ASSOCIATED BANK v CA

Tarlac has a current account with PNB where provincial funds, including an appropriation for Concepcion Hospital,
are deposited. Checks are drawn against the account payable to the order of the hospital. These checks are released by
the Provincial Treasurer and received for the hospital by the admin officer and cashier. An audit revealed that several
checks drawn by the Province were not received by the hospital. It turns out these checks were encashed by Fausto
Pangilinan, who was the admin officer and cashier until his retirement. It turned out he was receiving and encashing checks
meant for the hospital. On the first check, he tried encashing the same with Associated Bank but the manager thereof
refused, but advised him to deposit the check in his account with the bank. When the check was cleared and paid by PNB,
he was able to withdraw the money. He did this procedure for 29 other checks. The manager of Associated Bank testified
that Pangilinan made it appear that the checks were paid to him for projects with the hospital; this was done by forging
the signature of the chief of the hospital.

The Treasurer wrote to PNB to restore the amounts deducted from the Province’s account. In turn, PNB demanded
reimbursement from Associated Bank. Both PNB and Associated Bank did not do what was requested of them. Tarlac
brought a suit against PNB which impleaded Associated Bank as a third party defendant which filed a fourth party
complaint against the chief of the hospital and Pangilinan.

Issue: Who should bear the loss?

Ruling: Associated Bank and Tarlac.

A collecting bank, in presentment to the drawee bank, indorses the check. As an indorser, it warrants that the
instrument is genuine; it cannot interpose the defense of forgery against the drawee bank.

In this case, the checks were indorsed by Associated Bank to PNB, warranting that the checks are genuine. It
turned out, however, that they were forged and thus, the warranty shall operate. Since a forged indorsement is
inoperative, the collecting bank had no right to be paid by the drawee bank; the collecting bank must necessarily return
the money wrongfully paid.

As a collecting bank, it must suffer the loss because it has the duty to ascertain the genuineness of all prior
indorsements since presentment is an assertion that it has done its duty to ascertain the genuineness; the duty of the
drawee bank is to verify the drawer’s signature, not the indorsers’.

If the drawer is negligent to the point of contributing to the loss, the drawee can charge its account. If the drawee
is negligent, by not informing promptly the presentor of the forgery, it will bear the loss. If both are negligent, the loss
should be apportioned. In this case, Tarlac was also negligent because it permitted Pangilinan to collect the checks despite
being retired; in fact, some were issued to Pangilinan and some to the present cashier.

The Court ruled 50-50. Because the drawer Tarlac is negligent, it can only recover half from the drawee bank,
instead of the whole amount that PNB was not allowed to deduct. Associated Bank, having been in breach of its warranty,
is directed to pay back what it received from PNB. But only half because the drawer was also negligent.