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who
deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed)
is merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior
indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the
checks negotiated to it. It is within the bank's discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on
its depositor. It is only logical that this bank be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the
forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing
House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall
be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by
law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a
forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central
Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later,
Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the
checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation
issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until
June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro
Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the
twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are
both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check)
adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose
the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated
by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the
latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office
on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two
days later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice
of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it. 37Had Associated Bank
decided to debit Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while
Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and
even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the
twenty-four-hour return rule.

21

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the
checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from
Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a
customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of
payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee's
indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac
the amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of
the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of
contract between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand
made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac
in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416
prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of
express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding them from the
coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the
Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal
interest rate, or six percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the
Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier
to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired
hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the
Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties
as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior
indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to
ascertain the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby
PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision
of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of
Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.
SO ORDERED.
ALLIED BANKING G.R. No. 133179
CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO,* JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
To ingratiate themselves to their valued depositors, some banks at times bend over backwards that they unwittingly
expose themselves to great risks.

22

The Case
This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals (CAs) Decision promulgated
on March 18, 1998[1] in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA Decision
modified the Decision dated November 15, 1993[2] of the Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil
Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as follows:
On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at its Quintin
Paredes Branch in Manila a money market placement of PhP 1,152,597.35 for a term of 31 days to mature on December 15,
1983,[3] as evidenced by Provisional Receipt No. 1356 dated November 14, 1983.[4]
On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to
pre-terminate Lim Sio Wans money market placement, to issue a managers check representing the proceeds of the placement,
and to give the check to one Deborah Dee Santos who would pick up the check. [5] Lim Sio Wan described the appearance
of Santos so that So could easily identify her.[6]
Later, Santos arrived at the bank and signed the application form for a managers check to be issued. [7] The bank issued
Managers Check No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wans money market placement in the
name of Lim Sio Wan, as payee.[8] The check was cross-checked For Payees Account Only and given to Santos.[9]
Thereafter, the managers check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent Metropolitan
Bank and Trust Co. (Metrobank),[10]with the forged signature of Lim Sio Wan as indorser. [11]
Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million with respondent Producers
Bank. Santos was the money market trader assigned to handle FCCs account. [12] Such deposit is evidenced by Official Receipt
No. 317568[13] and a Letter dated September 21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the
placement.[14] The placement matured on October 25, 1983 and was rolled-over until December 5, 1983 as evidenced by a Letter
dated October 25, 1983.[15] When the placement matured, FCC demanded the payment of the proceeds of the placement.
[16]

On December 5, 1983, the same date that So received the phone call instructing her to pre-terminate Lim Sio Wans

placement, the managers check in the name of Lim Sio Wan was deposited in the account of FCC, purportedly representing the
proceeds of FCCs money market placement with Producers Bank. [17] In other words, the Allied check was deposited with
Metrobank in the account of FCC as Producers Banks payment of its obligation to FCC.
To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC) Rules and
Regulations, Metrobank stamped a guaranty on the check, which reads: All prior endorsements and/or lack of endorsement
guaranteed.[18]
The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even without
checking the authenticity of Lim Sio Wans purported indorsement. Thus, the amount on the face of the check was credited to the
account of FCC.[19]

23

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to mature on January 9, 1984.[20]
On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to withdraw it.
[21]

She was then informed that the placement had been pre-terminated upon her instructions. She denied giving any instructions

and receiving the proceeds thereof. She desisted from further complaints when she was assured by the banks manager that her
money would be recovered.[22]
When Lim Sio Wans second placement matured on January 9, 1984, So called Lim Sio Wan to ask for the latters instructions on
the second placement. Lim Sio Wan instructed So to roll-over the placement for another 30 days. [23] On January 24, 1984, Lim
Sio Wan, realizing that the promise that her money would be recovered would not materialize, sent a demand letter to Allied
asking for the payment of the first placement. [24] Allied refused to pay Lim Sio Wan, claiming that the latter had authorized the
pre-termination of the placement and its subsequent release to Santos.[25]
Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 1984[26] docketed as Civil Case No. 6757 against
Allied to recover the proceeds of her first money market placement. Sometime in February 1984, she withdrew her second
placement from Allied.
Allied filed a third party complaint[27] against Metrobank and Santos. In turn, Metrobank filed a fourth party complaint [28] against
FCC. FCC for its part filed a fifth party complaint [29] against Producers Bank. Summonses were duly served upon all the parties
except for Santos, who was no longer connected with Producers Bank. [30]
On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank that the signature on the check
was forged.[31] Thus, Metrobank withheld the amount represented by the check from FCC. Later on, Metrobank agreed to release
the amount to FCC after the latter executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse
the amount.[32]
Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant, along with Allied.
[33]

The RTC admitted the amended complaint despite the opposition of Metrobank. [34] Consequently, Allieds third party complaint

against Metrobank was converted into a cross-claim and the latters fourth party complaint against FCC was converted into a third
party complaint.[35]
After trial, the RTC issued its Decision, holding as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of P1,158,648.49 plus 12%
interest per annum from March 16, 1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of attorneys fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.
Defendant Allied Banks cross-claim against defendant Metrobank is DISMISSED.
Likewise defendant Metrobanks third-party complaint as against Filipinas Cement Corporation is
DISMISSED.
Filipinas Cement Corporations fourth-party complaint against Producers Bank is also DISMISSED.
SO ORDERED.[36]

24

The Decision of the Court of Appeals


Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying the RTC Decision, as
follows:
WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered
ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus
12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs
of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendantappellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified,
the decision appealed from is AFFIRMED.
SO ORDERED.[37]

Hence, Allied filed the instant petition.


The Issues
Allied raises the following issues for our consideration:
The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to preterminate the initial placement and to deliver the check to Deborah Santos.
The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the
reimbursement of amount adjudged demandable.
The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount
adjudged demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all endorsement
on the check, it being the collecting bank.[38]

The petition is partly meritorious.


A Question of Fact
Allied questions the finding of both the trial and appellate courts that Allied was not authorized to release the proceeds of Lim Sio
Wans money market placement toSantos. Allied clearly raises a question of fact. When the CA affirms the findings of fact of the
RTC, the factual findings of both courts are binding on this Court. [39]
We also agree with the CA when it said that it could not disturb the trial courts findings on the credibility of witness So inasmuch
as it was the trial court that heard the witness and had the opportunity to observe closely her deportment and manner of
testifying. Unless the trial court had plainly overlooked facts of substance or value, which, if considered, might affect the result of
the case,[40] we find it best to defer to the trial court on matters pertaining to credibility of witnesses.
Additionally, this Court has held that the matter of negligence is also a factual question. [41] Thus, the finding of the RTC, affirmed
by the CA, that the respective parties were negligent in the exercise of their obligations is also conclusive upon this Court.
The Liability of the Parties

25

As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is the doctrine that the
relationship between a bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the same kind and quality.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum. [42] More
succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market placement is
a simple loan or mutuum.[43] Further, we defined a money market in Cebu International Finance Corporation v. Court of
Appeals, as follows:
[A] money market is a market dealing in standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open
market. In a money market transaction, the investor is a lender who loans his money to a borrower through a
middleman or dealer.
In the case at bar, the money market transaction between the petitioner and the private respondent
is in the nature of a loan.[44]

Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon
maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation of Allied
to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus:
Art. 1231. Obligations are extinguished:
(1)
(2)
(3)
(4)
(5)
(6)

By payment or performance;
By the loss of the thing due;
By the condonation or remission of the debt;
By the confusion or merger of the rights of creditor and debtor;
By compensation;
By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a


resolutory condition, and prescription, are governed elsewhere in this Code.(Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her money
market placement to Santos and the bank had been negligent in so doing, there is no question that the obligation of Allied to pay
Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that payment shall be made to the person in whose favor
the obligation has been constituted, or his successor in interest, or any person authorized to receive it. As commented by Arturo
Tolentino:
Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor,
if there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in utmost
good faith and by mistake as to the person of his creditor, or through error induced by the fraud of a third
person, the payment to one who is not in fact his creditor, or authorized to receive such payment, is void,
except as provided in Article 1241. Such payment does not prejudice the creditor, and accrual of
interest is not suspended by it.[45] (Emphasis supplied.)
Since there was no effective payment of Lim Sio Wans money market placement, the bank still has an obligation to pay her at six
percent (6%) interest from March 16, 1984 until the payment thereof.

26

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans money. It points out that Metrobank guaranteed
all prior indorsements inscribed on the managers check, and without Metrobanks guarantee, the present controversy would
never have occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the proper party
is, aside from being an efficient intervening cause, also the last negligent act, x x x contributory to the injury
caused in the present case, which thereby leads to the conclusion that it is the collecting bank, Metrobank
that is the proximate cause of the alleged loss of the plaintiff in the instant case. [46]
We are not persuaded.
Proximate cause is that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury and without which the result would not have occurred. [47] Thus, there is an efficient supervening event if the
event breaks the sequence leading from the cause to the ultimate result. To determine the proximate cause of a controversy, the
question that needs to be asked is: If the event did not happen, would the injury have resulted? If the answer is NO, then the
event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment, the money represented by the check would still
be lost because of Metrobanks negligence in indorsing the check without verifying the genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:
Section 66. Liability of general indorser.Every indorser who indorses without qualification, warrants to all
subsequent holders in due course;
a)
b)

The matters and things mentioned in subdivisions (a), (b) and (c) of the next
preceding section; and
That the instrument is at the time of his indorsement valid and subsisting;

And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the
case may be according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
Section 65. Warranty where negotiation by delivery, so forth.Every person negotiating an
instrument by delivery or by a qualified indorsement, warrants:
a)
b)
c)
d)

That the instrument is genuine and in all respects what it purports to be;
That he has a good title of it;
That all prior parties had capacity to contract;
That he has no knowledge of any fact which would impair the validity of the instrument
or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than
the immediate transferee.
The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes. (Emphasis supplied.)

27

The warranty that the instrument is genuine and in all respects what it purports to be covers all the defects in the instrument
affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the
negotiable instrument even if a previous indorsement was forged. We held in a line of cases that a collecting bank which
indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including
the forged indorsement itself, and ultimately should be held liable therefor. [48]
However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was attended
with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of the cases where the
checks were negligently issued, this Court held the institution issuing the check just as liable as or more liable than the collecting
bank.
In isolated cases where the checks were deposited in an account other than that of the payees on the strength of forged
indorsements, we held the collecting bank solely liable for the whole amount of the checks involved for having indorsed the
same. In Republic Bank v. Ebrada,[49] the check was properly issued by the Bureau of Treasury. While in Banco de Oro Savings
and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation,[50] Banco de Oro admittedly issued the checks in the name
of the correct payees. And in Traders Royal Bank v. Radio Philippines Network, Inc.,[51] the checks were issued at the request of
Radio Philippines Network, Inc. from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is liable for 60% of the amount on
the face of the negotiable instrument and the collecting bank is liable for 40%. We also noted the relative negligence exhibited by
two banks, to wit:
Both banks were negligent in the selection and supervision of their employees resulting in the
encashment of the forged checks by an impostor. Both banks were not able to overcome the presumption of
negligence in the selection and supervision of their employees. It was the gross negligence of the employees
of both banks which resulted in the fraud and the subsequent loss. While it is true that petitioner BPIs
negligence may have been the proximate cause of the loss, respondent CBCs
negligence contributed equally to the success of the impostor in encashing the proceeds of the forged
checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while
respondent CBC may recover its losses, such losses are subject to mitigation by the courts. ( See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks, we rule that the demands of
substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the arbitration
proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio. [52]

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bank should equally share
the liability for the loss of amount represented by the checks concerned due to the negligence of both parties:
The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan),
in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three
years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospitals real cashier, respondent Province contributed to the loss amounting to
P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect,
the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00.
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr.
Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payees
indorsement.[53]

28

A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or institution which
issued the check was held partially liable for the amount of the check was because of the negligence of these parties which
resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in issuing the managers check and in transmitting it
to Santos without even a written authorization. [54] In fact, Allied did not even ask for the certificate evidencing the money market
placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions could have prevented the
whole fraudulent transaction from unfolding. Allieds negligence must be considered as the proximate cause of the resulting loss.
To reiterate, had Allied exercised the diligence due from a financial institution, the check would not have been issued and no loss
of funds would have resulted. In fact, there would have been no issuance of indorsement had there been no check in the first
place.
The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When Metrobank indorsed
the check in compliance with the PCHC Rules and Regulations [55] without verifying the authenticity of Lim Sio Wans indorsement
and when it accepted the check despite the fact that it was cross-checked payable to payees account only, [56] its negligent and
cavalier indorsement contributed to the easier release of Lim Sio Wans money and perpetuation of the fraud. Given the relative
participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio
of the liabilities of Allied and Metrobank, as ruled by the CA, must be upheld.
FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wans indorsement, can raise the real
defense of forgery as against both banks.[57]
As to Producers Bank, Allied Banks argument that Producers Bank must be held liable as employer of Santos under
Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that an
employee has committed. Such provision of law does not apply to civil liability arising from delict.
One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case.
Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the conviction of the
employee for a crime. Here, there has been no conviction for any crime.
As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly
claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered against it pursuant
to Art. 22 of the Civil Code, which provides: Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just cause or legal ground, shall return the
same to him.

The above provision of law was clarified in Reyes v. Lim, where we ruled that [t]here is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience. [58]
In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: Under Article 22 of the Civil Code, there
is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with damages to
another.[59]

29

In the instant case, Lim Sio Wans money market placement in Allied Bank was pre-terminated and withdrawn without
her consent. Moreover, the proceeds of the placement were deposited in Producers Banks account in Metrobank without any
justification. In other words, there is no reason that the proceeds of Lim Sio Wans placement should be deposited in FCCs
account purportedly as payment for FCCs money market placement and interest in Producers Bank. With such payment,
Producers Banks indebtedness to FCC was extinguished, thereby benefitting the former. Clearly, Producers Bank was unjustly
enriched at the expense of Lim Sio Wan. Based on the facts and circumstances of the case, Producers Bank should reimburse
Allied and Metrobank for the amounts the two latter banks are ordered to pay Lim Sio Wan.
It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly
enriched. It must be remembered that FCCs money market placement with Producers Bank was already due and demandable;
thus, Producers Banks payment thereof was justified. FCC was entitled to such payment. As earlier stated, the fact that the
indorsement on the check was forged cannot be raised against FCC which was not a part in any stage of the negotiation of the
check. FCC was not unjustly enriched.
From the facts of the instant case, we see that Santos could be the architect of the entire controversy. Unfortunately,
since summons had not been served onSantos, the courts have not acquired jurisdiction over her. [60] We, therefore, cannot
ascribe to her liability in the instant case.
Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check plus 12% interest per
annum, moral damages, attorneys fees, and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio Wan based on
a proportion of 60:40.
WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV No. 46290 and
the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.
Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:
WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered
ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus
12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs
of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendantappellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified,
the decision appealed from is AFFIRMED.
SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and Metrobank the
aforementioned amounts. The liabilities of the parties are concurrent and independent of each other.
SO ORDERED.

[G.R. No. 139130. November 27, 2002]

30

RAMON

K.
ILUSORIO, petitioner, vs. HON.
BANKING CORPORATION, respondents.

COURT

OF

APPEALS,

and

THE

MANILA

DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision [1] promulgated on January 28, 1999 by the Court of Appeals in CAG.R. CV No. 47942, affirming the decision of the then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of
Makati, Branch 138) dismissing Civil Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational
Investment Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good
standing of respondent bank, the Manila Banking Corporation, under current Checking Account No. 06-09037-0. As he was then
running about 20 corporations, and was going out of the country a number of times, petitioner entrusted to his secretary,
Katherine[2] E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled
the statements of said checking account.[3]
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal
account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with an aggregate
amount of P119,634.34. Petitioner did not bother to check his statement of account until a business partner apprised him that he
saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru
falsification before the Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit executed by its employee,
Mr. Dante Razon, also lodged a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of
petitioners statement that his signatures in the checks were forged. [4] Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance with prescribed verification procedures with utmost
care and diligence by comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which
we have on file at our said office on such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in
said Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she personally encashed the abovementioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing on the checks further alleged
to have not authorized the issuance and encashment of the same. [5]
Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were
wrongfully encashed but respondent bank refused. Hence, petitioner filed the instant case.[6]
At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as narrated above, and how he
discovered the alleged forgeries. Several employees of Manila Bank were also called to the witness stand as hostile
witnesses. They testified that it is the banks standard operating procedure that whenever a check is presented for encashment or
clearing, the signature on the check is first verified against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining the genuineness of the
signatures appearing on the checks. However, in a letter dated March 25, 1987, the NBI informed the trial court that they could
not conduct the desired examination for the reason that the standard specimens submitted were not sufficient for purposes of
rendering a definitive opinion. The NBI then suggested that petitioner be asked to submit seven (7) or more additional standard
signatures executed before or about, and immediately after the dates of the questioned checks. Petitioner, however, failed to
comply with this request.
After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994 with the following
dispositive portion:

31

WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the light of the foregoing
considerations and established facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.[7]
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but without success. The
appellate court held that petitioners own negligence was the proximate cause of his loss. The appellate court disposed as
follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant.
SO ORDERED.[8]
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED FROM
RAISING THE DEFENSE THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN
THE CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA THRU
FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT
OF PETITIONER STATING THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVITCOMPLAINT.[9]
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW. [10]
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE RESPONDENT
BANK TO PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS
NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES. [11]
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE LOSS,
AND SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO
ESTEBAN.[12]
Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against private respondent; and
(2) whether or not private respondent, in filing anestafa case against petitioners secretary, is barred from raising the defense that
the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He
adds that as a general rule a bank which has obtained possession of a check upon an unauthorized or forged endorsement of
the payees signature and which collects the amount of the check from the drawee is liable for the proceeds thereof to the
payee. Petitioner invokes the doctrine of estoppel, saying that having itself instituted a forgery case against Eugenio, Manila
Bank is now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the accepted and usual course of
judicial proceedings, hence there is no reason for the reversal of its ruling. Manila Bank additionally points out that Section
23[13] of the Negotiable Instruments Law is inapplicable, considering that the fact of forgery was never proven. Lastly, the bank
negates petitioners claim of estoppel.[14]
On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled to damages, petitioner
has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the
checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing
them with those on the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as
requested by the National Bureau of Investigation from which to draw a conclusive finding regarding forgery. The Court of
Appeals found that petitioner, by his own inaction, was precluded from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the alleged forgery is not
convincing enough. The burden to prove forgery was upon the plaintiff, which burden he failed to discharge. Aside from his own
testimony, the appellant presented no other evidence to prove the fact of forgery. He did not even submit his own specimen
signatures, taken on or about the date of the questioned checks, for examination and comparison with those of the subject
checks. On the other hand, the appellee presented specimen signature cards of the appellant, taken at various years, namely, in
1976, 1979 and 1981 (Exhibits 1, 2, 3 and 7), showing variances in the appellants unquestioned signatures. The evidence further

32

shows that the appellee, as soon as it was informed by the appellant about his questioned signatures, sought to borrow the
questioned checks from the appellant for purposes of analysis and examination (Exhibit 9), but the same was denied by the
appellant. It was also the former which sought the assistance of the NBI for an expert analysis of the signatures on the
questioned checks, but the same was unsuccessful for lack of sufficient specimen signatures. [15]
Moreover, petitioners contention that Manila Bank was remiss in the exercise of its duty as drawee lacks factual
basis. Consistently, the CA and the RTC found that Manila Bank employees exercised due diligence in cashing the checks. The
banks employees in the present case did not have a hint as to Eugenios modus operandi because she was a regular customer of
the bank, having been designated by petitioner himself to transact in his behalf. According to the appellate court, the employees
of the bank exercised due diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs employees exercised due diligence before encashing the checks. Its verifiers
first verified the drawers signatures thereon as against his specimen signature cards, and when in doubt, the verifier went further,
such as by referring to a more experienced verifier for further verification. In some instances the verifier made a confirmation by
calling the depositor by phone. It is only after taking such precautionary measures that the subject checks were given to the teller
for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect any forgery -- if indeed there
was. However, a mistake is not equivalent to negligence if they were honest mistakes. In the instant case, we believe and so
hold that if there were mistakes, the same were not deliberate, since the bank took all the precautions. [16]
As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something
which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the
doing of something which a prudent and reasonable man would do. [17] In the present case, it appears that petitioner accorded his
secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements,
including custody and possession of cancelled checks and reconciliation of accounts. Said the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of his account, through a letter
dated July 14, 1980 (Exhibit 8). Thus, the said secretary became a familiar figure in the bank. What is worse, whenever the bank
verifiers call the office of the appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said secretary, by entrusting not only his credit cards
with her but also his checkbook with blank checks. He also entrusted to her the verification and reconciliation of his
account. Further adding to his injury was the fact that while the bank was sending him the monthly Statements of Accounts, he
was not personally checking the same. His testimony did not indicate that he was out of the country during the period covered by
the checks. Thus, he had all the opportunities to verify his account as well as the cancelled checks issued thereunder -- month
after month. But he did not, until his partner asked him whether he had entrusted his credit card to his secretary because the said
partner had seen her use the same. It was only then that he was minded to verify the records of his account. [18]
The abovecited findings are binding upon the reviewing court. We stress the rule that the factual findings of a trial court,
especially when affirmed by the appellate court, are binding upon us [19] and entitled to utmost respect [20] and even finality. We find
no palpable error that would warrant a reversal of the appellate courts assessment of facts anchored upon the evidence on
record.
Petitioners failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is
that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. [21] In the instant case, the bank was not shown to be remiss in its duty of
sending monthly bank statements to petitioner so that any error or discrepancy in the entries therein could be brought to the
banks attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he was prevented
by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have
been alerted to any anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or detect any
misappropriation by his secretary had he only reviewed the status of his accounts based on the bank statements sent to him
regularly. In view of Article 2179 of the New Civil Code, [22] when the plaintiffs own negligence was the immediate and proximate
cause of his injury, no recovery could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that
Manila Bank had no authority to pay the forged checks. True, it is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party, can be acquired through or under such
signature. However, the rule does provide for an exception, namely: unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority. In the instant case, it is the exception that
applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and checkbook including the verification of his statements of account.

33

Petitioners reliance on Associated Bank vs. Court of Appeals[23] and Philippine Bank of Commerce vs. CA[24] to buttress his
contention that respondent Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the
present case, the fact of forgery was not established with certainty. In those cited cases, the collecting banks were held to be
negligent for failing to observe precautionary measures to detect the forgery. In the case before us, both courts below uniformly
found that Manila Banks personnel diligently performed their duties, having compared the signature in the checks from the
specimen signatures on record and satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from
asserting the fact that forgery has not been clearly established. Petitioner cannot hold private respondent in estoppel for the latter
is not the actual party to the criminal action. In a criminal action, the State is the plaintiff, for the commission of a felony is an
offense against the State.[25] Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information filed in court is
required to be brought in the name of the People of the Philippines. [26]
Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against Eugenio on the basis of
petitioners own affidavit,[27] but without admitting that he had any personal knowledge of the alleged forgery. It is, therefore, easy
to understand that the filing of the estafa case by respondent bank was a last ditch effort to salvage its ties with the petitioner as
a valuable client, by bolstering the estafa case which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated
January 28, 1999 in CA-G.R. CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
G.R. No. 156207

September 15, 2006

EQUITABLE PCI BANK (the Banking Entity into which Philippine Commercial International Bank was merged), petitioner,
vs.
ROWENA ONG, respondent.
DECISION
CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank Magsaysay
Avenue, Santa Ana District, Davao City Branch, under Account No. 8502-00347-6, a PCI Bank General Santos City Branch,
TCBT1 Check No. 0249188 in the amount of P225,000.00. Upon inquiry by Serande at PCI Bank on 5 December 1991 on
whether TCBT Check No. 0249188 had been cleared, she received an affirmative answer. Relying on this assurance, she issued
two checks drawn against the proceeds of TCBT Check No. 0249188. One of these was PCI Bank Check No. 073661 dated 5
December 1991 for P132,000.00 which Sarande issued to respondent Rowena Ong Owing to a business transaction. On the
same day, Ong presented to PCI Bank Magsaysay Avenue Branch said Check No. 073661, and instead of encashing it,
requested PCI Bank to convert the proceeds thereof into a manager's check, which the PCI Bank obliged. Whereupon, Ong was
issued PCI Bank Manager's Check No. 10983 dated 5 December 1991 for the sum of P132,000.00, the value of Check No.
073661.
The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No. 10983 in her account with Equitable Banking
Corporation Davao City Branch. On 9 December 1991, she received a check return-slip informing her that PCI Bank had stopped
the payment of the said check on the ground of irregular issuance. Despite several demands made by her to PCI Bank for the
payment of the amount in PCI Bank Manager's Check No. 10983, the same was met with refusal; thus, Ong was constrained to
file a Complaint for sum of money, damages and attorney's fees against PCI Bank. 2
From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was returned on 5 December 1991 at 5:00 pm on the
ground that the account against which it was drawn was already closed. According to PCI Bank, it immediately gave notice to
Sarande and Ong about the return of Check No. 0249188 and requested Ong to return PCI Bank Manager's Check No. 10983
inasmuch as the return of Check No. 0249188 on the ground that the account from which it was drawn had already been closed
resulted in a failure or want of consideration for the issuance of PCI Bank Manager's Check No. 10983. 3

34

After the pre-trial conference, Ong filed a motion for summary judgment. 4 Though they were duly furnished with a copy of the
motion for summary judgment, PCI Bank and its counsel failed to appear at the scheduled hearing. 5Neither did they file any
written comment or opposition thereto. The trial court thereafter ordered Ong to formally offer her exhibits in writing, furnishing
copies of the same to PCI Bank which was directed to file its comment or objection. 6
Ong complied with the Order of the trial court, but PCI Bank failed to file any comment or objection within the period given to it
despite receipt of the same order. 7 The trial court then granted the motion for summary judgment and in its Order dated 2 March
1995, it held:
IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is GRANTED, ordering defendant Philippine
Commercial International Bank to pay the plaintiff the amount of ONE HUNDRED THIRTY-TWO THOUSAND PESOS
(P132,000.00) equivalent to the amount of PCIB Manager's Check No. 10983.
Set the reception of the plaintiff's evidence with respect to the damages claimed in the complaint. 8
PCI Bank filed a Motion for Reconsideration which the trial court denied in its Order dated 11 April 1996. 9 After the reception of
Ong's evidence in support of her claim for damages, the trial court rendered its Decision 10 dated 3 May 1999 wherein it ruled:
IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has preponderantly established by competent
evidence her claims in the Complaint, judgment in hereby rendered for the plaintiff against the defendant-bank ordering
the latter:
1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the concept of moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as exemplary damages;
3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00) representing
actual expenses;
4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as and for attorney's fee's; and
5. To pay the costs.11
From this decision, PCI Bank sought recourse before the Court of Appeals. In a Decision 12 dated 29 October 2002, the appellate
court denied the appeal of PCI Bank and affirmed the orders and decision of the trial court.
Unperturbed, PCI Bank then filed the present petition for review before this Court and raised the following issues:
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE AND REVERSIBLE ERROR WHEN IT
SUSTAINED THE LOWER COURT'S ORDER DATED 2 MARCH 1999 GRANTING RESPONDENT'S MOTION FOR
SUMMARY JUDGMENT NOTWITHSTANDING THE GLARING FACT THAT THERE ARE GENUINE, MATERIAL AND
FACTUAL ISSUES WHICH REQUIRE THE PRESENTATION OF EVIDENCE.
2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT SUSTAINED THE LOWER COURT'S
DECISION DATED 3 MAY 1999 GRANTING THE RELIEFS PRAYED FOR IN RESPONDENT ONG'S COMPLAINT
INSPITE OF THE FACT THAT RESPONDENT ONG WOULD BE "UNJUSTLY ENRICHED" AT THE EXPENSE OF
PETITIONER BANK, IF PETITIONER BANK WOULD BE REQUIRED TO PAY AN UNFUNDED CHECK.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERRORS WHEN IT AFFIRMED THE
COURT A QUO'S DECISIION DATED 3 MAY 1999 AWARDING DAMAGES TO RESPONDENT ONG AND HOLDING
THAT RESPONDENT ONG HAD PREPONDERANTLY ESTABLISHED BY COMPETENT EVIDENCE HER CLAIMS
IN THE COMPLAINT INSPITE OF THE FACT THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY THE
AWARD OF DAMAGES.
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT AFFIRMED THE
LOWER COURT'S FACTUAL FINDING IN ITS DECISION DATED 3 MAY 1999 HOLDING RESPONDENT ONG A
"HOLDER IN DUE COURSE" INSPITE OF THE FACT THAT THE REQUISITE OF "GOOD FAITH" AND FOR VALUE
IS LACKING AND DESPITE THE ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH FACTUAL ISSUE.
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT UPHELD THE
LOWER COURT'S DECISION DATED 3 MAY 1999 DENYING PETITIONER EPCI BANK'S COUNTERCLAIM
INSPITE OF THE FACT THAT IT WAS SHOWN THAT RESPONDENT ONG'S COMPLAINT LACKS MERIT. 13

35

We affirm the Decision of the trial court and the Court of Appeals.
The provision on summary judgment is found in Section 1, Rule 35 of the 1997 Rules of Court:
SECTION 1. Summary judgment for claimant. A party seeking to recover upon a claim, counterclaim, or cross-claim
or to obtain a declaratory relief may, at any time after the pleading in answer thereto has been served, move with
supporting affidavits, depositions or admissions for a summary judgment in his favor upon all or any part thereof.
Thus, it has been held that a summary judgment is proper where, upon a motion filed after the issues had been joined and on the
basis of the pleadings and papers filed, the court finds that there is no genuine issue as to any material fact to except as to the
amount of damages. A genuine issue has been defined as an issue of fact which calls for the presentation of evidence, as
distinguished from an issue which is sham, fictitious, contrived and patently unsubstantial so as not to constitute a genuine issue
for trial.14
A court may grant summary judgment to settle expeditiously a case if, on motion of either party, there appears from the
pleadings, depositions, admissions, and affidavits that no important issues of fact are involved, except the amount of
damages.15 Rule 35, Section 3, of the Rules of Court provides two requisites for summary judgment to be proper: (1) there must
be no genuine issue as to any material fact, except for the amount of damages; and (2) the party presenting the motion for
summary judgment must be entitled to a judgment as a matter of law. 16
Certainly, when the facts as pleaded appear uncontested or undisputed, then there's no real or genuine issue or question as to
the facts, and summary judgment is called for.17
By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but a manager's
check for that matter, PCI Bank's liability is fixed. Under the circumstances, we find that summary judgment was proper and a
hearing would serve no purpose. That summary judgment is appropriate was incisively expounded by the trial court when it
made the following observation:
[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since certification is equivalent to acceptance,
defendant-bank as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in
favor of the plaintiff who is a holder in due course whether the drawer (Warliza Sarande) had funds or not with the
defendant-bank (Security vs. State Bank, 154 N.W. 282) or the drawer was indebted to the bank for more than the
amount of the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the certifying bank as all the liabilities under
Sec. 62 of the Negotiable Instruments Law which refers to liability of acceptor (Title Guarantee vs. Emadee Realty
Corp., 240 N.Y. 36).
It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was paid to her by Warliza Sarande was
actually not funded but since plaintiff became a holder in due course, defendant-bank cannot interpose a defense of
want or lack of consideration because that defense is equitable or personal and cannot prosper against a holder in due
course pursuant to Section 28 of the Negotiable Instruments Law. Therefore, when the aforementioned check was
endorsed and presented by the plaintiff and certified to and accepted by defendant-bank in the purchase of PCIB
Manager's Check No. 1983 in the amount of P132,000.00, there was a valid consideration.18
The property of summary judgment was further explained by this Court when it pronounced that:
The theory of summary judgment is that although an answer may on its face appear to tender issues requiring trial
yet if it is demonstrated by affidavits, depositions, or admissions that those issues are not genuine, but sham or
fictitious, the Court is unjustified in dispensing with the trial and rendering summary judgment for plaintiff. The court is
expected to act chiefly on the basis of the affidavits, depositions, admissions submitted by the movant, and those of the
other party in opposition thereto. The hearing contemplated (with 10-day notice) is for the purpose of determining
whether the issues are genuine or not, not to receive evidence on the issues set up in the pleadings. A hearing is not
thus de riguer. The matter may be resolved, and usually is, on the basis of affidavits, depositions, admissions. This is
not to say that a hearing may be regarded as a superfluity. It is not, and the Court has plenary discretion to determine
the necessity therefore.19
The second and fourth issues are inter-related and so they shall be resolved together. The second issue has reference to PCI
Bank's claim of unjust enrichment on the part of Ong if it would be compelled to make good the manager's check it had issued.
As asserted by PCI Bank under the fourth issue, Ong is not a holder in due course because the manager's check was drawn
against a closed account; therefore, the same was issued without consideration.
On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the transfer of value without just cause or
consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the

36

plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense of another. 20 It is based on the
equitable postulate that it is unjust for a person to retain benefit without paying for it. 21 It is well to stress that the check of
Sarande had been cleared by the PCI Bank for which reason the former issued the check to Ong. A check which has been
cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to
the amount credited to his account.22
Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot allege want or failure of consideration
between it and Sarande. Under settled jurisprudence, Ong is a stranger as regards the transaction between PCI Bank and
Sarande.23
PCI Bank next insists that since there was no consideration for the issuance of the manager's check, ergo, Ong is not a holder in
due course. This claim is equally without basis. Pertinent provisions of the Negotiable Instruments Law are hereunder quoted:
SECTION 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice it had been previously dishonored, if such
was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of
the person negotiating it.
The same law provides further:
Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Sec. 26. What constitutes holder for value. Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to that time.
Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.
Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary check but a manager's check. A manager's
check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its
issuance. By its peculiar character and general use in commerce, a manager's check is regarded substantially to be as good as
the money it represents.24
A manager's check stands on the same footing as a certified check. 25 The effect of certification is found in Section 187,
Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which it is drawn, the certification
is equivalent to an acceptance.26
The effect of issuing a manager's check was incontrovertibly elucidated when we declared that:
A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check both as to
effect and use. A cashier's check is a check of the bank's cashier on his own or another check. In effect, it is a bill of
exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is
really the bank's own check and may be treated as a promissory note with the bank as a maker. The check becomes
the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. x x x. 27
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris 28:

37

[S]ince the said check had been certified by the drawee bank, by the certification, the funds represented by the check
are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a check is certified
by the bank on which it is drawn, the certification is equivalent to acceptance. Said certification "implies that the check
is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that
they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good
then, and shall continue good, and this agreement is as binding on the bank as its notes circulation, a certificate of
deposit payable to the order of depositor, or any other obligation it can assume. The object of certifying a check, as
regards both parties, is to enable the holder to use it as money." When the holder procures the check to be certified,
"the check operates as an assignment of a part of the funds to the creditors." Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to
the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount
credited to his account" shall apply in this case x x x.
By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a manager's check in exchange thereof,
PCI Bank assumed the liabilities of an acceptor under Section 62 of the Negotiable Instruments Law which states:
Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he will pay it according to the
tenor of his acceptance; and admits
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a holder in due course and failure or want of consideration for
PCI Bank's issuance of the manager's check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees:
SEC. 2. Declaration of Policy. The State recognizes the vital role of banks in providing an environment conducive to
the sustained development of the national economy and the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking
and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.
In Associated Bank v. Tan,29 it was reiterated:
"x x x the degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature
of their relationship with their depositors is concerned." Indeed, the banking business is vested with the trust and
confidence of the public; hence the "appropriate standard of diligence must be very high, if not the highest degree of
diligence."
Measured against these standards, the next question that needs to be addressed is: Did PCI Bank exercise the requisite degree
of diligence required of it? From all indications, it did not. PCI Bank distinctly made the following uncontested admission:
1. On 29 November 1991, one Warliza Sarande deposited to her savings account with PCI Bank's Magsaysay Avenue
Branch, TCBT-General Santos Branch Check No. 0249188 for P225,000.00. Said check, however, was
inadvertently sent by PCI Bank through local clearing when it should have been sent through inter-regional
clearing since the check was drawn at TCBT-General Santos City.
2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No. 0249188 had been cleared. Not having
received any advice from the drawee bank within the regular clearing period for the return of locally cleared checks,
and unaware then of the error of not having sent the check through inter-regional clearing, PCI Bank advised
her that Check No. 024188 is treated as cleared. x x x. 30 (Emphasis supplied.)
From the foregoing, it is palpable and readily apparent that PCI Bank failed to exercise the highest degree of care 31required of it
under the law.
In the case of Philippine National Bank v. Court of Appeals,32 we declared:
The banking system has become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or

38

as active instruments of business and commerce, banks have attained an ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the award of moral and exemplary damages by the trial court to
the respondent.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendant's wrongful act or omission. 33 The requisites for an award of moral
damages are well-defined, thus, firstly, evidence of besmirched reputation or physical, mental or psychological suffering
sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or
omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is
predicated on any of the instances expressed or envisioned by Article 2219 34 and Article 222035 of the Civil Code. All these
elements are present in the instant case.36
In the first place, by refusing to make good the manager's check it has issued, Ong suffered embarrassment and humiliation
arising from the dishonor of the said check.37 Secondly, the culpable act of PCI Bank in having cleared the check of Serande and
issuing the manager's check to Ong is undeniable. Thirdly, the proximate cause of the loss is attributable to PCI Bank. Proximate
cause is defined as that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have occurred. 38 In this case, the proximate cause of the loss is the
act of PCI Bank in having cleared the check of Sarande and its failure to exercise that degree of diligence required of it under the
law which resulted in the loss to Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in
addition to the moral, temperate, liquidated or compensatory damages.
The law allows the grant of exemplary damages to set an example for the public good. The banking system has become an
indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as
mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have
attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of
all, confidence. For this reason, banks should guard against injury attributable to negligence or bad faith on its part. 39 Without a
doubt, it has been repeatedly emphasized that since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected,
and high standards of integrity and performance are even required of it. 40 Having failed in this respect, the award of exemplary
damages is warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary
damages may be adjudicated. The assessment of such damages, except liquidated ones, is left to the discretion of the
court, according to the circumstances of each case.
Based on the above provision, the determination of the amount to be awarded (except liquidated damages) is left to the sound
discretion of the court according to the circumstances of each case. 41 In the case before us, we find that the award of moral
damages in the amount of P50,000.00 and exemplary damages in the amount of P20,000.00 is reasonable and justified.
With the above disquisition, there is no necessity of further discussing the last issue on the PCI Bank's counterclaim based on
the supposed lack of merit of Ong's complaint.
WHEREFORE, premises considered, the Petition is DENIED and the Decision of the Court of Appeals dated 29 October 2002 in
CA-G.R. CV No. 65000 affirming the Decision dated 3 may 1999, of the Regional Trial Court of Davao City, Branch 14, in Civil
Case No. 21458-92, are AFFIRMED.
SO ORDERED.

[G.R. No. 149454. May 28, 2004]

39

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI INTERNATIONALE and LEONARDO T.
YABUT, respondents.

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who have the
right to expect high standards of integrity andperformance from it. Among its obligations in furtherance thereof is knowing the
signatures of its clients. Depositors are not estopped from questioning wrongful withdrawals, even if they have failed to question
those errors in the statements sent by the bank to them for verification.

The Case
Before us are two Petitions for Review [1] under Rule 45 of the Rules of Court, assailing the March 23, 2001 Decision[2] and
the August 17, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 63561. The decretal portion of the assailed
Decision reads as follows:
WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that defendant bank [Bank of
the Philippine Islands (BPI)] is held liable only for one-half of the value of the forged checks in the amount of P547,115.00 after
deductions subject to REIMBURSEMENT from third party defendant Yabut who is likewise ORDERED to pay the other half to
plaintiff corporation [Casa Montessori Internationale (CASA)]. [4]
The assailed Resolution denied all the parties Motions for Reconsideration.

The Facts
The facts of the case are narrated by the CA as follows:
On November 8, 1982, plaintiff CASA Montessori International [5] opened Current Account No. 0291-0081-01 with defendant BPI[,]
with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized signatories.
In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been encashed by a certain Sonny
D. Santos since 1990 in the total amount of P782,000.00, on the following dates and amounts:
Check No. Date Amount
1.

839700 April 24, 1990 P 43,400.00

2.

839459 Nov. 2, 1990 110,500.00

3.

839609 Oct. 17, 1990 47,723.00

4.

839549 April 7, 1990 90,700.00

5.

839569 Sept. 23, 1990 52,277.00

6.

729149 Mar. 22, 1990 148,000.00

7.

729129 Mar. 16, 1990 51,015.00

8.

839684 Dec. 1, 1990 140,000.00

40

9.

729034 Mar. 2, 1990 98,985.00


Total -- P 782,600.00[6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious name used by third party defendant
Leonardo T. Yabut who worked as external auditor of CASA. Third party defendant voluntarily admitted that he forged the
signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the handwritings thereon
compared to the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against defendant bank praying that the
latter be ordered to reinstate the amount ofP782,500.00[7] in the current and savings accounts of the plaintiff with interest at 6%
per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff. [8]

Ruling of the Court of Appeals


Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI and CASA. The
appellate court took into account CASAs contributory negligence that resulted in the undetected forgery. It then ordered
Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA, the other half. It also disallowed attorneys fees
and moral and exemplary damages.
Hence, these Petitions.[9]

Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable decisions of this Honorable
Court to the effect that forgery cannot be presumed; that it must be proved by clear, positive and convincing evidence; and that
the burden of proof lies on the party alleging the forgery.
II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in particular the Negotiable
Instruments Law (NIL) which precludes CASA, on account of its own negligence, from asserting its forgery claim against BPI,
specially taking into account the absence of any negligence on the part of BPI. [10]
In GR No. 149507, Petitioner CASA submits the following issues:
1. The Honorable Court of Appeals erred when it ruled that there is no showing that [BPI], although negligent, acted in bad faith x
x x thus denying the prayer for the award of attorneys fees, moral damages and exemplary damages to [CASA]. The Honorable
Court also erred when it did not order [BPI] to pay interest on the amounts due to [CASA].
2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise negligent in the case at bar, thus warranting
its conclusion that the loss in the amount of P547,115.00 be apportioned between [CASA] and [BPI] x x x. [11]
These issues can be narrowed down to three. First, was there forgery under the Negotiable Instruments Law
(NIL)? Second, were any of the parties negligent and therefore precluded from setting up forgery as a defense? Third, should
moral and exemplary damages, attorneys fees, and interest be awarded?

The Courts Ruling


The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.

First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:

41

Section 23. Forged signature; effect of. -- When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right x x x to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.[12]
Under this provision, a forged signature is a real [13] or absolute defense,[14] and a person whose signature on a negotiable
instrument is forged is deemed to have never become a party thereto and to have never consented to the contract that allegedly
gave rise to it.[15]
The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is forgery. [16]
In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA[17] and the RTC[18] found that Respondent Yabut himself had voluntarily admitted, through an Affidavit,
that he had forged the drawers signature and encashed the checks. [19] He never refuted these findings. [20] That he had been
coerced into admission was not corroborated by any evidence on record. [21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its examination of the said
checks,[22] had concluded that the handwritings thereon -- compared to the standard signature of the drawer -- were not hers.
[23]
This conclusion was the same as that in the Report [24] that the PNP Crime Laboratory had earlier issued to BPI -- the drawee
bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA, since these are supported by
substantial evidence on record.[25]

Voluntary Admission Not


Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation, and (2) against selfincrimination.
In the first place, he was not under custodial investigation. [26] His Affidavit was executed in private and before private
individuals.[27] The mantle of protection under Section 12 of Article III of the 1987 Constitution [28] covers only the period from the
time a person is taken into custody for investigation of his possible participation in the commission of a crime or from the time he
is singled out as a suspect in the commission of a crime although not yet in custody. [29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation of freedom, with
questions propounded on him by the police authorities for the purpose of eliciting admissions, confessions, or any information.
[30]
The said constitutional provision does not apply to spontaneous statements made in a voluntary manner [31] whereby an
individual orally admits to authorship of a crime. [32] What the Constitution proscribes is the compulsory or coercive disclosure of
incriminating facts.[33]
Moreover, the right against self-incrimination[34] under Section 17 of Article III [35] of the Constitution, which is ordinarily
available only in criminal prosecutions, extends to all other government proceedings -- including civil actions, legislative
investigations,[36] and administrative proceedings that possess a criminal or penal aspect [37] -- but not to private investigations
done by private individuals. Even in such government proceedings, this right may be waived, [38] provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made. [39]
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It is of no moment that
no criminal case has yet been filed against Yabut.The filing thereof is entirely up to the appropriate authorities or to the private
individuals upon whom damage has been caused. As we shall also explain later, it is not mandatory for CASA -- the plaintiff
below -- to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, [t]he Bill of Rights [40] does not concern itself with the relation between a private
individual and another individual. It governs the relationship between the individual and the State. [41] Moreover, the Bill of Rights
is a charter of liberties for the individual and a limitation upon the power of the [S]tate. [42] These rights[43] are guaranteed to
preclude the slightest coercion by the State that may lead the accused to admit something false, not prevent him from freely and
voluntarily telling the truth.[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not automatically entitle him to the
constitutional protection.[45] When he freely and voluntarily executed [46] his Affidavit, the State was not even involved. Such
Affidavit may therefore be admitted without violating his constitutional rights while under custodial investigation and against selfincrimination.

Clear, Positive and Convincing


Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.

42

Forgery cannot be presumed.[47] It must be established by clear, positive and convincing evidence. [48] Under the best
evidence rule as applied to documentary evidence like the checks in question, no secondary or substitutionary evidence may
inceptively be introduced, as the original writing itself must be produced in court. [49] But when, without bad faith on the part of the
offeror, the original checks have already been destroyed or cannot be produced in court, secondary evidence may be produced.
[50]
Without bad faith on its part, CASA proved the loss or destruction of the original checks through the Affidavit of the one person
who knew of that fact[51] -- Yabut. He clearly admitted to discarding the paid checks to cover up his misdeed. [52] In such a
situation, secondary evidence like microfilm copies may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard signature. PNP Document Examiner II
Josefina de la Cruz testified on cross-examination that two different persons had written them. [53] Although no conclusive report
could be issued in the absence of the original checks, [54] she affirmed that her findings were 90 percent conclusive. [55] According
to her, even if the microfilm copies were the only basis of comparison, the differences were evident. [56] Besides, the RTC
explained that although the Report was inconclusive, no conclusive report could have been given by the PNP, anyway, in the
absence of the original checks.[57] This explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents of a document -- such
as the drawers signature on a check -- is the subject of inquiry. [58] As to whether the document has been actually executed, this
rule does not apply; and testimonial as well as any other secondary evidence is admissible. [59]Carina Lebron herself, the drawers
authorized signatory, testified many times that she had never signed those checks. Her testimonial evidence is admissible; the
checks have not been actually executed. The genuineness of her handwriting is proved, not only through the courts comparison
of the questioned handwritings and admittedly genuine specimens thereof, [60] but above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of suppression of evidence [61] nor
creates an unfavorable inference against it. [62]Such failure merely authorizes the introduction of secondary evidence [63] in the form
of microfilm copies. Of no consequence is the fact that CASA did not present the signature card containing the signatures with
which those on the checks were compared. [64] Specimens of standard signatures are not limited to such a card. Considering that
it was not produced in evidence, other documents that bear the drawers authentic signature may be resorted to. [65] Besides, that
card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature, one cannot make a definitive
comparison that would establish forgery; [66] and that a comparison based on a mere reproduction of the document under
controversy cannot produce reliable results.[67] We have also said, however, that a judge cannot merely rely on a handwriting
experts testimony,[68] but should also exercise independent judgment in evaluating the authenticity of a signature under scrutiny.
[69]
In the present case, both the RTC and the CA conducted independent examinations of the evidence presented and arrived at
reasonable and similar conclusions. Not only did they admit secondary evidence; they also appositely considered testimonial and
other documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has been met. [70] The
result of examining a questioned handwriting, even with the aid of experts and scientific instruments, may be inconclusive; [71] but
it is a non sequitur to say that such result is not clear, positive and convincing. The preponderance of evidence required in this
case has been satisfied.[72]

Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making payments by virtue thereof. The
forged signatures are wholly inoperative, and CASA -- the drawer whose authorized signatures do not appear on the negotiable
instruments -- cannot be held liable thereon. Neither is the latter precluded from setting up forgery as a real defense.

Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence [73] is
expected,[74] and high standards of integrity and performance are even required, of it. [75] By the nature of its functions, a bank is
under obligation to treat the accounts of its depositors with meticulous care, [76] always having in mind the fiduciary nature of their
relationship.[77]
BPI contends that it has a signature verification procedure, in which checks are honored only when the signatures therein
are verified to be the same with or similar to the specimen signatures on the signature cards. Nonetheless, it still failed to detect
the eight instances of forgery. Its negligence consisted in the omission of that degree of diligence required [78] of a bank. It cannot
now feign ignorance, for very early on we have already ruled that a bank is bound to know the signatures of its customers; and if
it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was forged. [79] In fact, BPI was the same bank involved when we
issued this ruling seventy years ago.

43

Neither Waiver nor Estoppel


Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is reported in ten (10)
days, account will be correct. [80] Such notice cannot be considered a waiver, even if CASA failed to report the error. Neither is it
estopped from questioning the mistake after the lapse of the ten-day period.
This notice is a simple confirmation [81] or circularization -- in accounting parlance -- that requests client-depositors to affirm
the accuracy of items recorded by the banks. [82]Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks. [83] Internal or external auditors of a bank use it as a basic audit
procedure[84] -- the results of which its client-depositors are neither interested in nor privy to -- to test the details of transactions
and balances in the banks records.[85] Evidential matter obtained from independent sources outside a bank only serves to provide
greater assurance of reliability[86] than that obtained solely within it for purposes of an audit of its own financial statements, not
those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected [87] for various reasons. One, materiality is a
consideration in audit planning; [88] and two, the information obtained from such a substantive test is merely presumptive and
cannot be the basis of a valid waiver.[89] BPI has no right to impose a condition unilaterally and thereafter consider failure to meet
such condition a waiver. Neither may CASA renounce a right[90] it has never possessed.[91]
Every right has subjects -- active and passive. While the active subject is entitled to demand its enforcement, the passive
one is duty-bound to suffer such enforcement.[92]
On the one hand, BPI could not have been an active subject, because it could not have demanded from CASA a response
to its notice. Besides, the notice was a measly request worded as follows: Please examine x x x and report x x x. [93] CASA, on the
other hand, could not have been a passive subject, either, because it had no obligation to respond. It could -- as it did -- choose
not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything contrary to that
established as the truth, in legal contemplation. [94]Our rules on evidence even make a juris et de jure presumption[95] that
whenever one has, by ones own act or omission, intentionally and deliberately led another to believe a particular thing to be true
and to act upon that belief, one cannot -- in any litigation arising from such act or omission -- be permitted to falsify that supposed
truth.[96]
In the instant case, CASA never made any deed or representation that misled BPI. The formers omission, if any, may only
be deemed an innocent mistake oblivious to the procedures and consequences of periodic audits. Since its conduct was due to
such ignorance founded upon an innocent mistake, estoppel will not arise. [97] A person who has no knowledge of or consent to a
transaction may not be estopped by it.[98] Estoppel cannot be sustained by mere argument or doubtful inference x x x. [99] CASA is
not barred from questioning BPIs error even after the lapse of the period given in the notice.

Loss Borne by
Proximate Source
of Negligence
For allowing payment[100] on the checks to a wrongful and fictitious payee, BPI -- the drawee bank -- becomes liable to its
depositor-drawer. Since the encashing bank is one of its branches, [101] BPI can easily go after it and hold it liable for
reimbursement.[102] It may not debit the drawers account [103] and is not entitled to indemnification from the drawer. [104] In both law
and equity, when one of two innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the
one whose negligence was the proximate cause of the loss or who put it into the power of the third person to perpetrate the
wrong.[105]
Proximate cause is determined by the facts of the case. [106] It is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. [107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on checks being
encashed, BPI is expected to use reasonable business prudence. [108] In the performance of that obligation, it is bound by its
internal banking rules and regulations that form part of the contract it enters into with its depositors. [109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its branches without privity;
that is, without the proper verification of his corresponding identification papers. Second, BPI was unable to discover early on
not only this irregularity, but also the marked differences in the signatures on the checks and those on the signature card. Third,
despite the examination procedures it conducted, the Central Verification Unit [111] of the bank even passed off these evidently
different signatures as genuine. Without exercising the required prudence on its part, BPI accepted and encashed the eight
checks presented to it. As a result, it proximately contributed to the fraud and should be held primarily liable [112] for the negligence
of its officers or agents when acting within the course and scope of their employment. [113] It must bear the loss.
[110]

44

CASA Not Negligent


in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception [114] to the general rule that a
forged signature is wholly inoperative. [115] Contrary to BPIs claim, however, we do not find CASA negligent in handling its financial
affairs. CASA, we stress, is not precluded from setting up forgery as a real defense.

Role of Independent Auditor


The major purpose of an independent audit is to investigate and determine objectively if the financial statements submitted
for audit by a corporation have been prepared in accordance with the appropriate financial reporting practices [116] of private
entities. The relationship that arises therefrom is both legal and moral. [117] It begins with the execution of the engagement
letter[118] that embodies the terms and conditions of the audit and ends with the fulfilled expectation of the auditors ethical [119] and
competent performance in all aspects of the audit. [120]
The financial statements are representations of the client; but it is the auditor who has the responsibility for the accuracy in
the recording of data that underlies their preparation, their form of presentation, and the opinion [121] expressed therein.[122] The
auditor does not assume the role of employee or of management in the clients conduct of operations [123] and is never under the
control or supervision[124] of the client.
Yabut was an independent auditor [125] hired by CASA. He handled its monthly bank reconciliations and had access to all
relevant documents and checkbooks.[126] In him was reposed the clients[127] trust and confidence[128] that he would perform
precisely those functions and apply the appropriate procedures in accordance with generally accepted auditing standards. [129] Yet
he did not meet these expectations. Nothing could be more horrible to a client than to discover later on that the person tasked to
detect fraud was the same one who perpetrated it.

Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements, together with the cancelled checks
and other debit/credit memoranda, shall examine the contents and give notice of any discrepancies within a reasonable
time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA, [130] it was Yabut who should examine those
documents in order to prepare the bank reconciliations. [131] He owned his working papers,[132] and his output consisted of his
opinion as well as the clients financial statements and accompanying notes thereto. CASA had every right to rely solely upon his
output -- based on the terms of the audit engagement -- and could thus be unwittingly duped into believing that everything was in
order.Besides, [g]ood faith is always presumed and it is the burden of the party claiming otherwise to adduce clear and
convincing evidence to the contrary.[133]
Moreover, there was a time gap between the period covered by the bank statement and the date of its actual
receipt. Lebron personally received the December 1990 bank statement only in January 1991 [134] -- when she was also informed
of the forgery for the first time, after which she immediately requested a stop payment order. She cannot be faulted for the late
detection of the forged December check. After all, the bank account with BPI was not personal but corporate, and she could not
be expected to monitor closely all its finances. A preschool teacher charged with molding the minds of the youth cannot be
burdened with the intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but not presented for payment within that
period, will not be reflected therein.[135] An experienced auditor with intent to defraud can easily conceal any devious scheme from
a client unwary of the accounting processes involved by manipulating the cash balances on record -- especially when bank
transactions are numerous, large and frequent. CASA could only be blamed, if at all, for its unintelligent choice in the selection
and appointment of an auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it. [136] Its mere existence is not sufficient without proof that it,
and no other cause,[137] has given rise to damages.[138] In addition, this fault is common to, if not prevalent among, small and
medium-sized business entities, thus leading the Professional Regulation Commission (PRC), through the Board of Accountancy
(BOA), to require today not only accreditation for the practice of public accountancy, [139] but also the registration of firms in the
practice thereof. In fact, among the attachments now required upon registration are the code of good governance [140] and a sworn
statement on adequate and effective training.[141]
The missing checks were certainly reported by the bookkeeper [142] to the accountant[143] -- her immediate supervisor -- and
by the latter to the auditor. However, both the accountant and the auditor, for reasons known only to them, assured the
bookkeeper that there were no irregularities.
The bookkeeper[144] who had exclusive custody of the checkbooks[145] did not have to go directly to CASAs president or to
BPI. Although she rightfully reported the matter, neither an investigation was conducted nor a resolution of it was arrived at,

45

precisely because the person at the top of the helm was the culprit. The vouchers, invoices and check stubs in support of all
check disbursements could be concealed or fabricated -- even in collusion -- and management would still have no way to verify
its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may be held liable for
breach of contract and negligence,[146] with all the more reason may they be charged with the perpetration of fraud upon an
unsuspecting client. CASA had the discretion to pursue BPI alone under the NIL, by reason of expediency or munificence or
both. Money paid under a mistake may rightfully be recovered,[147] and under such terms as the injured party may choose.

Third Issue:
Award of Monetary Claims

Moral Damages Denied


We deny CASAs claim for moral damages.
In the absence of a wrongful act or omission, [148] or of fraud or bad faith,[149] moral damages cannot be awarded.[150] The
adverse result of an action does not per se make the action wrongful, or the party liable for it. One may err, but error alone is not
a ground for granting such damages. [151] While no proof of pecuniary loss is necessary therefor -- with the amount to be awarded
left to the courts discretion[152] -- the claimant must nonetheless satisfactorily prove the existence of its factual basis [153] and
causal relation[154] to the claimants act or omission.[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the Civil Code -- upon which
its claim for moral damages is predicated. [156]Neither bad faith nor negligence so gross that it amounts to malice [157] can be
imputed to BPI. Bad faith, under the law, does not simply connote bad judgment or negligence; [158]it imports a dishonest purpose
or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud.[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and senses, and having existence
only in legal contemplation -- is not entitled to moral damages, [160] because it cannot experience physical suffering and mental
anguish.[161] However, for breach of the fiduciary duty required of a bank, a corporate client may claim such damages when its
good reputation is besmirched by such breach, and social humiliation results therefrom. [162] CASA was unable to prove that BPI
had debased the good reputation of, [163] and consequently caused incalculable embarrassment to, the former. CASAs mere
allegation or supposition thereof, without any sufficient evidence on record, [164] is not enough.

Exemplary Damages Also Denied


We also deny CASAs claim for exemplary damages.
Imposed by way of correction [165] for the public good,[166] exemplary damages cannot be recovered as a matter of right.
As we have said earlier, there is no bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.[168] The latter, having no right to moral damages, cannot demand exemplary damages. [169]
[167]

Attorneys Fees Granted


Although it is a sound policy not to set a premium on the right to litigate, [170] we find that CASA is entitled to reasonable
attorneys fees based on factual, legal, and equitable justification. [171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the latters interest, [172] or
where the court deems it just and equitable, [173]attorneys fees may be recovered. In the present case, BPI persistently denied the
claim of CASA under the NIL to recredit the latters account for the value of the forged checks.This denial constrained CASA to
incur expenses and exert effort for more than ten years in order to protect its corporate interest in its bank account. Besides, we
have already cautioned BPI on a similar act of negligence it had committed seventy years ago, but it has remained
unrelenting. Therefore, the Court deems it just and equitable to grant ten percent (10%) [174] of the total value adjudged to CASA
as attorneys fees.

Interest Allowed

46

For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts to obtain payment,
legal interest may be adjudicated at the discretion of the Court, the same to run from the filing [175] of the Complaint.[176] Since a
court judgment is not a loan or a forbearance of recovery, the legal interest shall be at six percent (6%) per annum.[177] If the
obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of x x x legal interest, which is six percent per annum.[178] The actual base for its
computation shall be on the amount finally adjudged, [179] compounded[180]annually to make up for the cost of money[181] already
lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages awarded for breach of
contract.[182] Because BPI evidently breached its contract of deposit with CASA, we award interest in addition to the total amount
adjudged. Under Section 196 of the NIL, any case not provided for shall be governed by the provisions of existing legislation or,
in default thereof, by the rules of the law merchant. [183] Damages are not provided for in the NIL. Thus, we resort to the Code of
Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts of commerce shall be governed by its provisions
and, in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those
of the civil law.[184] This law being silent, we look at Article 18 of the Civil Code, which states: In matters which are governed by
the Code of Commerce and special laws, their deficiency shall be supplied by its provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No. 149507 PARTLY GRANTED. The
assailed Decision of the Court of Appeals isAFFIRMED with modification: BPI is held liable for P547,115, the total value of the
forged checks less the amount already recovered by CASA from Leonardo T. Yabut, plus interest at the legal rate of six percent
(6%) per annum -- compounded annually, from the filing of the complaint until paid in full; and attorneys fees of ten percent (10%)
thereof, subject to reimbursement from Respondent Yabut for the entire amount, excepting attorneys fees. Let a copy of this
Decision be furnished the Board of Accountancy of the Professional Regulation Commission for such action as it may deem
appropriate against Respondent Yabut. No costs.
SO ORDERED.

[G.R. No. 129015. August 13, 2004]


SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, vs. FAR EAST BANK AND TRUST COMPANY AND
COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook question if a bank pays out on a forged check, is it liable to
reimburse the drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision
adverse to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of
law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (Samsung Construction), while based in Bian, Laguna,
maintained a current account with defendant Far East Bank and Trust Company [1] (FEBTC) at the latters Bel-Air, Makati branch.
[2]
The sole signatory to Samsung Constructions account was Jong Kyu Lee (Jong), its Project Manager, [3] while the checks
remained in the custody of the companys accountant, Kyu Yong Lee (Kyu). [4]
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the banks branch in
Bel-Air, Makati. The check, payable to cash and drawn against Samsung Constructions current account, was in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Constructions account. After ascertaining there were enough funds to cover the check, [5] she compared the
signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the
bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the
check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards. [6]
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy
that two bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez
likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III (Sempio), the assistant accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction.
Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga,

47

Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and
discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jongs signature, Kyu perused the checkbook and found that the last
blank check was missing.[7] He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of
the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed
for the amount of the check.[8] Jong proceeded to the police station and consulted with his lawyers. [9] Subsequently, a criminal
case for qualified theft was filed against Sempio before the Laguna court. [10]
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.[11] In response, FEBTC said that it was
still conducting an investigation on the matter. Unsatisfied, Samsung Construction filed a Complainton 10 June 1992 for violation
of Section 23 of the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned
check plus interest, and attorneys fees. [12] The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court
(RTC) of Manila, Branch 9.[13]
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs signature was
forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jongs signature had been forged on
the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP), [14] presented
Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jongs
signature on the check was genuine.[15]
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decision dated
25 April 1994, the RTC held that Jongs signature on the check was forged and accordingly directed the bank to pay or credit
back to Samsung Constructions account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the time the complaint was filed, and attorneys fees in the amount of Fifteen
Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of
Appeals rendered a Decision,[16] reversing the RTCDecision and absolving FEBTC from any liability. The Court of Appeals held
that the contradictory findings of the NBI and the PNP created doubt as to whether there was forgery. [17] Moreover, the appellate
court also held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on
the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from
gaining access thereto.[18] The Court of Appeals invoked the ruling in PNB v. National City Bank of New York [19] that, if a loss,
which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by
the negligent party, even if innocent of intentional fraud. [20]
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned
the RTCs finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the
check, and in applying the equity principle enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to
examine the record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and
jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is wholly inoperative, and payment made through or under such
signature is ineffectual or does not discharge the instrument. [21] If payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has
the makers signature and is expected to know and compare it. [22] The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.[23]

48

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the
ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor,
agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes
the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and
depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper form and presented in due
course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a
check, on which the depositors signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank
is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy
detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case
where the forged check was drawn by the depositors partner, the loss was placed upon the bank. The case referred to is
Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money
which had been deposited to the plaintiffs credit and which the bank had paid out on checks bearing forgeries of the plaintiffs
signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering
the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the
plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: A bank is bound to know its depositors signature. The rule is variously
expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank
must know the signatures of those whose general deposits it carries. [24]
By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts
still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial
Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can draw against the customers account by
specifying whose signature is necessary on checks that are chargeable against the customers account. Therefore, a check
drawn against the account of an individual customer that is signed by someone other than the customer, and without authority
from her, is not properly payable and is not chargeable to the customers account, inasmuch as any unauthorized signature on an
instrument is ineffective as the signature of the person whose name is signed. [25]
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is
forged.[26] On the premise that Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge
of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh
rule which compels it to suffer although no one has suffered by its being deceived. [27] The forgery may be so near like the
genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. [28]
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to
be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by
convincing testimony and effective illustrations.[29]
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made
by handwriting experts from the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of
Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and
convincing evidence.

49

This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents expert witness to stand
uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which
version to believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to
draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long
deferred to the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to
plough through the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible,
and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special attention, as it is absurd
and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any
actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary expert opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and
explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the
NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document examiner
reveals that there are a lot of differences in the questioned signature as compared to the standard specimen signature.
Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals
that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned signature
was hesitant when the signature was made.[30]
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that apparently, there [are] differences on that
questioned signature and the standard signatures. [31] This Court, in examining the signatures, makes a similar finding. The PNP
expert excused the noted differences by asserting that they were mere variations, which are normal deviations found in writing.
[32]
Yet the RTC, which had the opportunity to examine the relevant documents and to personally observe the expert witness,
clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial,
she was confronted several times with apparent differences between strokes in the questioned signature and the genuine
samples. Each time, she would just blandly assert that these differences were just variations, [33] as if the mere conjuration of the
word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount almost to a demonstration. [34]
The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward
stroke in the signature, or the point to the short stroke of the terminal in the capital letter L, as referred to by the PNP examiner
who had marked it in her comparison chart as point no. 6. To the plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the
PNP, at least nine (9) ended with an upward stroke. [35] However, unlike the questioned signature, the upward strokes of eight (8)
of these signatures are looped, while the upward stroke of the seventh [36] forms a severe forty-five degree (45) with the previous
stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the s stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke s is pointing
directly upwards?
A: There is none in the standard signature, sir.[37]

[38]

Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation,
the same excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner. [39]

There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP
experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had
been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her
testimony. She had placed among the top five examinees in the Competitive Seminar in Question Document Examination,
conducted by the NBI Academy, which qualified her as a document examiner. [40] She had trained with the Royal Hongkong Police
Laboratory and is a member of the International Association for Identification. [41]As of the time she testified, she had examined
more than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty documents a day. [42] In

50

comparison, PNP document examiner Perez admitted to having examined only around five hundred documents as of her
testimony.[43]
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of
analysis, recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a
stereoscopic microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to
facilitate the necessary comparisons.[44] She compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five contained in business
letters Jong had signed.[45] The NBI found that there were significant differences in the handwriting characteristics existing
between the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details. [46]
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its Decisions. While the
Court of Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were
more credible than those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be established comparing the
contested signatures as against those of any sample signature duly established as that of the persons whose signature was
forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank
signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have
detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence
between the bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was
not his.[47] The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know
whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would
have on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the
NBI examiner.They are also backed by factual circumstances that support the conclusion that the assailed check was indeed
forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its
discovery. He filed the appropriate criminal charges against Sempio, the putative forger. [48]
Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under
Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and
invoked the doctrines that where a loss must be borne by one of two innocent person, can be traced to the neglect or fault of
either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has
succeeded[49] or who put into the power of the third person to perpetuate the wrong. [50] Applying these rules, the Court of Appeals
determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant
accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and
who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who through negligence, enabled Sempio to have access to
the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have had
the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had
dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there to
certify that it was a genuine check issued to purchase equipment for the company. [51]
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is
guilty of negligence.[52] Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part
would have prevented the forgery. We cannot sustain this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily
imply that such partys negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as
to the evil that may lurk within the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of
Appeals[53] applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position
had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift
the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. [54]

51

Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank
checks. Jong did testify that his accountant, Kyu, kept the checks inside a safety box, [55] and no contrary version was presented
by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jongs testimony on that
point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions
part. The presumption remains that every person takes ordinary care of his concerns, [56] and that the ordinary course of business
has been followed.[57] Negligence is not presumed, but must be proven by him who alleges it. [58]While the complaint was lodged
at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was
forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care
was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was
negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the
drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be a difficult office, [59] but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care
exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on
the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank
would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own
negligence. The rule of equity enunciated in PNB v. National City Bank of New York, [60] as relied upon by the Court of Appeals,
deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is
held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his
customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has
himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the
banker's negligence, then he may lose his right to cast the loss upon the banker. [61] (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The
exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the
need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden
of loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one,
the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as
will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity,
abstract some of the check blanks, forges the depositors signature and collect on the checks from the bank. [62] And for another, in
point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery. [63]
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of
indorsers. The same circumstance attends PNB v. Court of Appeals,[64] which was also cited by the Court of Appeals. It is
accepted that a forged signature of the drawer differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the
drawee is in a position to verify the drawers signature by comparison with one in his hands, but has ordinarily no opportunity to
verify an indorsement.[65]
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawers signature or
a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawers
signature.[66]
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well
comment on the banks performance of its duty. It might be so that the bank complied with its own internal rules prior to paying
out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was
remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher
degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below
twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one hundred thousand

52

pesos necessitate the approval of one bank officer; and should the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required.[67]
In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter
circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large
amount to be made payable to cash or to bearer, instead of to the order of a specified person. [68]Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with
him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC,
was not even an employee of Samsung Construction. [69] These circumstances are already suspicious if taken independently,
much more so if they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the check, it was
not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be
undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to
verify the check.[70] She added that calling the issuer or drawer of the check to verify the same was not part of the standard
procedure of the bank, but an extra effort. [71] Even assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer.
Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was
presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of
Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong
would hand the phone over to Sempio. [72] However, the only proof of such allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally,[73] and had met Sempio for the first time only on the day the check was
encashed.[74] In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually known to the
employees of the bank.[75] Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness
any other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the
irregular circumstances attending the presentment of the forged check should have put the bank on the highest degree of
alert. The Court recently emphasized that the highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the
highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more
than that of a good father of a family.[76]
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that
the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the
bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable
Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged signature. Since the
drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the general rule should apply.
Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so
paid to the account of the depositor.[77] A bank is liable, irrespective of its good faith, in paying a forged check. [78]
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED,
and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.

G.R. No. L-15894

January 30, 1964

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
EQUITABLE BANKING CORPORATION, defendant-appellee.
-----------------------------

53

G.R. No. L-15894

January 30, 1964

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
THE BANK OF THE PHILIPPINE ISLANDS, defendant-appellee,
CORPORATION DE LOS P. DOMINICOS DE FILIPINAS, third-party-defendant-appellee.
Office of the Solicitor General for plaintiff-appellant.
Claudio Teehankee and Aranda and Aviado for defendant-appellee.
Ignacio B. Alcuaz for third-party-defendant-appellee.
CONCEPCION, J.:
Appeal from a decision of the Court of First Instance of Manila dismissing the complaints and the third-party complaints in the
above entitled cases, without special pronouncement as to costs. The cases are before us, only questions of law being raised in
the appeal, apart from the fact that the amount involved in G.R. No. L-16895 exceeds P200,000, and that the evidence
introduced therein is the same evidence in G.R. No. L-15894.
The Republic of the Philippines, hereinafter referred to as the Government, seeks to recover: (1) from the Equitable Banking
Corporation hereinafter referred to as the Equitable Bank in case G.R. No. L-15894, the sum of P17,100, representing the
aggregate value of four (4) treasury warrants hereinafter referred to as warrants paid to said bank by the Treasurer of the
Philippines hereinafter referred to as the Treasurer thru the Clearing Office of the Central Bank of the Philippines; and (2)
from the Bank of the Philippine Islands hereinafter referred to as the PI Bank in G.R. No. L-15895, the total sum of
P342,767.63, representing the aggregate value of twenty-four (24) warrants similarly paid by the Treasurer to the PI Bank. These
claims for refund are based upon a common ground although said twenty-eight (28) warrants were executed on genuine
government forms, the signature thereon of the drawing office and that of the representative of the Auditor General in that office
are forged.
It is not disputed that from July to December 1952, the Corporacion de los Padres Dominicos hereinafter referred to as the
Corporacion had acquired the twenty-four (24) treasury warrants involved in case G.R. No. L-15895 by accommodating its
former trusted employee one Jacinto Carranza who asked the Corporacion to cash the warrants, alleging that it was
difficult to do so directly with the Government and that his wife expected a sort of commission for the encashment; that the
Corporacion acceded to Carranza's request, provided that the warrants would first be deposited with PI Bank, and that actual
payment of the value of the warrants would be made only after the same had been duly accepted and cleared by the Treasurer
and the proceeds thereof duly credited to the account of the Corporacion in the PI Bank; that the warrants were, accordingly,
deposited by the Corporacion with said bank, which accepted them "subject to collection only"; that when the warrants were
deposited with the PI Bank, each bore the indorsement of the respective payees and that of the Corporation; that, subsequently,
the PI Bank presented the warrants for payment to the drawee thereof the Government thru the Clearing Office of the
Central Bank hereinafter referred to as the Clearing Office; that after being cleared, the warrants were paid by the Treasurer
as follows:
T/W No.

Payee

Date
ISSUED

Amount

Date
Cleared

2132655 Marcela Antonio Domingo

6-18-52 P8,722.37

7- 1-52

2132650 Gregoria Santos Castro

6-23-52 14,605.91

7- 8-52

2468943 Josefa Castro de Villanueva

10-34-52 14,250.15

11-14-52

2159698 Anacleta Santos de Angeles

10-18-52 15,800.00

12- 5-52

2159668 Virginia Salem de Marcelino

11-13-52 16,900.00

12-10-52

2159692 Brigida San Luis de Santos

9-15-52 13,900.00

11- 3-52

2159673 Silva Sanches de Apolinario

10-14-52 14,810.00

11-11-52

10-12-52 16,200.75

11-11-52

2451448 Gaudencia Ruiz Alvarez

7- 1-52 12,702.76

7-15-52

2132653 Anastacia Capili Trinidad

6-25-52

8,794.21

7-15-52

2468979 Monica Anselmo de Pascua

7- 1-52 13,870.24

9- 852

2468944 Rosalia Manalo de Nazario

7-10-52 14,701.76

9- 8-52

2159682 Luisa Santos de Arellano

11-18-52 16,400.50

12- 8-52

2159669 Leticia Moreno de Ocampo

11-16-52 15,880.75

12- 8-52

2159670 Juana Castro de Jesus

10-12-52 16,200.00

12-15-52

2159667

Francisca Gomez de
Galvez

54

2159671 Antonia Sison de Mauricio

9- 9-52 12,900.75

11-10-52

2159660 Rosario Pilapil de Rodrigo

9- 4-52 13,950.39

9-23-52

2169658 Mauricia Sison de Angeles

9-12-52 15,200.76

9-23-52

2159686 Lucia Angeles de Natalio

9-12-52 12,890.74

10-27-52

2468977 Nicolasa Alvares Jaranilla

7- 2-52 15,340.76

7-25-52

2468978 Maria Antonio de los Reyes

7- 2-52 14,722.31

7-25-52

2159659 Je Jastive de Fernandez

8-16-52 14,820.00

8-27-52

2159656 Gregoria Pascual de Lira

8-15-52 12,900.75

8-27-52

2159666 Luisa Dancel de Mendoza

10-11-52 16,300.75

12- 2-52

and that, accordingly, the PI Bank credited the proceeds of said warrants to the Corporation, which, in turn, withdrew said
proceeds by means of its own checks and eventually paid the corresponding amounts to Jacinto Carranza. On December 23,
1952, the Treasurer returned three (3) of said warrants (Nos. 2159659, 2159656, and 2159666) to the Central Bank, and
demanded, on the ground that they had been forged, that the value thereof be charged against the accounts of the PI Bank in
the Clearing Office and credited back to the demand deposit of the Bureau of the Treasury, hereinafter referred to as the
Treasury. Four (4) days later, two (2) more warrants (Nos. 2468977 and 2468978), and, finally, on January 16, 1953, the
remaining nineteen (19) warrants were returned by the Treasury to the Central Bank for the same reason and with the same
demand. The Central Bank in turn referred said warrants, together with the letters of demand of the Treasurer, for appropriate
action to the PI Bank, which opposed the return of the warrants or to have the value thereof charged against its account in the
Clearing Office and requested the Central Bank to return the warrants to the Treasurer.
The records of G.R. No. L-15894 show that the four (4) warrants involved therein were deposited with the Equitable Bank by
persons known thereto as its depositors or customers, namely, Robert Wong, Lu Chill Kau and Chung Ching; that, in due course,
the Equitable Bank cleared said warrants, thru the Clearing Office, then collected the corresponding amounts from the Treasurer
and thereafter credited said amounts to the accounts of the respective depositors; that on January 15, 1958, the Treasurer
notified the Equitable Bank of the alleged defect of said warrants and demanded reimbursement of the amounts thereof; and that
this demand was rejected by the Equitable Bank. Hence, the institution of G.R. No. L-15895 (Civil Case No. 19599 of the Court
of First Instance of Manila), against the PI Bank, for the recovery of P342,767.63, and of G.R. No. L-15894 (Civil Case No. 19600
of the Court of First Instance of Manila), against the Equitable Bank for, the recovery of P17,100.00.
Upon leave of the lower court, the PI Bank filed a third-party complaint against the Corporacion. In G.R. No. L-15895, and the
Equitable Bank filed a similar complaint against, Robert Wong, Lu Chill Kau and Chung Ching in G.R. No. L-15894, for whatever
reimbursements the PI Bank and the Equitable Bank may respectively be sentenced to make to the Government. By agreement
of the parties, the two (2) cases were jointly heard, and after appropriate proceedings, the lower court rendered the decision
adverted to above. 1wph1.t
The clearing of the aforementioned twenty-eight (28) warrants thru the Clearing Office was made pursuant to the "24-hour
clearing house rule", which had been adopted by the Central Bank in a conference with representatives and officials of the
different banking institutions in the Philippines. The rule is embodied in Section 4, subsection (c) of Circular No. 9 of the Central
Bank, dated February 17, 1949 (Exhibit B), as amended by the letter of the Governor of the Central Bank, dated June 4, 1949
(Exhibit D), reading:
Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity
from which the item was received. For this purpose, the Receipt for Returned Checks (Cash Form No. 9) should be
used. The original and duplicate copies of said Receipt shall be given to the bank, institution or entity which returned
the items and the triplicate copy should be retained by the bank, institution or entity whose demand is being returned.
At the following clearing, the original of the Receipt for returned Checks shall be presented through the Clearing Office
as a demand against the bank, institution or entity whose item has been returned. Nothing in this section shall prevent
the resumed items from being settled by direct reimbursement to the bank, institution or entity returning the items. All
items cleared at 11:00 o'clock a.m. shall be returned not later than 2:00 o'clock p.m. on the same day and all items
cleared at 3:00 o'clock p.m. shall be returned not later than 8:30 a.m. of the following business day, except for items
cleared on Saturday which may be returned not later than 3:30 a.m. of the following day. (Emphasis supplied.)
The Government maintains that it is not bound by this rule because: (1) the Treasury is not a bank; and (2) the Treasurer has
objected to the application of said rule to his office. This contention, however, untenable for, admittedly, the Treasury is a member
of the aforementioned Clearing Office and Exh. A clearly shows that the former "has agreed to clear its clearable items through"
the latter "subject to the rules and regulations of the Central Bank." Besides, the above quoted rule applies not only to banks,
but, also, to the institutions and entities therein alluded to. Then too, the opposition of the Treasurer to the "24-hour clearing
house rule" is not sufficient to exempt the Treasury from the operation thereof. Upon the other hand, said opposition is predicated
upon the allegation that it is physically impossible for the Treasury to check and verify the genuineness of treasury warrants
within twenty-four (24) hours, because, during 1952 said office used to receive daily from 3,000 to 4,000 warrants which,
considering its very limited personnel at that time, would have required one (1) or two (2) months clear. This claim is belied,

55

however, by the statements the Treasurer, Exhibits 38 and 38-A to 38-C, showing that on September 15, 23 and 24 and
November 25, 1952, his office had cleared 1,618, 2,851, 1,742 and 2,360 warrant respectively. Moreover, if the rule was unwise,
the Treasurer could have secured the proper remedy through the President of the Philippines, since the Treasury and Central
Bank are both agencies of the Government.
At any rate, the aforementioned twenty-eight (28) warrants were cleared and paid by the Treasurer, in view which the PI Bank
and the Equitable Bank credited the corresponding amounts to the respective depositors of the warrants and then honored their
checks for said amounts. Thus, the Treasury had not only been negligent in clearing its own warrants, but had, also, thereby
induced the PI Bank and the Equitable Bank to pay the amounts thereof to said depositors. The gross nature of the negligence of
the Treasury becomes more apparent when we consider that each one of the twenty-four (24) warrants involve in G.R. No. L15895 was for over P5,000, and, hence; beyond the authority of the auditor of the Treasury whose signature thereon had
been forged to approve. In other words, the irregularity of said warrants was apparent the face thereof, from the viewpoint of
the Treasury. Moreover, the same had not advertised the loss of genuine forms of its warrants. Neither had the PI Bank nor the
Equitable Bank been informed of any irregularity in connection with any of the warrants involved in these two (2) cases, until after
December 23, 1952, or after the warrants had been cleared and honored when the Treasury gave notice of the forgeries
adverted to above. As a consequence, the loss of the amounts thereof is mainly imputable to acts and omissions of the Treasury,
for which the PI Bank and the Equitable Bank should not and cannot be penalized.
Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or fault
of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means
it has succeeded, (Phil. National Bank v. National City Bank of New York, 63 Phil. 711, 723.)
Generally, where a drawee bank otherwise would have a right of recovery against a collecting or indorsing bank for its
payment of a forged check its action will be barred if it is guilty of an unreasonable delay in discovering the forgery and
in giving notice? thereof. (C.J.S. 769-700.).
Where defendant bank, on presentation to it on September 2, of forged check drawn on another bank, paid part of
amount to presenter, drawee paying check through clearing house on said day, held that the latter, not giving notice of
forgery until December 5, could not hold defendant for amount so paid. (First State Bank & Trust Co. v. First Nat. Bank,
145 N. E. 382, 314 Ill. 269, affirming 234 Ill. App. 39.)
WHEREFORE, the decision appealed from is hereby affirmed, without special pronouncement as to costs. It is so ordered.
[G.R. No. 138510. October 10, 2002]
TRADERS ROYAL BANK, petitioner, vs. RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL BROADCASTING
CORPORATION and
BANAHAW
BROADCASTING CORPORATION,
through
the BOARD
OF
ADMINISTRATORS, and SECURITY BANK AND TRUSTCOMPANY, respondents.
DECISION
CORONA, J.:
Petitioner seeks the review and prays for the reversal of the Decision [1] of April 30, 1999 of Court of Appeals in CA-G.R. CV
No. 54656, the dispositive portion of which reads:
WHEREFORE, the appealed decision is AFFIRMED with modification in the sense that appellant SBTC is hereby absolved from
any liability. Appellant TRB is solely liable to the appellees for the damages and costs of suit specified in the dispositive portion of
the appealed decision. Costs against appellant TRB.
SO ORDERED.[2]
As found by the Court of Appeals, the antecedent facts of the case are as follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio Philippines Network (RPN), Intercontinental
Broadcasting Corporation (IBC), and Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable years
1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent a letter to the BIR requesting settlement of plaintiffs tax
obligations.
The BIR granted the request and accordingly, on June 26, 1986, plaintiffs purchased from defendant Traders Royal Bank (TRB)
three (3) managers checks to be used as payment for their tax liabilities, to wit:

56

Check Number Amount


30652 P4,155.835.00
30650 3,949,406.12
30796 1,685,475.75
Defendant TRB, through Aida Nuez, TRB Branch Manager at Broadcast City Branch, turned over the checks to Mrs. Vera who
was supposed to deliver the same to the BIR in payment of plaintiffs taxes.
Sometime in September, 1988, the BIR again assessed plaintiffs for their tax liabilities for the years 1979-82. It was then they
discovered that the three (3) managers checks (Nos. 30652, 30650 and 30796) intended as payment for their taxes were never
delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were presented for payment by unknown persons to defendant
Security Bank and Trust Company (SBTC), Taytay Branch as shown by the banks routing symbol transit number (BRSTN
01140027) or clearing code stamped on the reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued warrants of levy, distraint and garnishment against
them. Thus, they were constrained to enter into a compromise and paid BIR P18,962,225.25 in settlement of their unpaid
deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts covered by the checks be reimbursed or
credited to their account. The defendants refused, hence, the instant suit. [3]
On February 17, 1985, the trial court rendered its decision, thus:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered in favor of the plaintiffs and against the
defendants by :
a) Condemning the defendant Traders Royal Bank to pay actual damages in the sum of Nine Million Seven Hundred
Ninety Thousand and Seven Hundred Sixteen Pesos and Eighty-Seven Centavos (P9,790,716.87) broken
down as follows:
1) To plaintiff RPN-9 - P4,155,835.00
2) To Plaintiff IBC-13 - P3,949,406.12
3) To Plaintiff BBC-2 - P1,685,475.72
plus interest at the legal rate from the filing of this case in court.
b) Condemning the defendant Security Bank and Trust Company, being collecting bank, to reimburse the defendant
Traders Royal Bank, all the amounts which the latter would pay to the aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the plaintiffs the sum of Three Hundred Thousand (P300,000.00)
Pesos as exemplary damages and attorneys fees equivalent to twenty-five percent of the total amount
recovered; and
d) Costs of suit.
SO ORDERED.[4]
Defendants Traders Royal Bank and Security Bank and Trust Company, Inc. both appealed the trial courts decision to the
Court of Appeals. However, as quoted in the beginning hereof, the appellate court absolved defendant SBTC from any liability
and held TRB solely liable to respondent networks for damages and costs of suit.
In the instant petition for review on certiorari of the Court of Appeals decision, petitioner TRB assigns the following
errors: (a) the Honorable Court of Appeals manifestly overlooked facts which would justify the conclusion that negligence on the
part of RPN, IBC and BBC bars them from recovering anything from TRB, (b) the Honorable Court of Appeals plainly erred and
misapprehended the facts in relieving SBTC of its liability to TRB as collecting bank and indorser by overturning the trial courts

57

factual finding that SBTC did endorse the three (3) managers checks subject of the instant case, and (c) the Honorable Court of
Appeals plainly misapplied the law in affirming the award of exemplary damages in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs petition raises questions of fact in violation of Rule 45 of the
1997 Revised Rules on Civil Procedure which restricts petitions for review on certiorari of the decisions of the Court of Appeals
on pure questions of law. RPN, IBC and BBC maintain that the issue of whether or not respondent networks had been negligent
were already passed upon both by the trial and appellate courts, and that the factual findings of both courts are binding and
conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had no participation in the negotiation of the checks,
emphasizing that the BRSTN imprints at the back of the checks cannot be considered as proof that respondent SBTC accepted
the disputed checks and presented them to Philippine Clearing House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the threshold issue now is whether or not TRB should be held
solely liable when it paid the amount of the checks in question to a person other than the payee indicated on the face of the
check, the Bureau of Internal Revenue.
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature. [5] Consequently, if a bank pays a forged check, it must be considered
as paying out of its funds and cannot charge the amount so paid to the account of the depositor.
In the instant case, the 3 checks were payable to the BIR. It was established, however, that said checks were never
delivered or paid to the payee BIR but were in fact presented for payment by some unknown persons who, in order to receive
payment therefor, forged the name of the payee. Despite this fraud, petitioner TRB paid the 3 checks in the total amount of
P9,790,716.87.
Petitioner ought to have known that, where a check is drawn payable to the order of one person and is presented for
payment by another and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty of
petitioner to know that the check was duly indorsed by the original payee and, where it pays the amount of the check to a third
person who has forged the signature of the payee, the loss falls upon petitioner who cashed the check. Its only remedy is against
the person to whom it paid the money.[6]
It should be noted further that one of the subject checks was crossed. The crossing of one of the subject checks should
have put petitioner on guard; it was duty-bound to ascertain the indorsers title to the check or the nature of his possession.
Petitioner should have known the effects of a crossed check: (a) the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once to one who has an account with a bank and (c) the act of crossing the check 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 pursuant to that purpose, otherwise, he is not a holder in due course. [7]
By encashing in favor of unknown persons checks which were on their face payable to the BIR, a government agency
which can only act only through its agents, petitioner did so at its peril and must suffer the consequences of the unauthorized or
wrongful endorsement.[8] In this light, petitioner TRB cannot exculpate itself from liability by claiming that respondent networks
were themselves negligent.
A bank is engaged in a business impressed with public interest and it is its duty to protect its many clients and depositors
who transact business with it. It is under the obligation to treat the accounts of the depositors and clients with meticulous care,
whether such accounts consist only of a few hundreds or millions of pesos. [9]
Petitioner argues that respondent SBTC, as the collecting bank and indorser, should be held responsible instead for the
amount of the checks.
The Court of Appeals addressed exactly the same issue and made the following findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of the records constrains us to deviate from the lower courts
finding that SBTC, as a collecting bank, should similarly bear the loss.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the banks client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.
To hold appellant SBTC liable, it is necessary to determine whether it is a party to the disputed transactions.

58

Section 3 of the Negotiable Instruments Law reads:


SECTION 63. When person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker,
drawer, or acceptor, is deemed to be an indorser unless he clearly indicates by appropriate words his intention to be bound in
some other capacity.
Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules provide:
Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting
Bank/Branch which shall read as follows:
Cleared thru the Philippine Clearing House Corporation. All prior endorsements and/or lack of endorsement guaranteed. NAME
OF BANK/BRANCH BRSTN (Date of clearing).
Here, not one of the disputed checks bears the requisite endorsement of appellant SBTC. What appears to be a guarantee
stamped at the back of the checks is that of the Philippine National Bank, Buendia Branch, thereby indicating that it was the latter
Bank which received the same.
It was likewise established during the trial that whenever appellant SBTC receives a check for deposit, its practice is to stamp on
its face the words, non-negotiable. Lana Echevarrias testimony is relevant:
ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving checks?
A: First of all, I verify the check itself, the place, the date, the amount in words and everything. And then, if all these things are in
order and verified in the data sheet I stamp my non-negotiable stamp at the face of the check.
Unfortunately, the words non-negotiable do not appear on the face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in the clearing documents of appellant SBTC. Section 19 of the
Rules of the PCHC states:
Section 19 Regular Item Procedure:
Each clearing participant, through its authorized representatives, shall deliver to the PCHC fully qualified MICR checks grouped
in 200 or less items to a batch and supported by an add-list, a batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can countercheck and determine which checks have been presented on a
particular day by a particular bank for processing and clearing. In this case, however, the add-list submitted by appellant SBTC
together with the checks it presented for clearing on August 3, 1987 does not show that Check No. 306502 in the sum of
P3,949,406.12 was among those that passed for clearing with the PCHC on that date. The same is true with Check No. 30652
with a face amount of P4,155,835.00 presented for clearing on August 11, 1987 and Check No. 30796 with a face amount of
P1,685,475.75.
The foregoing circumstances taken altogether create a serious doubt on whether the disputed checks passed through the hands
of appellant SBTC.[10]
We subscribe to the foregoing findings and conclusions of the Court of Appeals.
A collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. However, it is doubtful if
the subject checks were ever presented to and accepted by SBTC so as to hold it liable as a collecting bank, as held by the
Court of Appeals.
Since TRB did not pay the rightful holder or other person or entity entitled to receive payment, it has no right to
reimbursement. Petitioner TRB was remiss in its duty and obligation, and must therefore suffer the consequences of its own
negligence and disregard of established banking rules and procedures.
We agree with petitioner, however, that it should not be made to pay exemplary damages to RPN, IBC and BBC because
its wrongful act was not done in bad faith, and it did not act in a wanton, fraudulent, reckless or malevolent manner. [11]

59

We find the award of attorneys fees, 25% of P10 million, to be manifestly exorbitant. [12] Considering the nature and extent
of the services rendered by respondent networks counsel, however, the Court deems it appropriate to award the amount of
P100,000 as attorneys fees.
WHEREFORE, the appealed decision is MODIFIED by deleting the award of exemplary damages. Further, respondent
networks are granted the amount of P100,000 as attorneys fees. In all other respects, the Court of Appeals decision is hereby
AFFIRMED.
SO ORDERED.
G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,


vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,


vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of
several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized
syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of the Court of Appeals in CA-G.R.
CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine
Commercial International Bank), and the August 8, 1995 Resolution, 2 ordering the collecting bank, Philippine Commercial
International Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court of Appeals and its March 5,
1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International
Bank," affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and
16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the
Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting
or depository bank.

60

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled
to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the
Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were
two parallel lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant Citibank
paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of
Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of
the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to
the Central Clearing House for clearing on the samd day, with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant
Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not
paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the
same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons,
hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the
BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank)
with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of indorsements guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to
defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that
Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly
needed to hold back the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a
syndicate later deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The
course likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:

61

"Premises considered, judgment is hereby rendered as follows:


"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the
amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the
amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next
preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the crossdefendant against the cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on
certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing
the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting
January 20, 1983, the date when the original complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by
the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals
contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on
the said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount
of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court
of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank
jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:

62

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a
depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check
only to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered
by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford. 9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person
other than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's
only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue. 10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting bank. 11
3. PCIBank is barred from raising issues of fact in the instant proceedings. 12
4. Petitioner Ford's cause of action had not prescribed. 13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes
appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due
for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385
was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment
of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words
"payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the
said tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly
was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed
against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate,
as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however,
fo delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a
pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the Meralco Branch
of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed
through PCIB's main office enroute to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit
'A' and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit 'A' was

63

cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB
Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the
syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo,
Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2)
RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORD's Godofredo
Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO
CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and
opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant
Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave
the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of
the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present
case. The manner by which the said funds were distributed among them are traceable from the record of checks drawn
against the original "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited therefrom and
readily indicate in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two
checks while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this
petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution
dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for
the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a
banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as
a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of
1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it
is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was
credited to it its Central bank account.16
The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite
quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of

64

the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law
(NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act
when he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means,
or for an illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a
fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud.
The person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that
there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover
from other parties who. Though their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now
fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left
only with the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils
down to thequestion of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its
claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members
of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails
the fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check
No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597
and 16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out
the fradulent schemes and the transactions. These circumstances were not checked by other officers of the company including
its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a
sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of
trust, the one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before
the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford
argues that even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to
divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on
appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent
or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person
and by the concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and
will defeat the superior's action against the third person, asuming, of course that the contributory negligence was the proximate
cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or
Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the
natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would
not have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their
actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867.
Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which
could have prompted PCIBank to validate the same.

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As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to
the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their
own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent,
who by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold
them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found
variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to
verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of
care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of
BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As
aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in
Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR
and not from any other person especially so when that person is not known to the defendant. It is very imprudent on
the part of the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his
signature considering that the plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of principal and agent. 22 A bank which receives such paper for
collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass
through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay
it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione
dcrossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only
in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's
account only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors
before it could make the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:

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"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of
Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all
prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation." 25
Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn
whether or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it
did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting
it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or
the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is
guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may
recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in
the amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would
attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually
receive nor hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of
the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for
"clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own personl,
covert and private capacity and done without the knowledge of the defendant PCIBank" 27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be held liable for the negligence of its officers or agents when
acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the
victim of the scheme hatched by a syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508.
He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a
Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in
exactly the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless
checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his
co-conspirator Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for
their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or
agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of
indebetedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum. 30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank
failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims

67

the genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the
issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of
the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds
of the subject check only to the payee thereof, the CIR. Citing Section 62 32 of the Negotiable Instruments Law, Ford argues that
by accepting the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and
that it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees
Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers
SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached
its contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score,
we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds
thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check
Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had
this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the
amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity
seasonably, in our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business
affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their
respective obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of
Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos. 36 By the very nature of their work the degree of responsibility, care
and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. 37 Banks
are expected to exercise the highest degree of diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in
1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a statement of his account, 39 and an action upon a check is ordinarily
governed by the statutory period applicable to instruments in writing. 40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required
by statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks'
liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of
the Civil Code of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017
areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the

68

proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%)
interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and
Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and
16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05,
with six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.
G.R. No. L-18657

August 23, 1922

THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,


vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking corporations, and each is duly licensed to do its
respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with whom it had an
account, payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor's
signature, as an endorser, and then personally endorsed and presented it to the Philippine National Bank where the amount of
the check was placed to his credit. After having paid the check, and on the next day, the Philippine national Bank endorsed the
check to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the account of
the plaintiff. In the ordinary course of business, the Hongkong Shanghai Banking Corporation rendered a bank statement to the
plaintiff showing that the amount of the check was charged to its account, and no objection was then made to the statement.
About four months after the check was charged to the account of the plaintiff, it developed that Lazaro Melicor, to whom the
check was made payable, had never received it, and that his signature, as an endorser, was forged by Maasim, who presented
and deposited it to his private account in the Philippine National Bank. With this knowledge , the plaintiff promptly made a
demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit for the amount of the forged check,
which the bank refused to do, and the plaintiff commenced this action to recover the P2,000 which was paid on the forged check.
On the petition of the Shanghai Bank, the Philippine National Bank was made defendant. The Shanghai Bank denies any liability,
but prays that, if a judgment should be rendered against it, in turn, it should have like judgment against the Philippine National
Bank which denies all liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff and in favor of the defendants,
from which the plaintiff appeals, claiming that the court erred in dismissing the case, notwithstanding its finding of fact, and in not
rendering a judgment in its favor, as prayed for in its complaint.

JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff relies upon them for a reversal.
Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check drawn and payable to order, when its value
was collected by a third person by means of forgery of the signature of the payee? Is it the drawee or the last indorser,
who ignored the forgery at the time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the check. "So that the person to whose order the check was issued did
not receive the money, which was collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment of made to Maasim in good faith of the
amount of the check, because the indorsement of Maasim is unquestionable and his signature perfectly genuine, and
the bank was not obliged to identify the signature of the former indorser. Neither could the Hongkong and Shanghai

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Banking Corporation be held responsible in making payment in good faith to the National Bank, because the latter is a
holder in due course of the check in question. In other words, the two defendant banks can not be held civilly
responsible for the consequences of the falsification or forgery of the signature of Lazaro Melicor, the National Bank
having had no notice of said forgery in making payment to Maasim, nor the Hongkong bank in making payment to
National Bank. Neither bank incurred in any responsibility arising from that crime, nor was either of the said banks by
subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the plaintiff authorized and
directed the Shanghai Bank to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check to any
other person than Melicor, or his order, and the testimony is undisputed that Melicor never did part with his title or endorse the
check, and never received any of its proceeds. Neither is the plaintiff estopped or bound by the banks statement, which was
made to it by the Shanghai Bank. This is not a case where the plaintiff's own signature was forged to one of it checks. In such a
case, the plaintiff would have known of the forgery, and it would have been its duty to have promptly notified the bank of any
forged signature, and any failure on its part would have released bank from any liability. That is not this case. Here, the forgery
was that of Melicor, who was the payee of the check, and the legal presumption is that the bank would not honor the check
without the genuine endorsement of Melicor. In other words, when the plaintiff received it banks statement, it had a right to
assume that Melicor had personally endorsed the check, and that, otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone except the plaintiff or its order.
Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and was
never paid to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to
endorse it for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the
Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of
Maasim, who was a forger. That the Philippine National Bank then endorsed the check and forwarded it to the Shanghai Bank by
whom it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a
forge signature. It was its legal duty to know that Melicor's endorsment was genuine before cashing the check. Its remedy is
against Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and against the Hongkong and
Shanghai Banking Corporation for the P2,000, with interest thereon from November 8, 1920 at the rate of 6 per cent per annum,
and the costs of this action, and a corresponding judgment will be entered in favor of the Hongkong Shanghai Banking
Corporation against the Philippine National Bank for the same amount, together with the amount of its costs in this action. So
ordered.
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:


From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this
Court in a Petition for Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a
forged indorsement of the payee, debiting the same against the drawer's account.

70

The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the
petitioner's account with the respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional
Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987 dismissing the
complaint as well as the respondent drawee Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross
negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also negligent, the
loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors of the respondent
Court:1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE
DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE
DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE
GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK
TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN
CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at
Second Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains
a checking account numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment
of debts to her suppliers, petitioner draws checks against her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the corresponding
invoice receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check
without bothering to verify the accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any verification as to whether or not the checks were delivered to their
respective payees. Although the respondent drawee Bank notified her of all checks presented to and paid by the bank, petitioner
did not verify he correctness of the returned checks, much less check if the payees actually received the checks in payment for
the supplies she received. In the course of her business operations covering a period of two years, petitioner issued, following
her usual practice stated above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all presented
by the indorsees as holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of the aforementioned checks
were for amounts in excess of her actual obligations to the various payees as shown in their corresponding invoices. To mention
a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh.
A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282
issued on September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April
7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh.
A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh.

71

D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's International Food Corp. in the
amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No.
589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9)
in Check No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit
(Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed checks. 3 Aside from the daily notice
given to the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions,
attaching thereto all the cancelled checks she had issued and which were debited against her current account. It was only after
the lapse of more two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of
respondent drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia
branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo
Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its
Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao
branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even
see the subject checks and that the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches'
operations failed to discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee
Bank, only a Branch Manager and no other official of the respondent drawee bank, may accept a second indorsement on a
check for deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were initialed and/or approved
for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the
Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value
of the eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent
drawee Bank refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial
Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not
parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee
bank the money value of eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements
of the payees were forged. How and by whom the forgeries were committed are not established on the record, but the respective
payees admitted that they did not receive those checks and therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party
whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave
rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he
cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a
check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never
gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the
payee or indorsee of a note or check. Since under said provision a forged signature is "wholly inoperative", no one can
gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between
and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to
the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.

72

As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two
types of cases: (1) where forgery was accomplished by a person not associated with the drawer for example a mail robbery;
and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of
the drawer's negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged
indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor
is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render
difficult the forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a
check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to the
drawee bank. 5For his negligence or failure either to discover or to report promptly the fact of such forgery to the drawee, the
drawer loses his right against the drawee who has debited his account under a forged indorsement. 6 In other words, he is
precluded from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and
were given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the
checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the
purpose of giving effect thereto. 7 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is
called issuance of the instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee, there
can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the
eighty-two (82) checks to their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia
Galang delivered them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon.
It was established that the signatures of the payees as first indorsers were forged. The record fails to show the identity of the
party who made the forged signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero
and Benito Lam, and were deposited in the latter's accounts as earlier noted. The second indorsements were all genuine
signatures of the alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and the genuine
second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of respondent
drawee Bank to the credit of their respective savings accounts in the Buendia, Ongpin and Elcao branches of the same bank.
The total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by respondent drawee
Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account
for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty
to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged
indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with
the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's
indorsement. The drawer and the payee often time shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having
developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It
will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a series of
forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act
as a prudent businessman would under the circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and
loyalty of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly received her bank statements, she apparently did not carefully examine
the same nor the check stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the documents serving as bases for the checks. With such
discovery, the subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper
commenced her fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that
even one single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was
concerned, to make an adequate investigation on the matter. Had this been done, the discrepancies would have been
discovered, sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the other hand, since the record mentions nothing about such
a complaint, the possibility exists that the checks in question covered inexistent sales. But even in such a case, considering the
length of a period of two (2) years, it is hard to believe that petitioner did not know or realize that she was paying more than she

73

should for the supplies she was actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds
seem to be disappearing or that there may be a leak in her business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result in stopping the continuance of the fraudulent scheme.
If she fails to take steps, the facts may establish her negligence, and in that event, she would be estopped from recovering from
the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with reasonable diligence whether before
she signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully,
particularly the invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts
payable in the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in some checks,
the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she should not have
signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner
been more vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank
in her issued checks, or at least made random scrutiny of cancelled checks returned by respondent drawee Bank at the close of
each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter
to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her negligence
which caused the respondent drawee Bank to honor the forged checks or prevented it from recovering the amount it had already
paid on the checks, petitioner cannot now complain should the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her
account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at
bar because in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or
employee of the drawer. The drawer was not found to be negligent in the handling of its business affairs and the theft of the
check by a total stranger was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due
to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the drawer's account
the amount theretofore paid under the check with a forged payee's indorsement because the drawee did not pay as ordered by
the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing
a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that
the check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the
payee's bank which in turn must present it for payment against the drawee bank in the course of normal banking transactions
between banks. The crossed check cannot be presented for payment but it can only be deposited and the drawee bank may only
pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement.
The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by
some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In
effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the
NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits
the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the
instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee
acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as
such indorsee where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the
drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against
it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The
drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability
on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for
wrongful dishonor of the bill or check.

74

Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence.
But under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation.
Under the laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the selection and
supervision of its employees as being the cause of the loss because negligence is the proximate cause thereof and under Article
2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the same Code the respondent
drawee Bank may be held liable for damages. The article provides
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in
any manner contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee
bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations
which form part of any contract it enters into with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of
fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks
with second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by
a team of auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its
depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost
diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no
way We can allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein
the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in
accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank
liable is based on law and substantial justice and not on mere equity. And although the case was brought before the court not on
breach of contractual obligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss does not preclude her from
recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent court. And in breaches of contract under Article 1173, due diligence on the
part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to determine
the exact amount of loss suffered by the petitioner, considering that she partly benefited from the issuance of the questioned
checks since the obligation for which she issued them were apparently extinguished, such that only the excess amount over and
above the total of these actual obligations must be considered as loss of which one half must be paid by respondent drawee
bank to herein petitioner.
SO ORDERED.
G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style "Melissa's
RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.

75

Roberto B. Lugue for private respondent.

CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of action against the petitioners for their
encashment and payment to another person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm name "Melissa's RTW." She deals
with, among other customers, Robinson's Department Store, Payless Department Store, Rempson Department Store, and the
Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to Melissa's RTW in the amounts and
on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance
of the above-listed crossed checks. Further inquiry revealed that the said checks had been deposited with the Associated Bank
(hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its
branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the private respondent to deposit and
encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery of the total value of the
checks plus damages. After trial, judgment was rendered requiring them to pay the private respondent the total value of the
subject checks in the amount of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages,
P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private respondent had no cause of action
against them and should have proceeded instead against the companies that issued the checks. In disposing of this contention,
the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal, anomalous and irregular acts of
the appellants in violating common banking practices to the damage and prejudice of the appellees, in
allowing to be deposited and encashed as well as paying to improper parties without the knowledge,
consent, authority or endorsement of the appellee which totalled P15,805.00, the six (6) checks in dispute
which were "crossed checks" or "for payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate such right; and (3) an act or omission on the part of such
defendant violative of the right of the plaintiff or constituting a breach thereof. (Republic Planters Bank vs.
Intermediate Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great weight. The contents of the said checks
issued by the customers of the appellee had not been questioned. There is no dispute that the same are
crossed checks or for payee's account only, which is Melissa's RTW. The appellee had clearly shown that
she had never authorized anyone to deposit the said checks nor to encash the same; that the appellants had
allowed all said checks to be deposited, cleared and paid to one Rafael Sayson in violation of the instructions
in the said crossed checks that the same were for payee's account only; and that the appellee maintained a
savings account with the Prudential Bank, Cubao Branch, Quezon City which never cleared the said checks
and the appellee had been damaged by such encashment of the same.
We affirm.

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Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the
checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines,
which means that the drawee should pay only with the intervention of that company. 3 The crossing is general where the words
written between the two parallel lines are "and Co." or "for payee's account only," as in the case at bar. This means that the
drawee bank should not encash the check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be negotiated only once to one who has an account with a
bank; and (3) that the act of crossing the check 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 pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the Negotiable
Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that the
drawers had intended the same for deposit only by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction found on the face of the checks exclusively
belongs to the issuers thereof and not to the payee. Moreover, having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossed checks
and the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or
lack of endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes
treated the said checks as negotiable instruments and, accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held 'for moneys had and received." 6 The proceeds are held for the
rightful owner of the payment and may be recovered by him. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected without indorsement at all. The act of the bank
amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As she had not at any time
authorized Rafael Sayson to endorse or encash them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks. This liability attached whether or not the Bank was aware of the
unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by Sayson. The Bank should have first
verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his
own account. The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed to the private
respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., 9 "the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and
regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and
the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them because they have no privity of contract
with her. They also argue that it was Eddie Reyes, the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be liable to the private respondent
because he was not authorized to make the endorsements. And even if the endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not verifying the endorser's authority. There is no substantial difference between
an actual forging of a name to a check as an endorsement by a person not authorized to make the signature and the affixing of a
name to a check as an endorsement by a person not authorized to endorse it. 10

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The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire as to the authority of Rafael
Sayson to deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The failure of the Bank
to make this inquiry was a breach of duty that made it liable to the private respondent for the amount of the checks.
There being no evidence that the crossed checks were actually received by the private respondent, she would have a right of
action against the drawer companies, which in turn could go against their respective drawee banks, which in turn could sue the
herein petitioner as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly from the bank responsible for such encashment regardless of whether or
not the checks were actually delivered to the payee. 11We approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment, the Bank had stamped on the back thereof
the words: "All prior endorsements and/or lack of endorsements guaranteed," and thus made the assurance that it had
ascertained the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in holding that the private respondent had a valid cause of action
against the petitioners and that the latter are indeed liable to her for their unauthorized encashment of the subject checks. We
also agree with the reduction of the award of the exemplary damages for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.
FIRST DIVISION
[G.R. No. L-29432. August 6, 1975.]
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE ISLAND, Respondent.
Bausa, Ampil & Suarez for Petitioner.
Aviado & Aranda for Respondent.
SYNOPSIS
Petitioner deposited in its current account with respondent bank several checks with a total face value of P8,030.58, all acquired
from Antonio J. Ramirez, a regular bettor at the jai-alai games and a sale agent of the Inter-Island Gas Service, Inc., the payee of
the checks. The deposits were all temporarily credited to petitioners account in accordance with the clause printed on the banks
deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to inter-bank clearing, the Inter-Island
Gas discovered that all the indorsement made on the cheeks purportedly by its cashiers, as well as the rubber stamp impression
thereon reading "Inter-Island Gas Service, Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the
drawee banks of the said checks and forgeries and filed a criminal complaint against its former employee. In view of these
circumstances, the respondent Bank debited the petitioners current account and forwarded to the latter the checks containing
the forged indorsements, which petitioner refused to accept. Later, petitioner drew against its current account a check for
P135,000.00. This check was dishonored by respondent as its records showed that petitioners balance after netting out the
value of the checks with the forged indorsement, was insufficient to cover the value of the check drawn. A complaint was filed by
petitioner with the Court of First Instance of Manila. The same was dismissed by the said court after due trial, as well as by the
Court of Appeals, on appeal. Hence, this petition for review.
The Supreme Court ruled that respondent acted within legal bounds when it debited petitioners account; that the payments
made by the drawee banks to the respondent on account of the checks with forged indorsements were ineffective; that on
account thereof, no creditor-debtor relationship was created between the parties; that petitioner was grossly recreant in
accepting the checks in question from Ramirez without making any inquiry as to authority to exchange checks belonging to the
payee-corporation; and that petitioner, in indorsing the said checks when it deposited them with respondent, guaranteed the
genuineness of all prior indorsement thereon so that the respondent, which relied upon its warranty, cannot be held liable for the
resulting loss.
Judgment affirmed
SYLLABUS
1. NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. A forged signature in a negotiable
instrument makes it wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the
forged signature except against a party who cannot invoke the forgery.
2. ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES CREATED EVEN IF DEPOSITARY OR
COLLECTING BANK HAD ALREADY COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONERS

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ACCOUNT; REASON. Where the indorsement made on the checks were forged prior to their delivery to depositor, the
payments made by the drawee-banks to the collecting bank on account of the said checks were ineffective. Such being the case,
the relationship of creditor and debtor between the depositor and the depository had not been validly effected, the checks not
having properly and legitimately converted into cash.
3. ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS THE VALUE OF CHECKS
CONTAINING FORGED INDORSEMENT; RULING IN THE CASE OF GREAT EASTERN LIFE INSURANCE CO. v.
HONGKONG & SHANGHAI BANK. In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678 (1992), the
Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently
found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no
right to pay the sum stated therein to the forger "or to anyone else upon a forged signature." "It was its duty to know," said the
Court, "that (the payees) endorsement was genuine before cashing the check." The depositor must in turn shoulder the loss of
the amounts which the respondent, as its collecting agent, had no reimburse to the drawee-banks.
4. ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE CASE OF INSULAR DRUG CO. v.
NATIONAL. In Insular Drug Co. v. National, 58 Phil. 685 (1933), the Court made the pronouncement that." . .The right of an
agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect
money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking
checks made payable to a corporation which can act by agents, does so at his peril, and must abide by the consequences if the
agent who endorses the same is without authority."cralaw virtua1aw library
5. ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK WHO RELIED ON INDORSERS
WARRANTY. Under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument
negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser
warrants that the instrument "is genuine and in all respects what it purports to be." Where the depositor indorsed the checks with
forged indorsement when it deposited them with the collecting bank, the former as an endorser guaranteed the genuineness of
all prior indorsement thereon. The collecting bank which relied upon this warranty cannot be held liable for the resulting loss.
6. ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO COLLECTING BANK; APPLICATION OF ART.
2154 OF THE CIVIL CODE. The transfer by the drawee-banks of funds to the collecting bank on account of forged checks
would be ineffectual when made under the mistaken and valid assumption that the indorsement of the payee thereon were
genuine. Under Article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises," By virtue thereof, there can be no valid payment of money by
drawee-banks to the collecting bank on account of forged checks.
DECISION
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision
of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter
referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current
account with the respondent bank. The particulars of these checks are as follows:chanrob1es virtual 1aw library
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc.
or order:chanrob1es virtual 1aw library
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or
bearer:chanrob1es virtual 1aw library

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4/13/59 B-335063 P 2108.70 21


4/27/59 B-335072 P2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the Inter-Island Gas Service,
Inc. or bearer:chanrob1es virtual 1aw library
5/18/59 VN430188 P940.8025cralaw:red
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc.
order:chanrob1es virtual 1aw library
5/14/59 1860160 P 500.00 26
5/18/59 1860660 P 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island
Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily credited to the petitioners account in accordance with
the clause printed on the deposit slips issued by the respondent and which reads:jgc:chanrobles.com.ph
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only,
until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank and the
latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless
of whether or not the item itself can be returned."cralaw virtua1aw library
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted
to inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to the said company) as
well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island
Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a
criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1
The respondents cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the
petitioners cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would debit the value of the
checks against the petitioners account as soon as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective
accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the amounts
they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value
which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioners current account and
forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the
order of the Mariano Olondriz y Cia. in payment of certain shares of stock. The check was, however, dishonored by the
respondent as its records showed that as of October 8, 1959 the current account of the petitioner, after netting out the value of
the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however
dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as follows:chanrob1es virtual 1aw library
(a) Whether the respondent had the right to debit the petitioners current account in the amount corresponding to the total value
of the checks in question after more than three months had elapsed from the date their value was credited to the petitioners
account:(b) Whether the respondent is estopped from claiming that the amount of P8,030.58, representing the total value of the
checks with the forged indorsements, had not been properly credited to the petitioners account, since the same had already
been paid by the drawee-banks and received in due course by the respondent; and(c) On the assumption that the respondent
had improperly debited the petitioners current account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited the petitioners account. When the petitioner deposited
the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to
collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioners account, so that following the rule in Gullas v. Philippine National Bank 2

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it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent
from using the petitioners funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor
relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3
"When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority."cralaw virtua1aw library
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge
it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the
forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the
drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate
court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal contemplation, therefore,
the payments made by the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the
case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks
not having been properly and legitimately converted into cash. 4
In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to
reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The
reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or anyone
else upon a forged signature." "It was its duty to know," said the Court, "that [the payees] endorsement was genuine before
cashing the check." The petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent,
had to reimburse to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of
the checks in question were collected by the Respondent. The record shows that the respondent had acted promptly after being
informed that the indorsements on the checks were forged. Moreover, having received the checks merely for collection and
deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks.
Indeed, having itself indorsed them to the respondent in accordance with the rules and practices of commercial banks, of which
the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the Negotiable
Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.."
The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the
attention of the petitioner that the payee of all the checks was a corporation the Inter-Island Gas Service, Inc. Yet, the
petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry
as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6 the Court made the
pronouncement that.
". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman
with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in
payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must
abide by the consequences if the agent who indorses the same is without authority." (underscoring supplied)
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be
deposited, but not encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely,
exhs. 21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from liability with respect to them. The
fact that they are bearer checks and at the same time crossed checks should have aroused the petitioners suspicion as to the
title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner), it appearing
on their face that a corporate entity the Inter Island Gas Service, Inc. was the payee thereof and Ramirez delivered the said
checks to the petitioner ostensibly on the strength of the payees cashiers indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument
negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser
warrants that the instrument "is genuine and in all respects what it purports to be." Considering that the petitioner indorsed the
said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior
indorsements thereon. The respondent which relied upon the petitioners warranty should not be held liable for the resulting loss.
This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable
Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all
respects what it purports to be." Under that same section this warranty "extends in favor of no holder other than the immediate
transferee," which, in the case at bar, would be the Respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the
item to the account of its depositor," at any time before "current funds or solvent credits shall have been actually received by the
Bank," would not materially affect the conclusion we have reached. That stipulation prescribes that there must be an actual
receipt by the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds

81

to the respondent on account of the checks in question was ineffectual because made under the mistaken and valid assumption
that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received
when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was,
therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the
questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioners cost.

G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,


vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and
GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are
easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden
Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private
respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months
38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while
the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as
Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They
were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants
had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later,
however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it
finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of
P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total
amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury
on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit
in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment
was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of
appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;

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2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association,
Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to
reinstate and credit to such account such amount existing before the debit was made including the amount of
P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow defendant
Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses
of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses
of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the
following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on
the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot
be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants
already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should
bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the
proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with
such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for
its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for
any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with
Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants
through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself
to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by
Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of
Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings
that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could
not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by
Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers,
not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence
and cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half
million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been
cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it
had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden
Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of P968,000.00

83

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to
"accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one
week." 8 For a bank with its long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips
through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent,
assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have
come into possession of this bank, the right is reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and
give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned.
This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings
when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the
bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip,
does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We
do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract,
the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere
agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides
that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or
less rigor by the courts, according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that
assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this is refuted by
Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account
not only once or even twice but three times. The total withdrawal was in excess of its original balance before the treasury
warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any
reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the
treasury warrants with it for clearance. There would have been no need for it to wait until the warrants had been cleared before
paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the
warrants was not communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the
treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for
the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been
established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of
Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and
convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are
payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following
requirements:

84

(a) It must be in writing and signed by the maker or drawer;


(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
xxx

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of
this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited
with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay
"not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of
the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor
General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the
rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of
the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and
section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all
respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that
this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to
the present controversy.1wphi1 That case involved checks whereas this case involves treasury warrants. Golden Savings never
represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the
fact of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to
credit Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to
Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00
should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would
unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury
warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the
judgment of the lower court shall be reworded as follows:

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3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden
Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.
G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.
RESOLUTION

FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis for and in behalf of different
airline companies. Private respondent Arturo S. Miranda had a revolving credit line with petitioner. He procured tickets from
petitioner on behalf of airline passengers and derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect on six (6) checks issued by
private respondent with a total face amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of preliminary
attachment and attorney's fees, averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent paid various amounts in cash
and in kind, and thereafter issued six (6) postdated checks amounting to P115,000.00 which were all dishonored by the drawee
banks. Travel-On further alleged that in March 1972, private respondent made another payment of P10,000.00 reducing his
indebtedness to P105,000.00. The writ of attachment was granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-On during the period stipulated in the complaint.
Private respondent, however, claimed that he had already fully paid and even overpaid his obligations and that refunds were in
fact due to him. He argued that he had issued the postdated checks for purposes of accommodation, as he had in the past
accorded similar favors to petitioner. During the proceedings, private respondent contested several tickets alleged to have been
erroneously debited to his account. He claimed reimbursement of his alleged over payments, plus litigation expenses, and
exemplary and moral damages by reason of the allegedly improper attachment of his properties.
In support of his theory that the checks were issued for accommodation, private respondent testified that he bad issued the
checks in the name of Travel-On in order that its General Manager, Elita Montilla, could show to Travel-On's Board of Directors
that the accounts receivable of the company were still good. He further stated that Elita Montilla tried to encash the same, but
that these were dishonored and were subsequently returned to him after the accommodation purpose had been attained.
Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended to Travel-On by private
respondent related to situations where one or more of its passengers needed money in Hongkong, and upon request of TravelOn respondent would contact his friends in Hongkong to advance Hongkong money to the passenger. The passenger then paid
Travel-On upon his return to Manila and which payment would be credited by Travel-On to respondent's running account with it.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent the amount of P8,894.91
representing net overpayments by private respondent, moral damages of P10,000.00 for the wrongful issuance of the writ of
attachment and for the filing of this case, P5,000.00 for attorney's fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily established and that the postdated
checks were issued not for the purpose of encashment to pay his indebtedness but to accommodate the General Manager of
Travel-On to enable her to show to the Board of Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact then increased the award of
moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of moral damages to P20,000.00,
with interest at the legal rate from the date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.

86

In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability on the part of private
respondent. Petitioner further argues that even assuming that the checks were for accommodation, private respondent is still
liable thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the ground that the various
statements of account prepared by petitioner did not show that Private respondent had an outstanding balance of P115,000.00
which is the total amount of the checks he issued. It was pointed out that while the various exhibits of petitioner showed various
accountabilities of private respondent, they did not satisfactorily establish the amount of the outstanding indebtedness of private
respondent. The appellate court made much of the fact that the figures representing private respondent's unpaid accounts found
in the "Schedule of Outstanding Account" dated 31 January 1970 did not tally with the figures found in the statement which
showed private respondent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory explanation
as to why the total outstanding amount of P278,432.74 was still used as basis in the accounting of 7 April 1972 considering that
according to the table of transactions for the year 1969 and 1970, the total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972 Statement of Account had simply not been updated;
that if we use as basis the figure as of 31 January 1970 which is P278,432.74 and from it deduct P38,638.17 which represents
some of the payments subsequently made by private respondent, the figure P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in figures, simply did not mean that private respondent
had no more financial obligations to petitioner. It must be stressed that private respondent's account with petitioner was
a running or open one, which explains the varying figures in each of the statements rendered as of a given date.
The appellate court erred in considering only the statements of account in determining whether private respondent was indebted
to petitioner under the checks. By doing so, it failed to give due importance to the most telling piece of evidence of private
respondent's indebtedness the checks themselves which he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all important evidence of petitioner's
case; that these checks clearly established private respondent's indebtedness to petitioner; that private respondent was liable
thereunder.
It is important to stress that a check which is regular on its face is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon is deemed to have become a party thereto for value. 1 Thus,
the mere introduction of the instrument sued on in evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite
settled that a negotiable instrument is presumed to have been given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of proving the existence of
valuable consideration upon petitioner. This cannot be countenanced; it was up to private respondent to show that he had indeed
issued the checks without sufficient consideration. The Court considers that Private respondent was unable to rebut satisfactorily
this legal presumption. It must also be noted that those checks were issued immediately after a letter demanding payment had
been sent to private respondent by petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner were presented for payment by the latter would lead to no
other conclusion than that these checks were intended for encashment. There is nothing in the checks themselves (or in any
other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued for "accommodation" and
that accordingly private respondent maker of those checks was not liable thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to accommodation transactions, no such transaction was here
shown. Section 29 of the Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. An accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his
name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of taking the instrument, knew him to be only an accommodation party.
In accommodation transactions recognized by the Negotiable Instruments Law, an accommodating party lends his
credit to the accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as a holder in
due course, who gave full value therefor to the accommodated party. The latter, in other words, receives or realizes full
value which the accommodated party then must repay to the accommodating party, unless of course the

87

accommodating party intended to make a donation to the accommodated party. But the accommodating party is bound
on the check to the holder in due course who is necessarily a third party and is not the accommodated party. Having
issued or indorsed the check, the accommodating party has warranted to the holder in due course that he will pay the
same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment at the drawee bank but the
checks bounced. Travel-On obviously was not an accommodated party; it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due course, 4 that the checks were
supported by valuable consideration. 5 Private respondent maker of the checks did not successfully rebut these presumptions.
The only evidence aliunde that private respondent offered was his own self-serving uncorroborated testimony. He claimed that he
had issued the checks to Travel-On as payee to "accommodate" its General Manager who allegedly wished to show those
checks to the Board of Directors of Travel-On to "prove" that Travel-On's account receivables were somehow "still good." It will
be seen that this claim was in fact a claim that the checks were merely simulated, that private respondent did not intend to bind
himself thereon. Only evidence of the clearest and most convincing kind will suffice for that purpose; 6 no such evidence was
submitted by private respondent. The latter's explanation was denied by Travel-On's General Manager; that explanation, in any
case, appears merely contrived and quite hollow to us. Upon the other hand, the "accommodation" or assistance extended to
Travel-On's passengers abroad as testified by petitioner's General Manager involved, not the accommodation transactions
recognized by the NIL, but rather the circumvention of then existing foreign exchange regulations by passengers booked by
Travel-On, which incidentally involved receipt of full consideration by private respondent.
Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here involved. Those checks in
themselves constituted evidence of indebtedness of private respondent, evidence not successfully overturned or rebutted by
private respondent.
Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On, the amount of such liability
is the face amount of the checks, reduced only by the P10,000.00 which Travel-On admitted in its complaint to have been paid
by private respondent sometime in March 1992.
The award of moral damages to Private respondent must be set aside, for the reason that Petitioner's application for the writ of
attachment rested on sufficient basis and no bad faith was shown on the part of Travel-On. If anyone was in bad faith, it was
private respondent who issued bad checks and then pretended to have "accommodated" petitioner's General Manager by
assisting her in a supposed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-On's financial
condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review on Certiorari and to REVERSE and SET
ASIDE the Decision dated 22 October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as well as the
Decision dated 31 January 1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June 1972, plus ten percent (10%) of
the total amount due as attorney's fees. Costs against Private respondent.
[G.R. No. 138074. August 15, 2003]
CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO.,EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and FERNANDO
DAVID, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the decision[1] of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398, which
affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in
Civil Cases Nos. 5479[2] and 5492.[3] The trial court dismissed the complaint against herein respondents Far East Bank & Trust
Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB) and ruled
in favor of respondent Fernando David as to the proceeds of the two cashiers checks, including the earnings thereof pendente
lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00 and attorneys fees also in the amount
of P100,000.00.
The facts of this case are not disputed, to wit:

88

On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani entered into an
agreement whereby the latter was to give Yang a PCIB managers check in the amount of P4.2 million in exchange for two (2) of
Yangs managers checks, each in the amount of P2.087 million, both payable to the order of private respondent Fernando David.
Yang and Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to be divided equally
between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount of
US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22, 1987, payable
to the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987, likewise payable
to the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00, dated
December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.
At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers checks and dollar drafts to
her business associate, Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo Ranigo. Ranigo was to meet
Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over Yangs cashiers
checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in the sum of P4.2 million
and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers checks and the dollar draft
bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong at half past four in the afternoon
of December 22, 1987. Liong, in turn, informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able to get hold of said
instruments, without delivering the exchange consideration consisting of the PCIB managers check and the Hang Seng Bank
dollar draft.
At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in Makati City,
Chandiramani delivered to respondent Fernando David at China Banking Corporation branch in San Fernando City, Pampanga,
the following: (a) FEBTC Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087 million; and (b) Equitable
Cashiers Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of P2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife, Pushpa
Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters Bank
branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22,
1987, drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same
date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. Both banks
complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop payment order on FEBTC
Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of
US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint [4] for injunction and damages against Equitable,
Chandiramani, and David, with prayer for a temporary restraining order, with the Regional Trial Court of Pasay City. The
Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently amended to include a prayer for Equitable to
return to Yang the amount of P2.087 million, with interest thereon until fully paid. [5]
On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of preliminary injunction
against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No. 5492. This complaint
was later amended to include a prayer that defendants therein return to Yang the amount of P2.087 million, the value of FEBTC
Dollar Draft No. 4771, with interest at 18% annually until fully paid. [6]
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary injunction in Civil Case
No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case No. 5492 also.

89

Meanwhile, herein respondent David moved for dismissal of the cases against him and for reconsideration of the Orders
granting the writ of preliminary injunction, but these motions were denied. David then elevated the matter to the Court of Appeals
in a special civil action for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated. The trial court then
conducted pre-trial and trial of the two cases, but the proceedings had to be suspended after a fire gutted the Pasay City Hall
and destroyed the records of the courts.
After the records were reconstituted, the proceedings resumed and the parties agreed that the money in dispute be
invested in Treasury Bills to be awarded in favor of the prevailing side. It was also agreed by the parties to limit the issues at the
trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation (EBC)
Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated December 22, 1987, and Far East
Bank and Trust Company (FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated December
22, 1987, together with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment of FEBTC Dollar
Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop payment order of Cely Yang?
[7]

On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely Yang and declaring
the former entitled to the proceeds of the two (2) cashiers checks, together with the earnings derived therefrom pendente lite;
ordering the plaintiff to pay the defendant Fernando David moral damages in the amount of P100,000.00; attorneys fees in the
amount of P100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company (FEBTC), Philippine
Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice
to whatever action plaintiff Cely Yang will file against defendant Prem Chandiramani for reimbursement of the amounts received
by him from defendant Fernando David.
SO ORDERED.[8]
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the reason that the cashiers checks were complete on
their face when they were negotiated to him. They were not yet overdue when he became the holder thereof and he had no
notice that said checks were previously dishonored; he took the cashiers checks in good faith and for value. He parted some
$200,000.00 for the two (2) cashiers checks which were given to defendant Chandiramani; he had also no notice of any infirmity
in the cashiers checks or defect in the title of the drawer. As a matter of fact, he asked the manager of the China Banking
Corporation to inquire as to the genuineness of the cashiers checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 1314). Another proof that defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC cashiers
check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for lifting the stop
payment order was because of the fact that FEBTC realized that the checks were not actually lost but indeed reached the payee
defendant David.[9]
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of September
20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due course and misapprehended the factual
milieu, Yang seasonably filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the plaintiff-appellant
to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00).
SO ORDERED.[10]
In affirming the trial courts judgment with respect to herein respondent David, the appellate court found that:

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In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China Banking Corporation, the
genuineness of whether (sic) the cashiers checks he received from Chandiramani. As no stop payment order was made yet (at)
the time of the inquiry, defendant-appellee had no notice of what had transpired earlier between the plaintiff-appellant and
Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he had (sic) a transaction.
Further on, David received the checks in question in due course because Chandiramani, who at the time the checks were
delivered to David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the instrument(s) and defect
of title of the holder. To mandate that each holder inquire about every aspect on how the instrument came about will unduly
impede commercial transactions, Although negotiable instruments do not constitute legal tender, they often take the place
of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient to establish that they connived with
each other to defraud Yang. There was no concrete proof presented by Yang to support her theory. [11]
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by Yang against said bank to
be clearly unfounded and baseless. Since PCIB was compelled to litigate to protect itself, then it was entitled under Article
2208[12] of the Civil Code to attorneys fees and litigation expenses.
Hence, the instant recourse wherein petitioner submits the following issues for resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS
LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF THE
AMOUNT REPRESENTING HIS SHARE OF THE LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND
ATTORNEYS FEES.[13]
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure. It is basic
that in petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of law, questions of fact
are not entertained absent a showing that the factual findings complained of are totally devoid of support in the record or are
glaringly erroneous.[14] Given the facts in the instant case, despite petitioners formulation, we find that the following are the
pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder in due course;
and
b) Whether the appellate court committed a reversible error in awarding damages and attorneys fees to David and
PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in due course of the
checks in question. While it is true that he was named the payee thereof, David failed to inquire from Chandiramani about how
the latter acquired possession of said checks. Given his failure to do so, it cannot be said that David was unaware of any defect
or infirmity in the title of Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were
crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No.
93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were issued for a definite purpose and accordingly,
made inquiries to determine if he received the checks pursuant to that purpose. His failure to do so negates the finding in the
proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any consideration of value
in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when he received the checks, he
verified their genuineness with his bank, and only after said verification did he deposit them. David stresses that he had no notice
of previous dishonor or any infirmity that would have aroused his suspicions, the instruments being complete and regular upon
their face. David stresses that the checks in question were cashiers checks. From the very nature of cashiers checks, it is highly
unlikely that he would have suspected that something was amiss. David also stresses negotiable instruments are presumed to
have been issued for valuable consideration, and he who alleges otherwise must controvert the presumption with sufficient

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evidence. The petitioner failed to discharge this burden, according to David. He points out that the checks were delivered to him
as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder in
due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises
only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, [15] meaning a payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority sustains
the view that a payee may be a holder in due course. [16] Hence, the presumption that he is a prima facie holder in due course
applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether
David took possession of the checks under the conditions provided for in Section 52 [17] of the Negotiable Instruments Law. All the
requisites provided for in Section 52 must concur in Davids case, otherwise he cannot be deemed a holder in due course.
We find that the petitioners challenge to Davids status as a holder in due course hinges on two arguments: (1) the lack of
proof to show that David tendered any valuable consideration for the disputed checks; and (2) Davids failure to inquire from
Chandiramani as to how the latter acquired possession of the checks, thus resulting in Davids intentional ignorance tantamount
to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David from being
considered a holder in due course. Unfortunately for the petitioner, her arguments on this score are less than meritorious and far
from persuasive.
First, with respect to consideration, Section 24[18] of the Negotiable Instruments Law creates a presumption that every party
to an instrument acquired the same for a consideration [19] or for value.[20] Thus, the law itself creates a presumption in Davids
favor that he gave valuable consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove
that David got hold of the checks absent said consideration. In other words, the petitioner must present convincing evidence to
overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner failed to discharge her burden of
proof. The petitioners averment that David did not give valuable consideration when he took possession of the checks is
unsupported, devoid of any concrete proof to sustain it. Note that both the trial court and the appellate court found that David did
not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said instruments. Factual
findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court; they carry great weight when the
factual findings of the trial court are affirmed by the appellate court. [21]
Second, petitioner fails to point any circumstance which should have put David on inquiry as to the why and wherefore of
the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner and Chandiramani.
Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramanis duty to deliver the checks to
David as payee. The evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David took the
step of asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only
accepted the same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any
stop payment order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of
the latters title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramanis acquisition
or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud allegedly
committed by Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith.[22]
Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below, petitioner now claims
that David should have been put on alert as the instruments in question were crossed checks. Pursuant to Bataan Cigar &
Cigarette Factory, Inc. v. Court of Appeals, David should at least have inquired as to whether he was acquiring said checks for
the purpose for which they were issued, according to petitioners submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are not on all fours
with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a discount by the payee, while in the
instant case, the payee did not negotiate further the checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce [23] makes
reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the practice that a check with two parallel
lines in the upper left hand corner means that it could only be deposited and not converted into cash. [24] The effects of crossing a
check, thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by the payee knowingly violated the
avowed intention of crossing the check. Thus, in accepting the cross checks and paying cash for them, despite the warning of

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the crossing, the subsequent holder could not be considered in good faith and thus, not a holder in due course. Our ruling
inBataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.[25]
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no dispute
that the crossed checks were delivered and duly deposited by David, the payee named therein, in his bank account. In other
words, the purpose behind the crossing of the checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not entitled to
damages, attorneys fees, and costs of suit as both acted in bad faith towards her, as shown by her version of the facts which
gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously dragged into this suit for reasons which have
nothing to do with him at all, but which arose from petitioners failure to receive her share of the profit promised her by
Chandiramani. Moreover, in filing this suit which has lasted for over a decade now, the petitioner deprived David of the rightful
enjoyment of the two checks, to which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his
rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing as a person of good repute
in the business community of Pampanga. David thus contends that it is but proper that moral damages, attorneys fees, and costs
of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the appellate court that it was
needlessly dragged into this case. Hence, no error was committed by the appellate court in declaring PCIB entitled to attorneys
fees as it was compelled to litigate to protect itself.
We have thoroughly perused the records of this case and find no reason to disagree with the finding of the trial court, as
affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and unceremoniously dragged into this
case which should have been brought only between the plaintiff and defendant Chandiramani. [26]
A careful reading of the findings of facts made by both the trial court and appellate court clearly shows that the petitioner, in
including David as a party in these proceedings, is barking up the wrong tree. It is apparent from the factual findings that David
had no dealings with the petitioner and was not privy to the agreement of the latter with Chandiramani. Moreover, any loss which
the petitioner incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse should have been
against him and not against David. By needlessly dragging David into this case all because he and Chandiramani knew each
other, the petitioner not only unduly delayed David from obtaining the value of the checks, but also caused him anxiety and
injured his business reputation while waiting for its outcome. Recall that under Article 2217 [27] of the Civil Code, moral damages
include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and similar injury. Hence,
we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and baseless grounds.
Both were thus compelled to litigate to protect their interests, which makes an award of attorneys fees justified under Article 2208
(2)[28] of the Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated March 25, 1999, in
CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
SO ORDERED.

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