G.R. No.

132560               January 30, 2002 subject checks issued to him and asserted that the signatures on the
back were spurious. 3

WESTMONT BANK (formerly ASSOCIATED BANKING

CORP.), petitioner, The bank did not present evidence to the contrary, but simply contended
vs. that since plaintiff Ong claimed to have never received the originals of the
EUGENE ONG, respondent. two (2) checks in question from Island Securities, much less to have
authorized Tanlimco to receive the same, he never acquired ownership of
DECISION these checks. Thus, he had no legal personality to sue as he is not a real
party in interest. The bank then filed a demurrer to evidence which was
QUISUMBING, J.: denied.

This is a petition for review of the decision dated January 13, 1998, of the
1  On February 8, 1989, after trial on the merits, the Regional Trial Court of
Court of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay
respondent ₱1,754,787.50 plus twelve percent (12%) interest per annum
computed from October 7, 1977, the date of the first extrajudicial
demand, plus damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account with petitioner,
formerly the Associated Banking Corporation, but now known as
Westmont Bank. Sometime in May 1976, he sold certain shares of stocks
through Island Securities Corporation. To pay Ong, Island Securities
purchased two (2) Pacific Banking Corporation manager’s checks, both 2  paid in full;
dated May 4, 1976, issued in the name of Eugene Ong as payee. Before
Ong could get hold of the checks, his friend Paciano Tanlimco got hold of
them, forged Ong’s signature and deposited these with petitioner, where
Tanlimco was also a depositor. Even though Ong’s specimen signature
was on file, petitioner accepted and credited both checks to the account
of Tanlimco, without verifying the ‘signature indorsements’ appearing at
the back thereof. Tanlimco then immediately withdrew the money and
absconded.
Instead of going straight to the bank to stop or question the payment,
Ong first sought the help of Tanlimco’s family to recover the amount.
Manila, Branch 38, rendered a decision, thus:
IN VIEW OF THE FOREGOING, the court hereby renders judgment for
the plaintiff and against the defendant, and orders the defendant to pay
the plaintiff:
1. The sum of P1,754,787.50 representing the total face value of
the two checks in question, exhibits "A" and "B", respectively, with
interest thereon at the legal rate of twelve percent (12%) per
annum computed from October 7, 1977 (the date of the first
extrajudicial demand) up to and until the same shall have been
2. Moral damages in the amount of P250,000.00;
3. Exemplary or corrective damages in the sum of P100,000.00
by way of example or correction for the public good;
4. Attorney’s fees of P50,000.00 and costs of suit.
Defendant’s counterclaims are dismissed for lack of merit.
SO ORDERED. 4

Later, he reported the incident to the Central Bank, which like the first
effort, unfortunately proved futile.
Petitioner elevated the case to the Court of Appeals without success. In
its decision, the appellate court held:
It was only on October 7, 1977, about five (5) months from discovery of
the fraud, did Ong cry foul and demanded in his complaint that petitioner
WHEREFORE, in view of the foregoing, the appealed decision is
pay the value of the two checks from the bank on whose gross
AFFIRMED in toto. 5

negligence he imputed his loss. In his suit, he insisted that he did not
"deliver, negotiate, endorse or transfer to any person or entity" the
Petitioner now comes before this Court on a petition for review, alleging
that the Court of Appeals erred:
I petitioner’s position that for all intents and purposes, Island Securities
... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT
RESPONDENT HAS A CAUSE OF ACTION AGAINST THE
PETITIONER.
II
... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING
PETITIONER LIABLE TO RESPONDENT AND DECLARING
THAT THE LATTER MAY RECOVER DIRECTLY FROM THE
FORMER; AND
III
... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES
AND IN NOT ABSOLVING PETITIONER FROM LIABILITY.
Essentially the issues in this case are: (1) whether or not respondent Ong
has a cause of action against petitioner Westmont Bank; and (2) whether
or not Ong is barred to recover the money from Westmont Bank due to
laches.
Respondent admitted that he was never in actual or physical possession
of the two (2) checks of the Island Securities nor did he authorize
Tanlimco or any of the latter’s representative to demand, accept and
receive the same. For this reason, petitioner argues, respondent cannot
sue petitioner because under Section 51 of the Negotiable Instruments
Law it is only when a person becomes a holder of a negotiable
6 
instrument can he sue in his own name. Conversely, prior to his
becoming a holder, he had no right or cause of action under such
negotiable instrument. Petitioner further argues that since Section 191 of 7 
the Negotiable Instruments Law defines a "holder" as the ‘payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof,’
in order to be a holder, it is a requirement that he be in possession of the
instrument or the bearer thereof. Simply stated, since Ong never had
possession of the checks nor did he authorize anybody, he did not
become a holder thereof hence he cannot sue in his own name. 8
Petitioner also cites Article 1249 of the Civil Code explaining that a
9 
check, even if it is a manager’s check, is not legal tender. Hence, the
creditor cannot be compelled to accept payment thru this means. It is 10 
has not yet tendered payment to respondent Ong, thus, any action by
Ong should be directed towards collecting the amount from Island
Securities. Petitioner claims that Ong’s cause of action against it has not
ripened as of yet. It may be that petitioner would be liable to the drawee
bank - - but that is a matter between petitioner and drawee-bank, Pacific
Banking Corporation. 11
For its part, respondent Ong leans on the ruling of the trial court and the
Court of Appeals which held that the suit of Ong against the petitioner
bank is a desirable shortcut to reach the party who ought in any event to
be ultimately liable. It likewise cites the ruling of the courts a quo which
12 
held that according to the general rule, a bank who has obtained
possession of a check upon an unauthorized or forged indorsement of
the payee’s signature and who collects the amount of the check from the
drawee is liable for the proceeds thereof to the payee. The theory of said
rule is that the collecting bank’s possession of such check is wrongful. 13
Respondent also cites Associated Bank vs. Court of Appeals which held
14 
that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
endorsements. The collecting bank is also 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. Hence, it is in a better
position to detect forgery, fraud or irregularity in the indorsement. 15
Anent Article 1249 of the Civil Code, Ong points out that bank checks are
specifically governed by the Negotiable Instruments Law which is a
special law and only in the absence of specific provisions or deficiency in
the special law may the Civil Code be invoked. 16
Considering the contentions of the parties and the evidence on record,
we find no reversible error in the assailed decisions of the appellate and
trial courts, hence there is no justifiable reason to grant the petition.
Petitioner’s claim that respondent has no cause of action against the
bank is clearly misplaced. As defined, a cause of action is the act or
omission by which a party violates a right of another. The essential
17 
elements of a cause of action are: (a) a legal right or rights of the plaintiff,
(b) a correlative obligation of the defendant, and (c) an act or omission of
the defendant in violation of said legal right.
18
The complaint filed before the trial court expressly alleged
respondent’s right as payee of the manager’s checks to receive the
amount involved, petitioner’s correlative duty as collecting bank to ensure
that the amount gets to the rightful payee or his order, and a breach of
that duty because of a blatant act of negligence on the part of petitioner
which violated respondent’s rights. 19
Under Section 23 of the Negotiable Instruments Law:
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.
Since the signature of the payee, in the case at bar, was forged to make
it appear that he had made an indorsement in favor of the forger, such
signature should be deemed as inoperative and ineffectual. Petitioner, as
the collecting bank, grossly erred in making payment by virtue of said
forged signature. The payee, herein respondent, should therefore be
allowed to recover from the collecting bank.
The collecting bank is liable to the payee and must bear the loss because
it is its legal duty to ascertain that the payee’s endorsement was genuine
before cashing the check. As a general rule, a bank or corporation who
20 
has obtained possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the amount of the
check from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained. 21
The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful, and when the money had been
collected on the check, the bank or other person or corporation can be
held as for moneys had and received, and the proceeds are held for the
rightful owners who may recover them. 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 the money without indorsement at all
and the act of the bank amounts to conversion of the check. 22
Petitioner’s claim that since there was no delivery yet and respondent
has never acquired possession of the checks, respondent’s remedy is
with the drawer and not with petitioner bank. Petitioner relies on the view
to the effect that where there is no delivery to the payee and no title vests
in him, he ought not to be allowed to recover on the ground that he lost
nothing because he never became the owner of the check and still
retained his claim of debt against the drawer. However, another view in
23 
certain cases holds that even if the absence of delivery is considered,
such consideration is not material. The rationale for this view is that in
said cases the plaintiff uses one action to reach, by a desirable short cut,
the person who ought in any event to be ultimately liable as among the
innocent persons involved in the transaction. In other words, the payee
ought to be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or not. 24
Considering the circumstances in this case, in our view, petitioner could
not escape liability for its negligent acts. Admittedly, respondent Eugene
Ong at the time the fraudulent transaction took place was a depositor of
petitioner bank. 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
25 
treat their client’s 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. In the present case, petitioner was held to be grossly negligent in
26 
performing its duties. As found by the trial court:
xxx (A)t the time the questioned checks were accepted for deposit to
Paciano Tanlimco’s account by defendant bank, defendant bank,
admittedly had in its files specimen signatures of plaintiff who maintained
a current account with them (Exhibits "L-1" and "M-1"; testimony of
Emmanuel Torio). Given the substantial face value of the two checks,
totalling P1,754,787.50, and the fact that they were being deposited by a
person not the payee, the very least defendant bank should have done,
as any reasonable prudent man would have done, was to verify the
genuineness of the indorsements thereon. The Court cannot help but
note that had defendant conducted even the most cursory comparison
with plaintiff’s specimen signatures in its files (Exhibit "L-1" and "M-1") it
would have at once seen that the alleged indorsements were falsified and
were not those of the plaintiff-payee. However, defendant apparently
failed to make such a verification or, what is worse did so but, chose to
disregard the obvious dissimilarity of the signatures. The first omission
makes it guilty of gross negligence; the second of bad faith. In either
case, defendant is liable to plaintiff for the proceeds of the checks in
question. 27
These findings are binding and conclusive on the appellate and the
reviewing courts.
On the second issue, petitioner avers that respondent Ong is barred by
laches for failing to assert his right for recovery from the bank as soon as
after he had exhausted possibilities of settling the matter amicably with
the family of Tanlimco and through the CB, about five months after the
unlawful transaction took place, did he resort to making the demand upon
the petitioner and eventually before the court for recovery of the money
value of the two checks. These acts cannot be construed as undue delay
in or abandonment of the assertion of his rights.
Moreover, the claim of petitioner that respondent should be barred by
laches is clearly a vain attempt to deflect responsibility for its negligent
act.  As explained by the appellate court, it is petitioner which had the last
1âwphi1

he discovered the scam. The lapse of five months before he went to seek clear chance to stop the fraudulent encashment of the subject checks
relief from the bank, according to petitioner, constitutes laches. had it exercised due diligence and followed the proper and regular
banking procedures in clearing checks. As we had earlier ruled, the one
31 

In turn, respondent contends that petitioner presented no evidence to who had the last clear opportunity to avoid the impending harm but failed
support its claim of laches. On the contrary, the established facts of the to do so is chargeable with the consequences thereof. 32

case as found by the trial court and affirmed by the Court of Appeals are
that respondent left no stone unturned to obtain relief from his WHEREFORE, the instant petition is DENIED for lack of merit. The
predicament. assailed decision of the Court of Appeals, sustaining the judgment of the
Regional Trial Court of Manila, is AFFIRMED.
On the matter of delay in reporting the loss, respondent calls attention to
the fact that the checks were issued on May 4, 1976, and on the very Costs against petitioner.
next day, May 5, 1976, these were already credited to the account of
Paciano Tanlimco and presented for payment to Pacific Banking SO ORDERED.
Corporation. So even if the theft of the checks were discovered and
reported earlier, respondent argues, it would not have altered the
situation as the encashment of the checks was consummated within
twenty four hours and facilitated by the gross negligence of the petitioner
bank.28

Laches may be defined as the failure or neglect for an unreasonable and

unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier. It is negligence or omission to
assert a right within a reasonable time, warranting a presumption that the
party entitled thereto has either abandoned or declined to assert it. It
29 

concerns itself with whether or not by reason of long inaction or

inexcusable neglect, a person claiming a right should be barred from
asserting the same, because to allow him to do so would be unjust to the
person against whom such right is sought to be enforced. 30

In the case at bar, it cannot be said that respondent sat on his rights. He
immediately acted after knowing of the forgery by proceeding to seek
help from the Tanlimco family and later the Central Bank, to remedy the
situation and recover his money from the forger, Paciano Tanlimco. Only
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.
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   said:
2
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.
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.   The crossing is general
3
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,   this Court declared that "the effects
5
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."   The proceeds are held for the rightful owner of the payment
6
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 the assurance that it had ascertained the genuineness of all prior
vs. Equitable Banking Corp.,   "the law imposes a duty of diligence on the
9
endorsements.
collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting bank, being We find that the respondent court committed no reversible error in
primarily engaged in banking, holds itself out to the public as the expert holding that the private respondent had a valid cause of action against
on this field, and the law thus holds it to a high standard of conduct." the petitioners and that the latter are indeed liable to her for their
unauthorized encashment of the subject checks. We also agree with the
The petitioners insist that the private respondent has no cause of action reduction of the award of the exemplary damages for lack of sufficient
against them because they have no privity of contract with her. They also evidence to support them.
argue that it was Eddie Reyes, the private respondent's own husband,
who endorsed the checks. WHEREFORE, the petition is DENIED, with costs against the petitioner.
It is so ordered.
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

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.   We approve such
11

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
G.R. No. 149454             May 28, 2004 defendant Yabut who is likewise ORDERED to pay the other half
to plaintiff corporation [Casa Montessori Internationale (CASA)]."4
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs. The assailed Resolution denied all the parties’ Motions for
CASA MONTESSORI INTERNATIONALE LEONARDO T. Reconsideration.
YABUT, respondents.
The Facts
x ----------------------------- x
The facts of the case are narrated by the CA as follows:
G.R. No. 149507             May 28, 2004
"On November 8, 1982, plaintiff CASA Montessori
CASA MONTESSORI INTERNATIONALE, petitioner, International5 opened Current Account No. 0291-0081-01 with
vs. defendant BPI[,] with CASA’s President Ms. Ma. Carina C.
BANK OF THE PHILIPPINE ISLANDS, respondent. Lebron as one of its authorized signatories.

DECISION "In 1991, after conducting an investigation, plaintiff discovered

that nine (9) of its checks had been encashed by a certain Sonny
PANGANIBAN, J.: D. Santos since 1990 in the total amount of ₱782,000.00, on the
following dates and amounts:
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 ‘Check
of integrity and performance from it. Date Amount
No.

Among its obligations in furtherance thereof is knowing the signatures of 1. 839700 April 24, 1990 ₱ 43,400.00
its clients. Depositors are not estopped from questioning wrongful 2. 839459 Nov. 2, 1990 110,500.00
withdrawals, even if they have failed to question those errors in the
statements sent by the bank to them for verification. 3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
The Case
5. 839569 Sept. 23, 1990 52,277.00
Before us are two Petitions for Review  under Rule 45 of the Rules of
1
6. 729149 Mar. 22, 1990 148,000.00
Court, assailing the March 23, 2001 Decision2 and the August 17, 2001
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 63561. The 7. 729129 Mar. 16, 1990 51,015.00
decretal portion of the assailed Decision reads as follows:
8. 839684 Dec. 1, 1990 140,000.00
"WHEREFORE, upon the premises, the decision appealed from 9. 729034 Mar. 2, 1990 98,985.00
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 ₱547,115.00 after Total -- ₱ 782,600.006
deductions subject to REIMBURSEMENT from third party
 "It turned out that ‘Sonny D. Santos’ with account at BPI’s
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 of ₱782,500.007 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 CASA’s 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 attorney’s 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 attorney’s 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 ₱547,115.00 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, attorney’s fees,
and interest be awarded?
The Court’s 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:
"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 real13 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 another’s
name with intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawer’s
signature on the check.
First, both the CA17 and the RTC18 found that Respondent Yabut himself
had voluntarily admitted, through an Affidavit, that he had forged the
drawer’s 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
Report24 that the PNP Crime Laboratory had earlier issued to BPI -- the
drawee bank -- upon the latter’s request.
Indeed, we respect and affirm the RTC’s 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 self-incrimination.
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 Constitution28 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-incrimination34 under Section 17 of Article
III35 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 aspect37 -- 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 Rights40 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
rights43 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 executed46 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 self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless
clear, positive and convincing.
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 fact51 -- 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 drawer’s 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 drawer’s
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 drawer’s 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 court’s 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 evidence61 nor creates an unfavorable
inference against it.62 Such failure merely authorizes the introduction of
secondary evidence63 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 drawer’s
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 expert’s 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 drawer’s 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 diligence73 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
required78 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.
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 confirmation81 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 procedure84 -- the results of which its client-depositors are
neither interested in nor privy to -- to test the details of transactions and
balances in the bank’s records.85 Evidential matter obtained from
independent sources outside a bank only serves to provide greater
assurance of reliability86 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
detected87 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
right90 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 presumption95 that whenever one has, by one’s 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 former’s 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 BPI’s error even
after the lapse of the period given in the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 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 drawer’s
account103 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;110 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 Unit111 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 liable112 for the "negligence of its officers or agents when acting
within the course and scope of their employment."113 It must bear the loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is
recognized as an exception114 to the general rule that a forged signature
is wholly inoperative.115 Contrary to BPI’s 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 practices116 of private entities. The relationship that
arises therefrom is both legal and moral.117 It begins with the execution of
the engagement letter118 that embodies the terms and conditions of the
audit and ends with the fulfilled expectation of the auditor’s ethical119 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
opinion121 expressed therein.122 The auditor does not assume the role of
employee or of management in the client’s conduct of operations123 and is
never under the control or supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He handled its
monthly bank reconciliations and had access to all relevant documents
and checkbooks.126 In him was reposed the client’s127 trust and
confidence128 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 client’s 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 1991134 -- 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 Clearly then, Yabut was able to perpetrate the wrongful act through no
account with BPI was not personal but corporate, and she could not be fault of CASA. If auditors may be held liable for breach of contract and
expected to monitor closely all its finances. A preschool teacher charged negligence,146 with all the more reason may they be charged with the
with molding the minds of the youth cannot be burdened with the perpetration of fraud upon an unsuspecting client. CASA had the
intricacies or complexities of corporate existence. discretion to pursue BPI alone under the NIL, by reason of expediency or
munificence or both. Money paid under a mistake may rightfully be
There is also a cutoff period such that checks issued during a given recovered,147 and under such terms as the injured party may choose.
month, but not presented for payment within that period, will not be
reflected therein.135 An experienced auditor with intent to defraud can Third Issue:
easily conceal any devious scheme from a client unwary of the
accounting processes involved by manipulating the cash balances on Award of Monetary Claims
record -- especially when bank transactions are numerous, large and
frequent. CASA could only be blamed, if at all, for its unintelligent choice Moral Damages Denied
in the selection and appointment of an auditor -- a fault that is not
tantamount to negligence.
We deny CASA’s claim for moral damages.
Negligence is not presumed, but proven by whoever alleges it.136 Its mere
In the absence of a wrongful act or omission,148 or of fraud or bad
existence "is not sufficient without proof that it, and no other
faith,149 moral damages cannot be awarded.150 The adverse result of an
cause,"137 has given rise to damages.138 In addition, this fault is common
action does not per se make the action wrongful, or the party liable for it.
to, if not prevalent among, small and medium-sized business entities,
One may err, but error alone is not a ground for granting such
thus leading the Professional Regulation Commission (PRC), through the
damages.151 While no proof of pecuniary loss is necessary therefor -- with
Board of Accountancy (BOA), to require today not only accreditation for
the amount to be awarded left to the court’s discretion152 -- the claimant
the practice of public accountancy,139 but also the registration of firms in
must nonetheless satisfactorily prove the existence of its factual
the practice thereof. In fact, among the attachments now required upon
basis153 and causal relation154 to the claimant’s act or omission.155
registration are the code of good governance140 and a sworn statement on
adequate and effective training.141
Regrettably, in this case CASA was unable to identify the particular
instance -- enumerated in the Civil Code -- upon which its claim for moral
The missing checks were certainly reported by the bookkeeper142 to the
damages is predicated.156 Neither bad faith nor negligence so gross that it
accountant143 -- her immediate supervisor -- and by the latter to the
amounts to malice157 can be imputed to BPI. Bad faith, under the law,
auditor. However, both the accountant and the auditor, for reasons
"does not simply connote bad judgment or negligence;158 it imports a
known only to them, assured the bookkeeper that there were no
dishonest purpose or some moral obliquity and conscious doing of a
irregularities.
wrong, a breach of a known duty through some motive or interest or ill
will that partakes of the nature of fraud."159
The bookkeeper144 who had exclusive custody of the checkbooks145 did
not have to go directly to CASA’s president or to BPI. Although she
As a general rule, a corporation -- being an artificial person without
rightfully reported the matter, neither an investigation was conducted nor
feelings, emotions and senses, and having existence only in legal
a resolution of it was arrived at, precisely because the person at the top
contemplation -- is not entitled to moral damages,160 because it cannot
of the helm was the culprit. The vouchers, invoices and check stubs in
experience physical suffering and mental anguish.161 However, for breach
support of all check disbursements could be concealed or fabricated --
of the fiduciary duty required of a bank, a corporate client may claim such
even in collusion -- and management would still have no way to verify its
damages when its good reputation is besmirched by such breach, and
cash accountabilities.
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. CASA’s mere allegation or
supposition thereof, without any sufficient evidence on record,164 is not
enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary
damages cannot be recovered as a matter of right.167 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
Attorney’s 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 attorney’s 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 latter’s interest,172 or where the court deems
it just and equitable,173 attorney’s fees may be recovered. In the present
case, BPI persistently denied the claim of CASA under the NIL to recredit
the latter’s 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 attorney’s fees.
Interest Allowed
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
filing175 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 compounded180 annually to make up for the cost of
money181 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 is AFFIRMED with modification: BPI is held liable
for ₱547,115, 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 attorney’s fees of ten
percent (10%) thereof, subject to reimbursement from Respondent Yabut
for the entire amount, excepting attorney’s 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. 139130             November 27, 2002
RAMON K. ILUSORIO, petitioner,
vs.
HON. COURT OF APPEALS, and THE MANILA BANKING
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision1 promulgated on
January 28, 1999 by the Court of Appeals in CA-G.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,
Katherine2 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 petitioner’s statement that his
signatures in the checks were forged.4 Mr. Razon’s 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 above-mentioned
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 bank’s
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:
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.
Defendant’s 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
petitioner’s 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 AFFIDAVIT-COMPLAINT.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 an estafa case against petitioner’s 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 payee’s 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 2313 of the Negotiable Instruments Law is
inapplicable, considering that the fact of forgery was never proven.
Lastly, the bank negates petitioner’s 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
plaintiff’s 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 appellant’s
unquestioned signatures. The evidence further 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, petitioner’s 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 bank’s employees in the present case did not
have a hint as to Eugenio’s 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 TMBC’s employees exercised
due diligence before encashing the checks. Its verifiers first verified the
drawer’s 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 us19 and entitled to utmost
respect20 and even finality. We find no palpable error that would warrant a
reversal of the appellate court’s assessment of facts anchored upon the
evidence on record.
Petitioner’s 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 bank’s 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 plaintiff’s 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.
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 petitioner’s 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.

Petitioner’s reliance on Associated Bank vs. Court of Appeals23 and

Philippine Bank of Commerce vs. CA24 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 Bank’s personnel diligently performed their duties,
having compared the signature in the checks from the specimen
signatures on record and satisfied themselves that it was petitioner’s.
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 Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company ("FEBTC") at
1  and found that the last blank check was missing. He reported the matter
the latter’s Bel-Air, Makati branch. The sole signatory to Samsung
2  to Jong, who then proceeded to the bank. Jong learned of the
Construction’s account was Jong Kyu Lee ("Jong"), its Project
Manager, while the checks remained in the custody of the company’s
3  forged. The Bank Manager reputedly told Jong that he would be
accountant, Kyu Yong Lee ("Kyu"). 4 reimbursed for the amount of the check. Jong proceeded to the police
On 19 March 1992, a certain Roberto Gonzaga presented for payment
FEBTC Check No. 432100 to the bank’s branch in Bel-Air, Makati. The
check, payable to cash and drawn against Samsung Construction’s
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 Construction’s account.
After ascertaining there were enough funds to cover the check, she
5 
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 Jong’s signature.
Confirming the identity of Gonzaga, 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 bank’s
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 Jong’s signature, Kyu perused the checkbook
7 
encashment of the check, and realized that his signature had been
8 
station and consulted with his lawyers. Subsequently, a criminal case for
9 
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. In 11 
response, FEBTC said that it was still conducting an investigation on the
matter. Unsatisfied, Samsung Construction filed a Complaint on 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 attorney’s fees. The case was
12 
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 Jong’s 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 Jong’s signature had
been forged on the check. On the other hand, FEBTC, which had sought
the assistance of the Philippine National Police (PNP), presented
14 
Rosario C. Perez, a document examiner from the PNP Crime Laboratory.
She testified that her findings showed that Jong’s 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 Jong’s signature on the check was forged and accordingly
directed the bank to pay or credit back to Samsung Construction’s
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 attorney’s 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, reversing the RTC Decision and absolving FEBTC from any
16 
liability. The Court of Appeals held that the contradictory findings of the
NBI and the PNP created doubt as to whether there was
forgery. Moreover, the appellate court also held that assuming there was
17 
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. The Court of Appeals invoked the ruling
18 
in PNB v. National City Bank of New York that, if a loss, which must be
19 
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 RTC’s 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. If payment is made, the
21 
drawee cannot charge it to the drawer’s account. The traditional
justification for the result is that the drawee is in a superior position to
detect a forgery because he has the maker’s signature and is expected to
know and compare it. The rule has a healthy cautionary effect on banks
22 
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
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 bank’s 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 depositor’s order. When the bank
pays a check, on which the depositor’s 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 depositor’s.
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 depositor’s
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 plaintiff’s credit and
which the bank had paid out on checks bearing forgeries of the
plaintiff’s 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 customer’s account by
specifying whose signature is necessary on checks that are
chargeable against the customer’s 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 customer’s 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. On the premise
26 
that Jong’s 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. The forgery may be so near like the genuine as to defy
27 
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.
This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponent’s 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 court’s 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." This Court, in examining the signatures, makes
31 
a similar finding. The PNP expert excused the noted "differences" by
asserting that they were mere "variations," which are normal deviations
found in writing. Yet the RTC, which had the opportunity to examine the
32 
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," as if the mere
33 
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 (90º) 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. However, unlike the questioned signature, the upward strokes of
35 
eight (8) of these signatures are looped, while the upward stroke of the
seventh forms a severe forty-five degree (45º) with the previous stroke.
36 
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
Again, the PNP examiner downplayed the uniqueness of the final stroke
in the questioned signature as a mere variation, the same excuse she
38  that of the persons whose signature was forged.
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 expert’s. 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. She had 40 
trained with the Royal Hongkong Police Laboratory and is a member of
the International Association for Identification. As of the time she
41 
testified, she had examined more than fifty to fifty-five thousand
questioned documents, on an average of fifteen to twenty documents a
day. In comparison, PNP document examiner Perez admitted to having
42 
examined only around five hundred documents as of her testimony.
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. She
44 
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. The NBI found that there were significant
45 
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 examiner’s 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 Jong’s 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
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
Jong’s testimony that the signature on the check was not his. The
47 
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. Jong’s testimony is supported by the
43
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 or who put into the power of the third person to perpetuate
49 
the wrong." Applying these rules, the Court of Appeals determined that it
50 
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. Yet, we are unable to conclude that Samsung Construction
52 
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 party’s
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 Court’s pronouncement in PCI Bank
v. Court of Appeals applies in this case, to wit:
53 
[T]he 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 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
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," and no contrary version was presented by FEBTC. However, such
55  of the banker, or if by any act of his own he has at all contributed
testimony cannot prove that the checks were indeed kept in a safety box,
as Jong’s 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 Construction’s part. The
presumption remains that every person takes ordinary care of his
concerns, and that the ordinary course of business has been
56 
followed. Negligence is not presumed, but must be proven by him who
57 
alleges it. While the complaint was lodged at the instance of Samsung
58 
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," but necessarily so, as it seeks to overcome a presumption in law.
59 
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,  as relied upon by the Court of Appeals, deserves
60 
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
to induce the banker's negligence, then he may lose his right to
cast the loss upon the banker. (Emphasis supplied)
61 
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 depositor’s signature and collect on
the checks from the bank. And for another, in point of fact Samsung
62 
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, which was also cited by
64 
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 drawer’s 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 drawer’s 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 drawer’s
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 bank’s
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 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. Moreover, the check
68 
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. These circumstances are already suspicious if
69 
taken independently, much more so if they are evaluated in concurrence.
Given the shadiness attending Gonzaga’s 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. She
70 
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." Even assuming that such personal verification is tantamount to
71 
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. However, the only proof of such allegations is the testimony
72 
of Gemma Velez, who also testified that she did not know Sempio
personally, and had met Sempio for the first time only on the day the
73 
check was encashed. In fact, Velez had to inquire with the other officers
74 
of the bank as to whether Sempio was actually known to the employees
of the bank. Obviously, Velez had no personal knowledge as to the past
75 

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 client’s 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. A bank is liable, irrespective of its good faith, in paying a
77 

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. 173259               July 25, 2011
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
F.F. CRUZ and CO., INC. Respondent.
DECISION
DEL CASTILLO, J.:
As between a bank and its depositor, where the bank’s negligence is the
proximate cause of the loss and the depositor is guilty of contributory
negligence, the greater proportion of the loss shall be borne by the bank.
This Petition for Review on Certiorari seeks to reverse and set aside the
Court of Appeal’s January 31, 2006 Decision1 in CA-G.R. CV No. 81349,
which modified the January 30, 2004 Decision2 of the Regional Trial
Court of Manila City, Branch 46 in Civil Case No. 97-84010, and the June
26, 2006 Resolution3 denying petitioner’s motion for reconsideration.
Factual Antecedents
The antecedents are aptly summarized by the appellate court:
In its complaint, it is alleged that [respondent F.F. Cruz & Co., Inc.]
(hereinafter FFCCI) opened savings/current or so-called combo account
No. 0219-830-146 and dollar savings account No. 0219-0502-458-6 with
[petitioner Philippine National Bank] (hereinafter PNB) at its Timog
Avenue Branch. Its President Felipe Cruz (or Felipe) and Secretary-
Treasurer Angelita A. Cruz (or Angelita) were the named signatories for
the said accounts.
The said signatories on separate but coeval dates left for and returned
from the Unites States of America, Felipe on March 18, 1995 until June
10, 1995 while Angelita followed him on March 29, 1995 and returned
ahead on May 9, 1995.
While they were thus out of the country, applications for cashier’s and
manager’s [checks] bearing Felipe’s [signature] were presented to and
both approved by the PNB. The first was on March 27, 1995 for
₱9,950,000.00 payable to a certain Gene B. Sangalang and the other
one was on April 24, 1995 for ₱3,260,500.31 payable to one Paul
Bautista. The amounts of these checks were then debited by the PNB
against the combo account of [FFCCI].
When Angelita returned to the country, she had occasion to examine the
PNB statements of account of [FFCCI] for the months of February to
August 1995 and she noticed the deductions of ₱9,950,000.00 and
₱3,260,500.31. Claiming that these were unauthorized and fraudulently
made, [FFCCI] requested PNB to credit back and restore to its account
the value of the checks. PNB refused, and thus constrained [FFCCI] filed
the instant suit for damages against the PNB and its own accountant
Aurea Caparas (or Caparas).
In its traverse, PNB averred lack of cause of action. It alleged that it
exercised due diligence in handling the account of [FFCCI]. The
applications for manager’s check have passed through the standard bank
procedures and it was only after finding no infirmity that these were given
due course. In fact, it was no less than Caparas, the accountant of
[FFCCI], who confirmed the regularity of the transaction. The delay of
[FFCCI] in picking up and going over the bank statements was the
proximate cause of its self-proclaimed injury. Had [FFCCI] been
conscientious in this regard, the alleged chicanery would have been
detected early on and Caparas effectively prevented from absconding
with its millions. It prayed for the dismissal of the complaint.4
Regional Trial Court’s Ruling
The trial court ruled that F.F. Cruz and Company, Inc. ( FFCCI) was guilty
of negligence in clothing Aurea Caparas (Caparas) with authority to make
decisions on and dispositions of its account which paved the way for the
fraudulent transactions perpetrated by Caparas; that, in practice, FFCCI
waived the two-signature requirement in transactions involving the
subject combo account so much so that Philippine National Bank (PNB)
could not be faulted for honoring the applications for manager’s check
even if only the signature of Felipe Cruz appeared thereon; and that
FFCCI was negligent in not immediately informing PNB of the fraud.
On the other hand, the trial court found that PNB was, likewise, negligent
in not calling or personally verifying from the authorized signatories the
legitimacy of the subject withdrawals considering that they were in huge
amounts. For this reason, PNB had the last clear chance to prevent the
unauthorized debits from FFCCI’s combo account. Thus, PNB should
bear the whole loss –
WHEREFORE, judgment is hereby rendered ordering defendant [PNB] to
pay plaintiff [FFCCI] ₱13,210,500.31 representing the amounts debited
against plaintiff’s account, with interest at the legal rate computed from
the filing of the complaint plus costs of suit.
IT IS SO ORDERED.5
Court of Appeal’s Ruling
On January 31, 2006, the CA rendered the assailed Decision affirming
with modification the Decision of the trial court, viz:
WHEREFORE, the appealed Decision is AFFIRMED with
the MODIFICATION that [PNB] shall pay [FFCCI] only 60% of the actual
damages awarded by the trial court while the remaining 40% shall be
borne by [FFCCI].
SO ORDERED.6
The appellate court ruled that PNB was negligent in not properly verifying
the genuineness of the signatures appearing on the two applications for
manager’s check as evidenced by the lack of the signature of the bank
verifier thereon. Had this procedure been followed, the forgery would
have been detected.
Nonetheless, the appellate court found FFCCI guilty of contributory
negligence because it clothed its accountant/bookkeeper Caparas with
apparent authority to transact business with PNB. In addition, FFCCI
failed to timely examine its monthly statement of account and report the
discrepancy to PNB within a reasonable period of time to prevent or
recover the loss. FFCCI’s contributory negligence, thus, mitigated the
bank’s liability. Pursuant to the rulings in Philippine Bank of Commerce v.
Court of Appeals7 and The Consolidated Bank & Trust Corporation v.
Court of Appeals,8 the appellate court allocated the damages on a 60-40
ratio with the bigger share to be borne by PNB.
From this decision, both FFCCI and PNB sought review before this Court.
On August 17, 2006, FFCCI filed its petition for review on certiorari which
was docketed as G.R. No. 173278.9 On March 7, 2007, the Court issued
a Resolution10 denying said petition. On June 13, 2007, the Court issued
another Resolution11 denying FFCCI’s motion for reconsideration. In
denying the aforesaid petition, the Court ruled that FFCCI essentially
raises questions of fact which are, as a rule, not reviewable under a Rule
45 petition; that FFCCI failed to show that its case fell within the
established exceptions to this rule; and that FFCCI was guilty of
contributory negligence. Thus, the appellate court correctly mitigated
PNB’s liability.
On July 13, 2006, PNB filed its petition for review on certiorari which is
the subject matter of this case.
Issue
Whether the Court of Appeals seriously erred when it found PNB guilty of
negligence.12
Our Ruling
We affirm the ruling of the CA.
PNB is guilty of negligence.
Preliminarily, in G.R. No. 173278, we resolved with finality13 that FFCCI is
guilty of contributory negligence, thus, making it partly liable for the loss
(i.e., as to 40% thereof) arising from the unauthorized withdrawal of
₱13,210,500.31 from its combo account. The case before us is, thus,
limited to PNB’s alleged negligence in the subject transactions which the
appellate court found to be the proximate cause of the loss, thus, making
it liable for the greater part of the loss (i.e., as to 60% thereof) pursuant to
our rulings in Philippine Bank of Commerce v. Court of
Appeals14 and The Consolidated Bank & Trust Corporation v. Court of
Appeals.15
PNB contends that it was not negligent in verifying the genuineness of
the signatures appearing on the subject applications for manager’s
check. It claims that it followed the standard operating procedure in the
verification process and that four bank officers examined the signatures
and found the same to be similar with those found in the signature cards
of FFCCI’s authorized signatories on file with the bank.
PNB raises factual issues which are generally not proper for review under
a Rule 45 petition.  While there are exceptions to this rule, we find none
1avvphi1
applicable to the present case. As correctly found by the appellate court, Corporation v. Court of Appeals, 25 where the bank’s negligence is the
PNB failed to make the proper verification because the applications for proximate cause of the loss and the depositor is guilty of contributory
the manager’s check do not bear the signature of the bank verifier. PNB negligence, we allocated the damages between the bank and the
concedes the absence16 of the subject signature but argues that the same depositor on a 60-40 ratio. We apply the same ruling in this case
was the result of inadvertence. It posits that the testimonies of Geronimo considering that, as shown above, PNB’s negligence is the proximate
Gallego (Gallego), then the branch manager of PNB Timog Branch, and cause of the loss while the issue as to FFCCI’s contributory negligence
Stella San Diego (San Diego), then branch cashier, suffice to establish has been settled with finality in G.R. No. 173278. Thus, the appellate
that the signature verification process was duly followed. court properly adjudged PNB to bear the greater part of the loss
consistent with these rulings.
We are not persuaded.
WHEREFORE, the petition is DENIED. The January 31, 2006 Decision
First, oral testimony is not as reliable as documentary and June 26, 2006 Resolution of the Court of Appeals in CA-G.R. CV No.
evidence.17 Second, PNB’s own witness, San Diego, testified that in the 81349 are AFFIRMED.
verification process, the principal duty to determine the genuineness of
the signature devolved upon the account analyst.18 However, PNB did not Costs against petitioner.
present the account analyst to explain his or her failure to sign the box for
signature and balance verification of the subject applications for SO ORDERED.
manager’s check, thus, casting doubt as to whether he or she did indeed
verify the signatures thereon. Third, we cannot fault the appellate court
for not giving weight to the testimonies of Gallego and San Diego
considering that the latter are naturally interested in exculpating
themselves from any liability arising from the failure to detect the
forgeries in the subject transactions. Fourth, Gallego admitted that PNB’s
employees received training on detecting forgeries from the National
Bureau of Investigation.19 However, Emmanuel Guzman, then NBI senior
document examiner, testified, as an expert witness, that the forged
signatures in the subject applications for manager’s check contained
noticeable and significant differences from the genuine signatures of
FFCCI’s authorized signatories and that the forgeries should have been
detected or observed by a trained signature verifier of any bank.20

Given the foregoing, we find no reversible error in the findings of the

appellate court that PNB was negligent in the handling of FFCCI’s combo
account, specifically, with respect to PNB’s failure to detect the forgeries
in the subject applications for manager’s check which could have
prevented the loss. As we have often ruled, the banking business is
impressed with public trust.21 A higher degree of diligence is imposed on
banks relative to the handling of their affairs than that of an ordinary
business enterprise.22 Thus, the degree of responsibility, care and
trustworthiness expected of their officials and employees is far greater
than those of ordinary officers and employees in other enterprises.23 In
the case at bar, PNB failed to meet the high standard of diligence
required by the circumstances to prevent the fraud. In Philippine Bank of
Commerce v. Court of Appeals24 and The Consolidated Bank & Trust
G.R. No. 158143               September 21, 2011
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Petitioner,
vs.
ANTONIO B. BALMACEDA and ROLANDO N. RAMOS, Respondents.
DECISION
BRION, J.:
Before us is a petition for review on certiorari,1 filed by the Philippine
Commercial International Bank2 (Bank or PCIB), to reverse and set aside
the decision3 dated April 29, 2003 of the Court of Appeals (CA) in CA-
G.R. CV No. 69955. The CA overturned the September 22, 2000
decision of the Regional Trial Court (RTC) of Makati City, Branch 148, in
Civil Case No. 93-3181, which held respondent Rolando Ramos liable to
PCIB for the amount of ₱895,000.00.
FACTUAL ANTECEDENTS
On September 10, 1993, PCIB filed an action for recovery of sum of
money with damages before the RTC against Antonio Balmaceda, the
Branch Manager of its Sta. Cruz, Manila branch. In its complaint, PCIB
alleged that between 1991 and 1993, Balmaceda, by taking advantage of
his position as branch manager, fraudulently obtained and encashed 31
Manager’s checks in the total amount of Ten Million Seven Hundred
Eighty Two Thousand One Hundred Fifty Pesos (₱10,782,150.00).
On February 28, 1994, PCIB moved to be allowed to file an amended
complaint to implead Rolando Ramos as one of the recipients of a portion
of the proceeds from Balmaceda’s alleged fraud. PCIB also increased the
number of fraudulently obtained and encashed Manager’s checks to 34,
in the total amount of Eleven Million Nine Hundred Thirty Seven
Thousand One Hundred Fifty Pesos (₱11,937,150.00). The RTC granted
this motion.
Since Balmaceda did not file an Answer, he was declared in default. On
the other hand, Ramos filed an Answer denying any knowledge of
Balmaceda’s scheme. According to Ramos, he is a reputable
businessman engaged in the business of buying and selling fighting
cocks, and Balmaceda was one of his clients. Ramos admitted receiving
money from Balmaceda as payment for the fighting cocks that he sold to
Balmaceda, but maintained that he had no knowledge of the source of
Balmaceda’s money.
THE RTC DECISION
On September 22, 2000, the RTC issued a decision in favor of PCIB, with
the following dispositive portion:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiff and against the defendants as follows:
1. Ordering defendant Antonio Balmaceda to pay the amount of
₱11,042,150.00 with interest thereon at the legal rate from [the]
date of his misappropriation of the said amount until full restitution
shall have been made[.]
2. Ordering defendant Rolando Ramos to pay the amount of
₱895,000.00 with interest at the legal rate from the date of
misappropriation of the said amount until full restitution shall have
been made[.]
3. Ordering the defendants to pay plaintiff moral damages in the
sum of ₱500,000.00 and attorney’s fees in the amount of ten
(10%) percent of the total misappropriated amounts sought to be
recovered.
4. Plus costs of suit.
SO ORDERED.4
From the evidence presented, the RTC found that Balmaceda, by taking
undue advantage of his position and authority as branch manager of the
Sta. Cruz, Manila branch of PCIB, successfully obtained and
misappropriated the bank’s funds by falsifying several commercial
documents. He accomplished this by claiming that he had been
instructed by one of the Bank’s corporate clients to purchase Manager’s
checks on its behalf, with the value of the checks to be debited from the
client’s corporate bank account. First, he would instruct the Bank staff to
prepare the application forms for the purchase of Manager’s checks,
payable to several persons. Then, he would forge the signature of the
client’s authorized representative on these forms and sign the forms as
PCIB’s approving officer. Finally, he would have an authorized officer of
PCIB issue the Manager’s checks. Balmaceda would subsequently ask
his subordinates to release the Manager’s checks to him, claiming that
the client had requested that he deliver the checks.5 After receiving the
Manager’s checks, he encashed them by forging the signatures of the
payees on the checks.
In ruling that Ramos acted in collusion with Balmaceda, the RTC noted
that although the Manager’s checks payable to Ramos were crossed
checks, Balmaceda was still able to encash the checks.6 After Balmaceda
encashed three of these Manager’s checks, he deposited most of the
money into Ramos’ account.7 The RTC concluded that from the
₱11,937,150.00 that Balmaceda misappropriated from PCIB,
₱895,000.00 actually went to Ramos. Since the RTC disbelieved Ramos’
allegation that the sum of money deposited into his Savings Account
(PCIB, Pasig branch) were proceeds from the sale of fighting cocks, it
held Ramos liable to pay PCIB the amount of ₱895,000.00.
THE COURT OF APPEALS DECISION
On appeal, the CA dismissed the complaint against Ramos, holding that
no sufficient evidence existed to prove that Ramos colluded with
Balmaceda in the latter’s fraudulent manipulations.8
According to the CA, the mere fact that Balmaceda made Ramos the
payee in some of the Manager’s checks does not suffice to prove that
Ramos was complicit in Balmaceda’s fraudulent scheme. It observed that
other persons were also named as payees in the checks that Balmaceda
acquired and encashed, and PCIB only chose to go after Ramos. With
PCIB’s failure to prove Ramos’ actual participation in Balmaceda’s fraud,
no legal and factual basis exists to hold him liable.
The CA also found that PCIB acted illegally in freezing and debiting
₱251,910.96 from Ramos’ bank account. The CA thus decreed:
WHEREFORE, the appeal is granted. The Decision of the trial court
rendered on September 22, 2000[,] insofar as appellant Ramos is
concerned, is SET ASIDE, and the complaint below against him is
DISMISSED.
Appellee is hereby ordered to release the amount of ₱251,910.96 to
appellant Ramos plus interest at [the] legal rate computed from
September 30, 1993 until appellee shall have fully complied therewith.
Appellee is likewise ordered to pay appellant Ramos the following:
a) ₱50,000.00 as moral damages
b) ₱50,000.00 as exemplary damages, and
c) ₱20,000.00 as attorney’s fees.
No costs.
SO ORDERED.9
THE PETITION
In the present petition, PCIB avers that:
I
THE APPELLATE COURT ERRED IN HOLDING THAT THERE
IS NO EVIDENCE TO HOLD THAT RESPONDENT RAMOS
ACTED IN COMPLICITY WITH RESPONDENT BALMACEDA
II
THE APPELLATE COURT ERRED IN ORDERING THE
PETITIONER TO RELEASE THE AMOUNT OF ₱251,910.96 TO
RESPONDENT RAMOS AND TO PAY THE LATTER MORAL
AND EXEMPLARY DAMAGES AND ATTORNEY’S FEES10
PCIB contends that the circumstantial evidence shows that Ramos had
knowledge of, and acted in complicity with Balmaceda in, the
perpetuation of the fraud. Ramos’ explanation that he is a businessman
and that he received the Manager’s checks as payment for the fighting
cocks he sold to Balmaceda is unconvincing, given the large sum of
money involved. While Ramos presented evidence that he is a reputable
businessman, this evidence does not explain why the Manager’s checks
were made payable to him in the first place.
PCIB maintains that it had the right to freeze and debit the amount of
₱251,910.96 from Ramos’ bank account, even without his consent, since
legal compensation had taken place between them by operation of law.
PCIB debited Ramos’ bank account, believing in good faith that Ramos
was not entitled to the proceeds of the Manager’s checks and was
actually privy to the fraud perpetrated by Balmaceda. PCIB cannot thus
be held liable for moral and exemplary damages.
OUR RULING
We partly grant the petition.
At the outset, we observe that the petition raises mainly questions of fact
whose resolution requires the re-examination of the evidence on record.
As a general rule, petitions for review on certiorari only involve questions
of law.11 By way of exception, however, we can delve into evidence and
the factual circumstance of the case when the findings of fact in the
tribunals below (in this case between those of the CA and of the RTC)
are conflicting. When the exception applies, we are given latitude to
review the evidence on record to decide the case with finality.12
Ramos’ participation in Balmaceda’s scheme not proven
From the testimonial and documentary evidence presented, we find it
beyond question that Balmaceda, by taking advantage of his position as
branch manager of PCIB’s Sta. Cruz, Manila branch, was able to apply
for and obtain Manager’s checks drawn against the bank account of one
of PCIB’s clients. The unsettled question is whether Ramos, who
received a portion of the money that Balmaceda took from PCIB, should
also be held liable for the return of this money to the Bank.
PCIB insists that it presented sufficient evidence to establish that Ramos
colluded with Balmaceda in the scheme to fraudulently secure Manager’s
checks and to misappropriate their proceeds. Since Ramos’ defense –
anchored on mere denial of any participation in Balmaceda’s wrongdoing
– is an intrinsically weak defense, it was error for the CA to exonerate
Ramos from any liability.
In civil cases, the party carrying the burden of proof must establish his
case by a preponderance of evidence, or evidence which, to the court, is
more worthy of belief than the evidence offered in opposition.13 This
Court, in Encinas v. National Bookstore, Inc.,14 defined "preponderance of
evidence" in the following manner:
"Preponderance of evidence" is the weight, credit, and value of the
aggregate evidence on either side and is usually considered to be
synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." Preponderance of evidence is a phrase
which, in the last analysis, means probability of the truth. It is evidence
which is more convincing to the court as worthy of belief than that which
is offered in opposition thereto.
The party, whether the plaintiff or the defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to
obtain a favorable judgment, subject to the overriding rule that the burden
to prove his cause of action never leaves the plaintiff. For the defendant,
an affirmative defense is one that is not merely a denial of an essential
ingredient in the plaintiff's cause of action, but one which, if established,
will constitute an "avoidance" of the claim.15
Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence, its
positive assertion that Ramos conspired with Balmaceda in perpetrating
the latter’s scheme to defraud the Bank. In PCIB’s estimation, it
successfully accomplished this through the submission of the following
evidence:
[1] Exhibits "A," "D," "PPPP," "QQQQ," and "RRRR" and their
submarkings, the application forms for MCs, show that [these
MCs were applied for in favor of Ramos;]
[2] Exhibits "K," "N," "SSSS," "TTTT," and "UUUU" and their
submarkings prove that the MCs were issued in favor of x x x
Ramos[; and]
[3] [T]estimonies of the witness for [PCIB].16
We cannot accept these submitted pieces of evidence as sufficient to
satisfy the burden of proof that PCIB carries as plaintiff.
On its face, all that PCIB’s evidence proves is that Balmaceda used
Ramos’ name as a payee when he filled up the application forms for the
Manager’s checks. But, as the CA correctly observed, the mere fact that
Balmaceda made Ramos the payee on some of the Manager’s checks is
not enough basis to conclude that Ramos was complicit in Balmaceda’s
fraud; a number of other people were made payees on the other
Manager’s checks yet PCIB never alleged them to be liable, nor did the
Bank adduce any other evidence pointing to Ramos’ participation that
would justify his separate treatment from the others. Also, while Ramos is
Balmaceda’s brother-in-law, their relationship is not sufficient, by itself, to
render Ramos liable, absent concrete proof of his actual participation in xxxx
the fraudulent scheme.
Q: After the accomplishment of this application form as you stated Mrs.
Moreover, the evidence on record clearly shows that Balmaceda acted witness, do you know what happened to the application form?
on his own when he applied for the Manager’s checks against the bank
account of one of PCIB’s clients, as well as when he encashed the A: Before that application form is processed it goes to several stages.
fraudulently acquired Manager’s checks. Here for example this was signed supposed to be by the client and his
signature representing that, he certified the signature based on their
Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the records to be authentic.
relevant events, testified that Balmaceda committed all the acts
necessary to obtain the unauthorized Manager’s checks – from filling up Q: When you said he to whom are you referring to?
the application form by forging the signature of the client’s representative,
to forging the signatures of the payees in order to encash the checks. As A: Mr. Balmaceda. And at the same time he approved the transaction.
Mrs. Costes stated in her testimony:
xxxx
Q: I am going into [these] particular instances where you said that Mr.
Balmaceda [has] been making unauthorized withdrawals from particular
Q: Do you know if the corresponding checks applied for in the application
account of a client or a client of yours at Sta. Cruz branch. Would you tell
forms were issued?
us how he effected his unauthorized withdrawals?
A: Yes sir.
A: He prevailed upon the domestic remittance clerk to prepare the
application of a Manager’s check which [has] been debited to a client’s
account. This particular Manager’s check will be payable to a certain Q: Could you please show us where these checks are now, the one
individual thru his account as the instruction of the client. applied for in Exhibit "A" which is in the amount of ₱150,000.00, where is
the corresponding check?
Q: What was your findings in so far as the particular alleged instruction of
a client is concerned? A: Rolando Ramos dated December 26, 1991 and one of the signatories
with higher authority, this is Mr. Balmaceda’s signature.
A: We found out that he forged the signature of the client.
Q: In other words he is likewise approving signatory to the Manager’s
check?
Q: On that particular application?
A: Yes sir. This is an authority that the check [has] been encashed.
A: Yes sir.
Q: In other words this check issued to Rolando Ramos dated December
Q: Showing to you several applications for Manager’s Check previously
26, 1991 is a cross check but nonetheless he allowed to encash by
attached as Annexes "A, B, C, D and E["] of the complaint. Could you
granting it.
please tell us where is that particular alleged signature of a client
applying for the Manager’s check which you claimed to have been forged
by Mr. Balmaceda? Could you please show us?

A: Here sir. ATTY. PACES: Witness pointing to an initial of the defendant Antonio
Balmaceda, the notation cross check.
A: And this is his signature.
xxxx
Q: How about the check corresponding to Exhibit E-2 which is an
application for ₱125,000.00 for a certain Rolando Ramos. Do you have
the check?
A: Yes sir.
ATTY. PACES: Witness producing a check dated December 19, 1991 the
amount of ₱125,000.00 payable to certain Rolando Ramos.
Q: Can you tell us whether the same modus operandi was ad[o]pted by
Mr. Balmaceda in so far as he is concerned?
A: Yes sir he is also the right signer and he authorized the cancellation of
the cross check.17 (emphasis ours)
xxxx
Q: These particular checks [Mrs.] witness in your findings, do you know if
Mr. Balmaceda [has] again any participation in these checks?
A: He is also the right signer and approved officer and he was authorized
to debit on file.
xxxx
Q: And do you know if these particular checks marked as Exhibit G-2 to
triple FFF were subsequently encashed?
A: Yes sir.
Q: Were you able to find out who encashed?
A: Mr. Balmaceda himself and besides he approved the encashment
because of the signature that he allowed the encashment of the check.
xxxx
Q: Do you know if this particular person having in fact withdraw of
received the proceeds of [these] particular checks, the payee?
A: No sir.
Q: It was all Mr. Balmaceda dealing with you?
A: Yes sir.
Q: In other words it would be possible that Mr. Balmaceda himself gotten
the proceeds of the checks by forging the payees signature?
A: Yes sir.18 (emphases ours)
Mrs. Nilda Laforteza, the Commercial Account Officer of PCIB’s Sta.
Cruz, Manila branch at the time the events of this case occurred,
confirmed Mrs. Costes’ testimony by stating that it was Balmaceda who
forged Ramos’ signature on the Manager’s checks where Ramos was the
payee, so as to encash the amounts indicated on the checks.19 Mrs.
Laforteza also testified that Ramos never went to the PCIB, Sta. Cruz,
Manila branch to encash the checks since Balmaceda was the one who
deposited the checks into Ramos’ bank account. As revealed during Mrs.
Laforteza’s cross-examination:
Q: Mrs. Laforteza, these checks that were applied for by Mr. Balmaceda,
did you ever see my client go to the bank to encash these checks?
A: No it is Balmaceda who is depositing in his behalf.
Q: Did my client ever call up the bank concerning this amount?
A: Yes he is not going to call PCIBank Sta. Cruz branch because his
account is maintained at Pasig.
Q: So Mr. Balmaceda was the one who just remitted or transmitted the
amount that you claimed [was sent] to the account of my client?
A: Yes.20 (emphases ours)
Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to
prove that Ramos encashed a Manager’s check for ₱480,000.00, could
only testify that the money was deposited into Ramos’ PCIB bank
account. She could not attest that Ramos himself presented the
Manager’s check for deposit in his bank account.21 These testimonies
clearly dispute PCIB’s theory that Ramos was instrumental in the
encashment of the Manager’s checks.
We also find no reason to doubt Ramos’ claim that Balmaceda deposited
these large sums of money into his bank account as payment for the
fighting cocks that Balmaceda purchased from him. Ramos presented
two witnesses – Vicente Cosculluela and Crispin Gadapan – who testified
that Ramos previously engaged in the business of buying and selling
fighting cocks, and that Balmaceda was one of Ramos’ biggest clients.
Quoting from the RTC decision, PCIB stresses that Ramos’ own witness
and business partner, Cosculluela, testified that the biggest net profit he
and Ramos earned from a single transaction with Balmaceda amounted
to no more than ₱100,000.00, for the sale of approximately 45 fighting
cocks.22 In PCIB’s view, this testimony directly contradicts Ramos’
assertion that he received approximately ₱400,000.00 from his biggest
transaction with Balmaceda. To PCIB, the testimony also renders
questionable Ramos’ assertion that Balmaceda deposited large amounts
of money into his bank account as payment for the fighting cocks.
On this point, we find that PCIB misunderstood Cosculluela’s testimony.
A review of the testimony shows that Cosculluela specifically referred to
the net profit that they earned from the sale of the fighting cocks;23 PCIB
apparently did not take into account the capital, transportation and other
expenses that are components of these transactions. Obviously, in sales
transactions, the buyer has to pay not only for the value of the thing sold,
but also for the shipping costs and other incidental costs that accompany
the acquisition of the thing sold. Thus, while the biggest net profit that
Ramos and Cosculluela earned in a single transaction amounted to no
more than ₱100,000.00,24 the inclusion of the actual acquisition costs of
the fighting cocks, the transportation expenses (i.e., airplane tickets from
Bacolod or Zamboanga to Manila) and other attendant expenses could
account for the ₱400,000.00 that Balmaceda deposited into Ramos’ bank
account.
Given that PCIB failed to establish Ramos’ participation in Balmaceda’s
scheme, it was not even necessary for Ramos to provide an explanation
for the money he received from Balmaceda. Even if the evidence
adduced by the plaintiff appears stronger than that presented by the
defendant, a judgment cannot be entered in the plaintiff’s favor if his
evidence still does not suffice to sustain his cause of action;25 to reiterate,
a preponderance of evidence as defined must be established to achieve
this result.
PCIB itself at fault as employer
In considering this case, one point that cannot be disregarded is the
significant role that PCIB played which contributed to the perpetration of
the fraud. We cannot ignore that Balmaceda managed to carry out his
fraudulent scheme primarily because other PCIB employees failed to
carry out their assigned tasks – flaws imputable to PCIB itself as the
employer.
Ms. Analiza Vega, an accounting clerk, teller and domestic remittance
clerk working at the PCIB, Sta. Cruz, Manila branch at the time of the
incident, testified that Balmaceda broke the Bank’s protocol when he
ordered the Bank’s employees to fill up the application forms for the
Manager’s checks, to be debited from the bank account of one of the
bank’s clients, without providing the necessary Authority to Debit from the
client.26 PCIB also admitted that these Manager’s checks were
subsequently released to Balmaceda, and not to the client’s
representative, based solely on Balmaceda’s word that the client had
tasked him to deliver these checks.27
Despite Balmaceda’s gross violations of bank procedures – mainly in the
processing of the applications for Manager’s checks and in the releasing
of the Manager’s checks – Balmaceda’s co-employees not only turned a
blind eye to his actions, but actually complied with his instructions. In this
way, PCIB’s own employees were unwitting accomplices in
Balmaceda’s fraud.
Another telling indicator of PCIB’s negligence is the fact that it allowed
Balmaceda to encash the Manager’s checks that were plainly crossed
checks. A crossed check is one where two parallel lines are drawn
across its face or across its corner.28 Based on jurisprudence, the
crossing of a check has the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be
negotiated only once — to the one who has an account with the 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 and he must inquire
if he received the check pursuant to this purpose; otherwise, he is not a
holder in due course.29 In other words, the crossing of a check is a
warning that the check should be deposited only in the account of the
payee. When a check is crossed, it is the duty of the collecting bank to
ascertain that the check is only deposited to the payee’s account.30 In
complete disregard of this duty, PCIB’s systems allowed Balmaceda to
encash 26 Manager’s checks which were all crossed checks, or checks
payable to the "payee’s account only."
The General Banking Law of 200031 requires of banks the highest
standards of integrity and performance. The banking business is
impressed with public interest. Of paramount importance is the trust and
confidence of the public in general in the banking industry. Consequently,
the diligence required of banks is more than that of a Roman pater
familias or a good father of a family.32 The highest degree of diligence is
expected.33
While we appreciate that Balmaceda took advantage of his authority and
position as the branch manager to commit these acts, this circumstance
cannot be used to excuse the manner the Bank – through its employees
–handled its clients’ bank accounts and thereby ignored established bank
procedures at the branch manager’s mere order. This lapse is made all
the more glaring by Balmaceda’s repetition of his modus operandi 33
more times in a period of over one year by the Bank’s own estimation.
With this kind of record, blame must be imputed on the Bank itself and its
systems, not solely on the weakness or lapses of individual employees.
Principle of unjust enrichment not applicable
PCIB maintains that even if Ramos did not collude with Balmaceda, it still
has the right to recover the amounts unjustly received by Ramos
pursuant to the principle of unjust enrichment. This principle is embodied
in Article 22 of the Civil Code which provides:
Article 22. 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 or legal ground, shall return the
same to him.
To have a cause of action based on unjust enrichment, we explained in
University of the Philippines v. Philab Industries, Inc.34 that:
Unjust enrichment claims do not lie simply because one party benefits
from the efforts or obligations of others, but instead it must be shown that
a party was unjustly enriched in the sense that the term unjustly could
mean illegally or unlawfully.
Moreover, to substantiate a claim for unjust enrichment, the claimant
must unequivocally prove that another party knowingly received
something of value to which he was not entitled and that the state of
affairs are such that it would be unjust for the person to keep the
benefit. Unjust enrichment is a term used to depict result or effect of
failure to make remuneration of or for property or benefits received under
circumstances that give rise to legal or equitable obligation to account for
them; to be entitled to remuneration, one must confer benefit by mistake,
fraud, coercion, or request. Unjust enrichment is not itself a theory of
reconvey. Rather, it is a prerequisite for the enforcement of the doctrine
of restitution.35 (emphasis ours)
Ramos cannot be held liable to PCIB on account of unjust enrichment
simply because he received payments out of money secured by fraud
from PCIB. To hold Ramos accountable, it is necessary to prove that he
received the money from Balmaceda, knowing that he (Ramos) was not
entitled to it. PCIB must also prove that Ramos, at the time that he
received the money from Balmaceda, knew that the money was acquired
through fraud. Knowledge of the fraud is the link between Ramos and
PCIB that would obligate Ramos to return the money based on the
principle of unjust enrichment.
However, as the evidence on record indicates, Ramos accepted the
deposits that Balmaceda made directly into his bank account, believing
that these deposits were payments for the fighting cocks that Balmaceda
had purchased. Significantly, PCIB has not presented any evidence
proving that Ramos participated in, or that he even knew of, the
fraudulent sources of Balmaceda’s funds.
PCIB illegally froze and debited Ramos’ assets
We also find that PCIB acted illegally in freezing and debiting Ramos’
bank account. In BPI Family Bank v. Franco,36 we cautioned against the
unilateral freezing of bank accounts by banks, noting that:
More importantly, [BPI Family Bank] does not have a unilateral right to
freeze the accounts of Franco based on its mere suspicion that the funds
therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant [BPI Family Bank], or any bank for that
matter, the right to take whatever action it pleases on deposits which it
supposes are derived from shady transactions, would open the
floodgates of public distrust in the banking industry.37
We see no legal merit in PCIB’s claim that legal compensation took place
between it and Ramos, thereby warranting the automatic deduction from
Ramos’ bank account. For legal compensation to take place, two
persons, in their own right, must first be creditors and debtors of each
other.38 While PCIB, as the depositary bank, is Ramos’ debtor in the
amount of his deposits, Ramos is not PCIB’s debtor under the evidence
the PCIB adduced. PCIB thus had no basis, in fact or in law, to
automatically debit from Ramos’ bank account.
On the award of damages
Although PCIB’s act of freezing and debiting Ramos’ account is unlawful,
we cannot hold PCIB liable for moral and exemplary damages. Since a
contractual relationship existed between Ramos and PCIB as the
depositor and the depositary bank, respectively, the award of moral
damages depends on the applicability of Article 2220 of the Civil Code,
which provides:
We deem it just and equitable, however, to uphold the award of
attorney’s fees in Ramos’ favor. Taking into consideration the time and
efforts involved that went into this case, we increase the award of
attorney’s fees from ₱20,000.00 to ₱75,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the
decision of the Court of Appeals dated April 29, 2003 in CA-G.R. CV No.
69955 with the MODIFICATION that the award of moral and exemplary
damages in favor of Rolando N. Ramos is DELETED, while the award of
attorney’s fees is INCREASED to ₱75,000.00. Costs against the
Philippine Commercial International Bank.
SO ORDERED.

Article 2220. Willful injury to property may be a legal ground for awarding
moral damages if the court should find that, under the circumstances,
such damages are justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in bad faith.
[emphasis ours]

Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious commission
of a wrong; it partakes of the nature of fraud.39

As the facts of this case bear out, PCIB did not act out of malice or bad
faith when it froze Ramos’ bank account and subsequently debited the
amount of ₱251,910.96 therefrom. While PCIB may have acted hastily
and without regard to its primary duty to treat the accounts of its
depositors with meticulous care and utmost fidelity,40 we find that its
actions were propelled more by the need to protect itself, and not out of
malevolence or ill will. One may err, but error alone is not a ground for
granting moral damages.41

We also disallow the award of exemplary damages. Article 2234 of the

Civil Code requires a party to first prove that he is entitled to moral,
temperate or compensatory damages before he can be awarded
exemplary damages.  Since no reason exists to award moral damages,
1âwphi1

so too can there be no reason to award exemplary damages.

G.R. No. 126000 October 7, 1998
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM
(MWSS), petitioner,
vs.
COURT OF APPEALS, HON. PERCIVAL LOPEZ, AYALA
CORPORATION and AYALA LAND, INC., respondents.
G.R. No. 128520 october 7, 1998
METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, petitioner,
vs.
HON. PERCIVAL MANDAP LOPEZ, CAPITOL HILLS GOLF AND
COUNTRY CLUB INC., SILHOUETTE TRADING CORPORATION, and
PABLO ROMAN JR., respondents.
MARTINEZ, J.:
These are consolidated petitions for review emanating from Civil Case
No. Q-93-15266 of the Regional Trial Court of Quezon City, Branch 78,
entitled "Metropolitan Waterworks and Sewerage System (hereafter
MWSS) vs. Capitol Hills Golf & Country Club Inc. (hereafter, CHGCCI),
STC (hereafter, SILHOUETTE), Ayala Corporation, Ayala Land, Inc.
(hereafter AYALA) Pablo Roman, Jr., Josefina A. Roxas, Jesus Hipolito,
Alfredo Juinito, National Treasurer of the Philippines and the Register of
Deeds of Quezon City."
From the voluminous pleadings and other documents submitted by the
parties and their divergent styles in the presentation of the facts, the
basic antecedents attendant herein are as follows:
Sometime in 1965, petitioner MWSS (then known as NAWASA) leased
around one hundred twenty eight (128) hectares of its land (hereafter,
subject property) to respondent CHGCCI (formerly the International
Sports Development Corporation) for twenty five (25) years and
renewable for another fifteen (15) years or until the year 2005, with the
stipulation allowing the latter to exercise a right of first refusal should the
subject property be made open for sale. The terms and conditions of
respondent CHGCCI's purchase thereof shall nonetheless be subject to
presidential approval.
Pursuant to Letter of instruction (LOI) No. 440 issued on July 29,1976 by
then President Ferdinand E. Marcos directing petitioner MWSS to
negotiate the cancellation of the MWSS-CHGCCI lease agreement for
the disposition of the subject property, Oscar Ilustre, then General
Manager of petitioner MWSS, sometime in November of 1980 informed
respondent CHGCCI, through its president herein respondent Pablo
Roman, Jr., of its preferential right to buy the subject property which was
up for sale. Valuation thereof was to be made by an appraisal company
of petitioner MWSS' choice, the Asian Appraisal Co., Inc. which, on
January 30, 1981, pegged a fair market value of P40.00 per square
meter or a total of P53,800,000.00 for the subject property.
Upon being informed that petitioner MWSS and respondent CHGCCI had
already agreed in principle on the purchase of the subject property,
President Marcos expressed his approval of the sale as shown in his
marginal note on the letter sent by respondents Jose Roxas and Pablo
Roman, Jr. dated December 20, 1982.
The Board of Trustees of petitioner MWSS thereafter passed Resolution
36-83, approving the sale of the subject property in favor of respondent
SILHOUETTE, as assignee of respondent CHGCCI, at the appraised
value given by Asian Appraisal Co., Inc. Said Board Resolution reads:
NOW, THEREFORE, BE IT RESOLVED, as it is hereby
resolved, that in accordance with Section 3, Par. (g) of the
MWSS Charter and subject to the approval of the
President of the Philippines, the sale of a parcel of land
located in Balara, Quezon City, covered by TCT No.
36069 of the Registry of Deeds of Quezon City,
containing an area of ONE HUNDRED TWENTY SEVEN
(127.313) hectares more or less, which is the remaining
portion of the area under lease after segregating a
BUFFER ZONE already surveyed along the undeveloped
area near the treatment plant and the developed portion
of the CHGCCI golf course, to SILHOUETTE TRADING
CORPORATION as Assignee of Capitol Hills Golf &
Country Club, Inc., at FORTY (P40.00) PESOS per
square meter, be and is hereby approved.
 BE IT RESOLVED FURTHER, that the General Manager
be authorized, as he is hereby authorized to sign for and
in behalf of the MWSS the contract papers and other
pertinent documents relative thereto.
The MWSS-SILHOUETTE sales agreement eventually pushed through.
Per the Agreement dated May 11, 1983 covering said purchase, the total
price for the subject property is P50,925,200, P25 Million of which was to
be paid upon President Marcos' approval of the contract and the balance
to be paid within one (1) year from the transfer of the title to respondent
SILHOUETTE as vendee with interest at 12% per annum. The balance
was also secured by an irrevocable letter of credit. A Supplemental
Agreement was forged between petitioner MWSS and respondent
SILHOUETTE on August 11, 1983 to accurately identify the subject
property.
Subsequently, respondent SILHOUETTE, under a deed of sale dated
July 26, 1984, sold to respondent AYALA about sixty-seven (67) hectares
of the subject property at P110.00 per square meter. Of the total price of
around P74 Million, P25 Million was to be paid by respondent AYALA
directly to petitioner MWSS for respondent SILHOUETTE's account and
P2 Million directly to respondent SILHOUETTE. P11,600,000 was to be
paid upon the issuance of title in favor of respondent AYALA, and the
remaining balance to be payable within one (1) year with 12% per annum
interest.
Respondent AYALA developed the land it purchased into a prime
residential area now known as the Ayala Heights Subdivision.
Almost a decade later, petitioner MWSS on March 26, 1993 filed an
action against all herein named respondents before the Regional Trial
Court of Quezon City seeking for the declaration of nullity of the MWSS-
SILHOUETTE sales agreement and all subsequent conveyances
involving the subject property, and for the recovery thereof with damages.
Respondent AYALA filed its answer pleading the affirmative defenses of
(1) prescription, (2) laches, (3) waiver/estoppel/ratification, (4) no cause
of action, (5) non-joinder of indispensable parties, and (6) non-jurisdiction
of the court for non-specification of amount of damages sought.
On June 10, 1993; the trial court issued an Order dismissing the
complaint of petitioner MWSS on grounds of prescription, laches,
estoppel and non-joinder of indispensable parties.
Petitioner MWSS's motion for reconsideration of such Order was denied,
forcing it to seek relief from the respondent Court where its appeal was
docketed as CA-G.R. CV No. 50654. It assigned as errors the following:
I. The court a quo committed manifest
serious error and gravely abused its
discretion when it ruled that plaintiffs
cause of action is for annulment of
contract which has already prescribed in
the face of the clear and unequivocal
recitation of six causes of action in the
complaint, none of which is for annulment.
II. The lower court erred and exceeded its
jurisdiction when, contrary to the rules of
court and jurisprudence, it treated and
considered the affirmative defenses of
Ayalas — defenses not categorized by the
rules as grounds for a motion to dismiss
— as grounds of a motion to dismiss
which justify the dismissal of the
complaint.
III. The lower court abused its discretion
and exceeded its jurisdiction when it
favorably acted on Ayala's motion for
preliminary hearing of affirmative defenses
(motion to dismiss) by dismissing the
complaint without conducting a hearing or
otherwise requiring the Ayalas to present
evidence on the factual moorings of their
motion.
IV. The lower court acted without
jurisdiction and committed manifest error
when it resolved factual issues and made
findings and conclusions of facts all in
favor of the Ayalas in the absence of any
evidence presented by the parties.
V. The court a quo erred when, contrary
to the rules and jurisprudence, it
prematurely ruled that laches and
 estoppel bar the complaint as against
Ayalas or that otherwise the alleged failure
to implead indispensable parties dictates
the dismissal of the complaint.
In the meantime, respondents CHGCCI and Roman filed their own
motions to hear their affirmative defenses which were identical to those
adduced by respondent AYALA. For its part, respondent SILHOUETTE
filed a similarly grounded motion to dismiss.
Ruling upon these motions, the trial court issued an order dated
December 13, 1993 denying all of them. The motions for reconsideration
of the respondents concerned met a similar fate in the May 9, 1994 Order
of the trial court. They thus filed special civil actions for certiorari before
the respondent Court which were docketed as CA-G.R. SP Nos. 34605,
34718 and 35065 and thereafter consolidated with CA-G.R. CV No.
50694 for disposition.
Respondent court, on August 19, 1996, rendered the assailed decision,
the dispositive portion of which reads:
WHEREFORE, judgment is rendered:
1.) DENYING the petitions for writ of certiorari for lack of
merit; and
2.) AFFIRMING the order of the lower court dismissing
the complaint against the appellees Ayalas.
SO ORDERED.
Petitioner MWSS appealed to this Court that portion of the respondent
Court's decision affirming the trial court's dismissal of its complaint
against respondent AYALA, docketed as G.R. No. 126000. The portion
dismissing the petition for certiorari (CA-GR Nos. 34605, 347718 and
35065) of respondents Roman, CHGCCI and SILHOUETTE, however,
became final and executory for their failure to appeal therefrom.
Nonetheless, these respondents were able to thereafter file before the
trial court another motion to dismiss grounded, again, on prescription
which the trial court in an Order of October 1996 granted.
This prompted petitioner MWSS to file another petition for review of said
trial court Order before this Court and docketed as G.R. No. 128520. On
motion of petitioner MWSS, this Court in a Resolution dated December 3,
1997 directed the consolidation of G.R. Nos. 126000 and 128520.
The errors assigned by petitioner MWSS in CA-GR No. 126000 are:
I.
In holding, per the questioned Decision dated 19 August
1996, that plaintiffs cause of action is for annulment of
contract which has already prescribed in the face of the
clear and unequivocal recitation of six causes of action in
the complaint, none of which is for annulment, and in
effect affirming the dismissal by the respondent judge of
the complaint against respondent Ayalas. This conclusion
of respondent CH is, with due respect, manifestly
mistaken and legally absurd.
II.
In failing to consider that the complaint recited six
alternative causes of action, such that the insufficiency of
one cause — assuming there is such insufficiency —
does not render insufficient the other causes and the
complaint itself. The contrary ruling in this regard by
respondent CA is founded entirely on speculation and
conjecture and is constitutive of grave abuse of discretion.
In G.R. No. 128520, petitioner MWSS avers that:
I.
The court of origin erred in belatedly granting
respondent's motions to dismiss which are but a rehash, a
disqualification, of their earlier motion for preliminary
hearing of affirmative defense / motion to dismiss. These
previous motions were denied by the lower court, which
denial the respondents raised to the Court of Appeals by
way of perfection for certiorari, which petitions in turn
were dismissed for lack of merit by the latter court. The
correctness and validity of the lower court's previous
orders denying movant's motion for preliminary hearing of
affirmative defense / motion to dismiss has accordingly
been settled already with finality and cannot be disturbed
or challenged anew at this instance of defendant's new
but similarly anchored motions to dismiss, without
committing procedural heresy causative of miscarriage of
justice.
II.
The lower court erred in not implementing correctly the
decision of the Court of Appeal. After all, respondents'
own petitions for certiorari questioning the earlier denial
of their motion for preliminary hearing of affirmative
defense / motion to dismiss were dismissed by the Court
of Appeal, in the process of affirming the validity and
legality of such denial by the court a quo. The dismissal
of the respondents' petitions are embodied in the
dispositive portion of the said decision of the Court of
Appeals dated 19 August 1996. The lower court cannot
choose to disregard such decretal aspect of the decision
and instead implement an obiter dictum.
III.
That part of the decision of the decision of the Court of
Appeals resolving the issue of prescription attendant to
the appeal of plaintiff against the Ayalas, has been
appealed by plaintiff to the Supreme Court by way of a
petition for review on certiorari. Not yet being final and
executory, the lower court erred in making capital out of
the same to dismiss the case against the other
defendants, who are the respondents herein.
IV.
The lower court erred in holding, per the questioned
orders, that plaintiff's cause of action is for annulment of
contract which has already prescribed in the face of the
clear and unequivocal recitation of six causes of action in
the complaint, none of which is for annulment. This
conclusion of public respondent is manifestly mistaken
and legally absurd.
V.
The court a quo erred in failing to consider the complaint
recites six alternative causes of action, such that the
insufficiency of one cause — assuming there is such
insufficiency — does not render insufficient the other
cause and the complaint itself. The contrary ruling in this
regard by public respondent is founded entirely on
speculation and conjecture and is constitutive of grave
abuse of discretion.
In disposing of the instant petition, this Court shall dwell on the more
crucial grounds upon which the trial court and respondent based their
respective rulings unfavorable to petitioner MWSS; i.e., prescription,
laches, estoppel/ratification and non-joinder of indispensable parties.
RE: Prescription
Petitioner MWSS claims as erroneous both the lower courts' uniform
finding that the action has prescribed, arguing that its complaint is one to
declare the MWSS-SILHOUETTE sale, and all subsequent conveyances
of the subject property, void which is imprescriptible.
We disagree.
The very allegations in petitioner MWSS' complaint show that the subject
property was sold through contracts which, at most, can be considered
only as voidable, and not void. Paragraph 12 of the complaint reads in
part:
12. . . . .
The plaintiff has been in continuous, peaceful and public
possession and ownership of the afore-described
properties, the title (TCT No. [36069] 199170) thereto,
including its derivative titles TCT Nos. 213872 and
307655, having been duly issued in its name. However,
as a result of fraudulent and illegal acts of herein
defendants, as described in the paragraphs hereinafter
following, the original of said title/s were cancelled and in
lieu thereof new titles were issued to corporate
defendant/s covering subject 127.9271 hectares. . . . .
Paragraph 34 alleges:
 34. Sometime thereafter, clearly influenced by the
premature if not questionable approval by Mr. Marcos of a
non-existent agreement, and despite full knowledge that
both the assessed and market value of subject property
were much higher, the MWSS Board of Trusties illegally
passed an undated resolution ("Resolution No. 36-83"),
approving the "sale" of the property to CHGCCI at
P40/sq.m. and illegally authorizing General Manager
Ilustre to sign the covering contract.
This "resolution" was signed by Messrs. Jesus Hipolito as
Chairman; Oscar Ilustre, as Vice Chairman; Aflredo Junio,
as Member; and Silvestre Payoyo, as Member; . . . .
Paragraph 53 states:
53. Defendants Pablo Roman, Jr., Josefino Cenizal, and
Jose Roxas as well as defendant corporations (CHGCCI,
STC and Ayala) who acted through the former and their
other principal officers, knowingly induced and caused
then President Marcos and the former officers of plaintiff
MWSS to enter into the aforesaid undated "Agreement"
which are manifestly and grossly disadvantageous to the
government and which gave the same defendants
unwarranted benefits, i.e., the ownership and dominion of
the afore-described property of plaintiff.
Paragraph 54 avers:
54. Defendants Jesus Hipolito and Alfredo Junio, then
public officers, together with the other public officers who
are now deceased (Ferdinand Marcos, Oscar Ilustre, and
Sivestre Payoyo) knowingly allowed themselves to be
persuaded, induced and influenced to approve and/or
enter into the aforementioned "Agreements" which are
grossly and manifestly disadvantageous to the
MWSS/government and which bestowed upon the other
defendants the unwarranted benefit/ownership of subject
property.
The three elements of a contract — consent, the object, and the cause of
obligation  are all present. It cannot be otherwise argued that the
1 petitioner MWSS' complaint was failed.
contract had for its object the sale of the property and the cause or
consideration thereof was the price to be paid (on the part of
respondents CHGCCI/SILHOUETTE) and the land to be sold (on the
part of petitioner MWSS). Likewise, petitioner MWSS' consent to the
May 11, 1983 and August 11, 1983 Agreements is patent on the face
of these documents and on its own resolution No. 36-83.
As noted by both lower courts, petitioner MWSS admits that it
consented to the sale of the property, with the qualification that
such consent was allegedly unduly influenced by the President
Marcos. Taking such allegation to be hypothetically true, such
would have resulted in only voidable contracts because all three
elements of a contract, still obtained nonetheless. The alleged
vitiation of MWSS' consent did not make the sale null and void ab
initio. Thus, "a contract where consent is given through mistake,
violence, intimidation, undue influence or fraud, is voidable"  .
2
Contracts "where consent is vitiated by mistake, violence,
intimidation, undue influence or fraud" are voidable or annullable  .3
These are not void as —
Concepts of Voidable Contracts. — Voidable or
anullable contracts are existent, valid, and binding,
although they can be annulled because of want of
capacity or vitiated consent of the one of the parties,
but before annulment, they are effective and
obligatory between parties. Hence, it is valid until it is
set aside and its validity may be assailed only in an
action for that purpose. They can be confirmed or
ratified. 
4
As the contracts were voidable at the most, the four year
prescriptive period under Art. 1391 of the New Civil Code will apply.
This article provides that the prescriptive period shall begin in the
cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases", and "in case of mistake or fraud,
from the time of the discovery of the same time".
Hypothetically admitting that President Marcos unduly influenced
the sale, the prescriptive period to annul the same would have
begun on February 26, 1986 which this Court takes judicial notice of
as the date President Marcos was deposed. Prescription would have
set in by February 26, 1990 or more than three years before
However, if petitioner MWSS' consent was vitiated by fraud, then the
prescriptive period commenced upon discovery. Discovery
commenced from the date of the execution of the sale documents
as petitioner was party thereto. At the least, discovery is deemed to
have taken place on the date of registration of the deeds with the
register of Deeds as registration is constructive notice to the
world.  Given these two principles on discovery, the prescriptive
5
period commenced in 1983 as petitioner MWSS actually knew of the
sale, or, in 1984 when the agreements were registered and titles
thereafter were issued to respondent SILHOUTTE. At the latest, the
action would have prescribed by 1988, or about five years before
the complaint was instituted. Thus, in Aznar vs. Bernard 6, this
Court held that:
Lastly, even assuming that the petitioners had indeed
failed to raise the affirmative defense of prescription
in a motion to dismiss or in an appropriate pleading
(answer, or amended or supplemental answer) and an
amendment would no longer be feasible, still
prescription, if apparent on the face of the complaint,
may be favorably considered. In the case at bar, the
private respondents admit in their complaint that the
contract or real estate mortgage which they alleged to
be fraudulent and which had been foreclosed, giving
rise to this controversy with the petitioners, was
executed on July 17, 1978, or more than eight long
years before the commencement of the suit in the
court a quo, on September 15, 1986. And an action
declare a contract null and void on the ground of
fraud must be instituted within four years. Extinctive
prescription is thus apparent on the face of the
complaint itself as resolved by the Court.
Petitioner MWSS further contends that prescription does not apply
as its complaint prayed not for the nullification of voidable contracts
but for the declaration of nullity of void ab initio contracts which are
imprescriptible. This is incorrect, as the prayers in a complaint are
not determinative of what legal principles will operate based on the
factual allegations of the complaint. And these factual allegations,
assuming their truth, show that MWSS consented to the sale, only
that such consent was purportedly vitiated by undue influence or
fraud. Therefore, the rules on prescription will operate. Even if
petitioner MWSS asked for the declaration of nullity of these
contracts, the prayers will not be controlling as only the factual
allegations in the complaint determine relief. "(I)t is the material
allegations of fact in the complaint, not the legal conclusion made
therein or the prayer that determines the relief to which the plaintiff
is entitled"  . Respondent court is thus correct in holding that:
7
x x x           x x x          x x x
The totality then of those allegations in the complaint
makes up a case of a voidable contract of sale — not
a void one. The determinative allegations are those
that point out that the consent of MWSS in the
Agreement of Sale was vitiated either by fraud or
undue for the declaration of nullity of the said
contract because the Complaint says no. Basic is the
rule however that it is the body and not the caption
nor the prayer of the Complaint that determines the
nature of the action. True, the caption and prayer of
the Complaint state that the action is for a judicial
declaration of nullity of a contract, but alas, as
already pointed out, its body unmistakably alleges
only a voidable contract. One cannot change the real
nature of an action adopting a different nomenclature
any more than one can change gin into whisky by just
replacing the label on the bottle with that of the
latter's and calling it whisky. No matter what, the
liquid inside remains gin.
x x x           x x x          x x x
Petitioner MWSS also theorizes that the May 11, 1983 MWSS-
SILHOUTTE Agreement and the August 11, 1983 Supplemental
Agreement were void ab initio because the "initial agreement" from
which these agreements emanated was executed "without the
knowledge, much less the approval" of petitioner MWSS through its
Board of Trustees. The "initial agreement" referred to in petitioner
MWSS' argument is the December 20, 1982 letter of respondents
Roxas and Roman, Jr. to President Marcos where the authors
mentioned that they had reached an agreement with petitioner's
then general manager, Mr. Oscar Ilustre. Petitioner MWSS maintains
that Mr. Ilustre was not authorized to enter into such "initial
agreement", contrary to Art. 1874 of the New Civil Code which
provides that "when a sale of a parcel of land or any interest therein
is through an agent, the authority of the latter shall be in writing
otherwise the sale shall be void." It then concludes that since its
Res. No. 36-83 and the May 11, 1983 and August 11, 1983
Agreements are "fruits" of the "initial agreement" (for which Mr.
Ilustre was allegedly not authorized in writing), all of these would
have been also void under Art. 1422 of NCC, which provides that a
contract which is the direct result of a pronounced illegal contract,
is also void and inexistent."
The argument does not impress. The "initial agreement" reflected in
the December 20, 1982 letter of respondent Roman to Pres. Marcos,
is not a sale under Art. 1874. Since the nature of the "initial
agreement" is crucial, we
quotes   the letter in full:
8
We respectfully approach Your Excellency in all
humility and in the spirit of the Yuletide Season. We
have explained to Your Excellency when you allowed
us the honor to see you, that the negotiations with
MWSS which the late Pablo R. Roman initiated way
back in 1975, with your kind approval, will finally be
concluded.
We have agreed in principle with Mr. Oscar Ilustre on
the terms of the sale as evidenced by the following:
1. Our written agreement
to hire Asian Appraisal
Company to appraise the
entire leased area which
then be the basis for the
negotiations of the
purchase price of the
property; and
2. Our exchange of
communications
wherein made a counter-
offer and our acceptance
counter-offer.
However, we were informed by Mr. Ilustre that only
written instruction from Your Excellency will allow us
to finally sign the Agreement.
In sum, our Agreement is for the purchase price of
FIFTY-SEVEN MILLION TWO-HUNDRED-FORTY
THOUSAND PESOS (P57,240,000) for the entire
leased area of 135 hectares; TWENTY-SEVEN
MILLION PESOS (P27,000,000) payable upon approval
of the contract by Your Excellency and the balance of
THIRTY MILLION TWO HUNDRED FORTY THOUSAND
PESOS (P30,240,000) after one (1) year inclusive of a
12% interest.
We believe that this arrangement is fair and equitable
to both parties considering that the value of the land
was appraised by a reputable company and
independent appraisal company jointly
commissioned by both parties and considering
further that Capitol Hills has still a 23-year lien on the
property by virtue of its existing lease contract with
MWSS.
We humbly seek your instruction, Your Excellency
and please accept our families' sincere wish for a
Merry Christmas and a Happy New Year to you and
the First Family.
The foregoing does not document a sale, but at most, only the
conditions proposed by respondent Roman to enter into one. By the
terms thereof, it refers only to an "agreement in principle".
Reflecting a future consummation, the letter mentions "negotiations
with MWSS (which) with your (Marcos) kind approval, will finally be
concluded". It must likewise be noted that presidential approval had
yet to be obtained. Thus, the "initial agreement" was not a sale as it
did not in any way transfer ownership over the property. The
proposed terms had yet to be approval by the President and the
agreement in principle still had to be formalized in a deed of sale.
Written authority as is required under Art. 1834 of the New Civil
Code, was not needed at the point of the "initial agreement".
Verily, the principle on prescription of actions is designed to cover
situations such as the case at bar, where there have been a series
of transfers to innocent purchasers for value. To set aside these
transactions only to accommodate a party who has slept on his
rights is anathema to good order. 9
 RE: Laches
Even assuming, for argument's sake, that the allegations in the
complaint establish the absolute nullity of the assailed contracts
and hence imprescriptible, the complaint can still be dismissed on
the ground of laches which is different from prescription. This
Court, as early as 1966, has distinguished these two concepts in
this wise:
. . . (T)he defense of laches applies independently of
prescription. Laches is different from the statute of
limitations. Prescription is concerned with the fact of
delay, whereas laches, is concerned with the effect of
delay. Prescription is a matter of time; laches is
principally a question of inequity of permitting a claim
to be enforced, this inequity being founded on some
change in the condition of the property or the relation
of the parties. Prescription is statutory; laches is not.
Laches applies in inequity, whereas prescription
applies at law. Prescription is based on fixed-time;
laches is not.  10
Thus, the prevailing doctrine is that the right to have a
contract declared void ab initio may be barred by laches
although not barred by prescription.  11
It has, for all its elements are present, viz:
(1) conduct on the part
of the defendant, or one
under whom he claims,
giving rise to the
situation that led to the
complaint and for which
the complaint seeks a
remedy;
(2) delay in asserting the
complainant's rights,
having had knowledge
or notice of the
defendant's conduct and
having been afforded an
opportunity to institute a
suit;
(3) lack of knowledge or
notice on the part of the
defendant that the
complainant would
assert the right on which
he bases his suit; and
(4) injury or prejudice to
the defendant in the
event relief is accorded
to the complainant, or
the suit is not held
barred. 12
There is no question on the presence of the first element. the main
thrust of petitioner MWSS's complaint is to bring to the fore what it
claims as fraudulent and/or illegal acts of the respondents in the
acquisition of the subject property.
The second element of delay is evident from the fact that petitioner
tarried for almost ten (10) years from the conclusion of the sale
sometime in 1983 before formally laying claim to the subject
property in 1993.
The third element is present as can be deduced from the allegations
in the complaint that petitioner MWSS (a) demanded for a
downpayment for no less than three times; (b) accepted
downpayment for P25 Million; and (c) accepted a letter of credit for
the balance. The pertinent paragraphs in the complaint thus read:
38. In a letter dated September 19, 1983, for failure of
CHGCCI to pay on time, Mr. Ilustre demanded
payment of the downpayment of P25 Million which
was due as of 18 April 1983. A copy of this letter is
hereto attached as Annex "X";
39. Again, in a letter dated February 7, 1984, then
MWSS Acting General Manager Aber Canlas
demanded payment from CHGCCI of the purchase
 price long overdue. A copy of this letter is hereto
attached as Annex "Y";
40. Likewise, in a letter dated March 14, 1984, Mr.
Canlas again demanded from CHGCCI payment of the
price. A copy of this demand letter is hereto attached
as Annex "Z";
41. Thereafter, in a letter dated July 27, 1984, another
entity, defendant Ayala Corporation, through SVP
Renato de la Fuente, paid with a check the long
overdue downpayment of P25,000,000.00 of
STC/CHGCCI. Likewise a domestic stand-by letter of
credit for the balance was issued in favor of MWSS;
Copies of the said letter, check and letter of credit are
hereto attached as Annexes "AA", "BB", and "CC",
respectively.
Under these facts supplied by petitioner MWSS itself,
respondents have every good reason to believe that
petitioner was honoring the validity of the conveyances of
the subject property, and that the sudden institution of the
complaint in 1993 alleging the nullity of such conveyances
was surely an unexpected turn of events for respondents.
Hence, petitioner MWSS cannot escape the effect of laches.
RE: Ratification
Pertinent to this issue is the claim of petitioner MWSS that Mr.
Ilustre was never given the authority by its Board of Trustees to
enter into the "initial agreement" of December 20, 1982 and
therefore, the sale of the subject property is invalid.
Petitioner MWSS misses the paint. The perceived infirmity in the
"initial agreement" can be cured by ratification. So settled is the
precept that ratification can be made by the corporate board either
expressly or impliedly. Implied ratification may take various forms
— like silence or acquiescence; by acts showing approval or
adoption of the contract; or by acceptance and retention of benefits
flowing therefrom.   Both modes of ratification have been made in
13
this case.
There was express ratification made by the Board of petitioner
MWSS when it passed Resolution No. 36-83 approving the sale of
the subject property to respondent SILHOUETTE and authorizing
Mr. Ilustre, as General Manager, "to sign for and in behalf of the
MWSS the contract papers and other pertinent documents relative
thereto." Implied ratification by "silence or acquiescence" is
revealed from the acts of petitioner MWSS in (a) sending three (3)
demand letters for the payment of the purchase price, (b) accepting
P25 Million as downpayment, and (c) accepting a letter of credit for
the balance, as hereinbefore mentioned. It may well be pointed out
also that nowhere in petitioner MWSS' complaint is it alleged that it
returned the amounts, or any part thereof, covering the purchase
price to any of the respondents-vendees at any point in time. This is
only indicative of petitioner MWSS' acceptance and retention of
benefits flowing from the sales transactions which is another form
of implied ratification.
RE: Non-joinder of indispensable parties
There is no denying that petitioner MWSS' action against herein
respondents for the recovery of the subject property now converted
into a prime residential subdivision would ultimately affect the
proprietary rights of the many lot owners to whom the land has
already been parceled out. They should have been included in the
suit as parties-defendants, for "it is well established that owners of
property over which reconveyance is asserted are indispensable
parties without whom no relief is available and without whom the
court can render no valid judgment."   Being indispensable parties,
14
the absence of these lot-owners in the suit renders all subsequent
actions of the trial court null and void for want of authority to act,
not only as to the absent parties but even as to those
present.   Thus, when indispensable parties are not before the
15
court, the action should be dismissed.  16
WHEREFORE, in view of the foregoing, the consolidated petitions
are hereby DENIED.
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:
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.  The allotment checks for said government hospital
2 
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.  Pangilinan sought to
3 
encash the first check  with Associated Bank. However, the manager of
4 
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,  as well as
5 
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.  All the checks bore the stamp of Associated Bank
6 
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.  He did not find as irregular the fact that the checks were not
7 
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 fourth-party
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.
SO ORDERED.  12
PNB and Associated Bank appealed to the Court of
Appeals.  Respondent court affirmed the trial court's decision in toto on
13 
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.  The PCHC Rules are merely contractual stipulations
15 
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.  Section 23 does not avoid the instrument but only the forged
18  check. Payment under a forged indorsement is not to the drawer's order.
signature.  Thus, a forged indorsement does not operate as the payee's
19  When the drawee bank pays a person other than the payee, it does not
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 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."  He cannot
23 
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
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.  The general
24 
rule then is that the drawee bank may not debit the drawer's account and
is not entitled to indemnification from the drawer.  The risk of loss must
25 
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.  In other
28  depositor who negotiated the check. The bank knows him, his address
words, the drawee bank canseek reimbursement or a return of the
amount it paid from the presentor bank or person.  Theoretically, the
29  bank is also in a better position to detect forgery, fraud or irregularity in
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.
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.  The drawee bank's duty is but to verify the genuineness of
32 
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
and history because he is a client. It has taken a risk on his deposit. The
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 drawer-Province 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.
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,  six crossed checks with forged
35 
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.  Had Associated Bank decided to debit
37 
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.  Hence, Associated Bank was not prejudiced by PNB's failure to
38 
comply with the twenty-four-hour return rule.
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.  PNB's duty was to verify the
39 
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 (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal
from March 20, 1981, the date of extrajudicial demand made by the interest from March 20, 1981 until payment is made.
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 SO ORDERED.
PNB. Bank deposits are considered under the law as loans.  Central
40 

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.  The trial court did not err in granting
41 

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
G.R. No. L-53194 March 14, 1988 THE ACT OF RESPONDENT FRANCISCO GOZON, II IN
PUTTING HIS CHECK BOOK CONTAINING THE
PHILIPPINE NATIONAL BANK petitioner, CHECK IN QUESTION INTO THE HANDS OF
vs. ERNESTO SANTOS WAS INDEED THE PROXIMATE
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance CAUSE OF THE LOSS, THEREBY PRECLUDING HIM
of Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents. FROM SETTING UP THE DEFENSE OF FORGERY OR
WANT 0F AUTHORITY UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201

GANCAYCO, J.: The petition is devoid of merit.

On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the This Court reproduces with approval the disquisition of the court a quo as
Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos whom follows:
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 A bank is bound to know the signatures of its customers;
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 and if it pays a forged check, it must be considered as
forged but the bank refused. making the payment out of its own funds, and cannot
ordinarily change the amount so paid to the account of
Upon complaint of private respondent on February 1, 1974 Ernesto the depositor whose name was forged' (San Carlos
Santos was apprehended by the police authorities and upon investigation Milling Co. vs. Bank of the P.I., 59 Phil. 59).
he admitted that he stole the check of Gozon, forged his signature and
encashed the same with the Bank. This rule is absolutely necessary to the circulation of
drafts and checks, and is based upon the presumed
Hence Gozon filed the complaint for recovery of the amount of negligence of the drawee in failing to meet its obligation to
P5,000.00, plus interest, damages, attorney's fees and costs against the know the signature of its correspondent. ... There is
bank in the Court of First Instance of Rizal. After the issues were joined nothing inequitable in such a rule. If the paper comes to
and the trial on the merits ensued, a decision was rendered on February the drawee in the regular course of business, and he,
4, 1980, the dispositive part of which reads as follows: having the opportunity ascertaining its character,
pronounces it to be valid and pays it, it is not only a
WHEREFORE, judgment is hereby rendered in favor of question of payment under mistake, but payment in
the plaintiff. The defendant is hereby condemned to return neglect of duty which the commercial law places upon
to plaintiff the amount of P5,000.00 which it had him, and the result of his negligence must rest upon him
unlawfully withheld from the latter, with interest at the (12 ALR 1901, citing many cases found in I Agbayani,
legal rate from September 22, 1972 until the amount is supra).
fully delivered. The defendant is further condemned to
pay plaintiff the sum of P2,000.00 as attorney's fees and Defendant, however, interposed the defense that it
to pay the costs of this suit. exercised diligence in accordance with the accepted
norms of banking practice when it accepted and paid
Not satisfied therewith, the bank now filed this petition for review on Exhibit "A". It presented evidence that the check had to
certiorari in this Court raising the sole legal issue that — 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 The act of plaintiff in leaving his checkbook in the car
check (Exhibit "A") with plaintiffs exemplar signatures while he went out for a short while can not be considered
(Exhibits "5-N" and "5-B") found in the PNB Form 35-A negligence sufficient to excuse the defendant bank from
would immediately show the negligence of the employees its own negligence. It should be home in mind that when
of the defendant bank. Even a not too careful comparison defendant left his car, Ernesto Santos, a long time
would immediately arrest one's attention and direct it to classmate and friend remained in the same. Defendant
the graceful lines of plaintiffs exemplar signatures found could not have been expected to know that the said
in Exhibits "5-A" and "5-B". The formation of the first letter Ernesto Santos would remove a check from his
"F" in the exemplars, which could be regarded as artistic, checkbook. Defendant had trust in his classmate and
is completely different from the way the same letter is friend. He had no reason to suspect that the latter would
formed in Exhibit "A-l". That alone should have alerted a breach that trust .
more careful and prudent signature verifier.
We agree.
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.   It is
1
Private respondent trustee Ernesto Santos as a classmate and a friend.
expected to use reasonable business prudence in accepting and cashing He brought him along in his car to the bank and he left his personal
a check presented to it. belongings in the car. Santos however removed and stole a check from
his cheek book without the knowledge and consent of private respondent.
In this case the findings of facts of the court a quo are conclusive. The No doubt private respondent cannot be considered negligent under the
trial court found that a comparison of the signature on the forged check circumstances of the case.
and the sample signatures of private respondent show marked
differences as the graceful lines in the sample signature which is WHEREFORE, the petition is DISMISSED for lack of merit with costs
completely different from those of the signature on the forged check. against petitioner.
Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial
court considered to be an "unbiased scientific expert" indicated the SO ORDERED.
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:
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.
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 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 payment out of its own funds, and cannot ordinarily charge the
not have authority to draw checks and where funds could only be drawn amount so paid to the account of the depositor whose name was
out by the check of Baldwin. forged. (7 C.J., 683.)

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 ½ 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, 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.
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.

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
G.R. No. 150228               July 30, 2009
BANK OF AMERICA NT & SA, Petitioner,
vs.
PHILIPPINE RACING CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court from the Decision1 promulgated on July 16, 2001 by the former
Second Division of the Court of Appeals (CA), in CA-G.R. CV No. 45371
entitled "Philippine Racing Club, Inc. v. Bank of America NT & SA,"
affirming the Decision2 dated March 17, 1994 of the Regional Trial Court
(RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor of the
respondent. Likewise, the present petition assails the
Resolution3 promulgated on September 28, 2001, denying the Motion for
Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as
follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains several
accounts with different banks in the Metro Manila area. Among the
accounts maintained was Current Account No. 58891-012 with
defendant-appellant BA (Paseo de Roxas Branch). The authorized joint
signatories with respect to said Current Account were plaintiff-appellee’s
President (Antonia Reyes) and Vice President for Finance (Gregorio
Reyes).
On or about the 2nd week of December 1988, the President and Vice
President of plaintiff-appellee corporation were scheduled to go out of the
country in connection with the corporation’s business. In order not to
disrupt operations in their absence, they pre-signed several checks
relating to Current Account No. 58891-012. The intention was to insure
continuity of plaintiff-appellee’s operations by making available
cash/money especially to settle obligations that might become due.
These checks were entrusted to the accountant with instruction to make
use of the same as the need arose. The internal arrangement was, in the
event there was need to make use of the checks, the accountant would
prepare the corresponding voucher and thereafter complete the entries
on the pre-signed checks.
It turned out that on December 16, 1988, a John Doe presented to
defendant-appellant bank for encashment a couple of plaintiff-appellee
corporation’s checks (Nos. 401116 and 401117) with the indicated value
of P110,000.00 each. It is admitted that these 2 checks were among
those presigned by plaintiff-appellee corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and
irregularities. On the space where the name of the payee should be
indicated (Pay To The Order Of) the following 2-line entries were instead
typewritten: on the upper line was the word "CASH" while the lower line
had the following typewritten words, viz: "ONE HUNDRED TEN
THOUSAND PESOS ONLY." Despite the highly irregular entries on the
face of the checks, defendant-appellant bank, without as much as
verifying and/or confirming the legitimacy of the checks considering the
substantial amount involved and the obvious infirmity/defect of the
checks on their faces, encashed said checks. A verification process,
even by was of a telephone call to PRCI office, would have taken less
than ten (10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that there was
no transaction involving PRCI that call for the payment of P220,000.00 to
anyone. The checks appeared to have come into the hands of an
employee of PRCI (one Clarita Mesina who was subsequently criminally
charged for qualified theft) who eventually completed without authority
the entries on the pre-signed checks. PRCI’s demand for defendant-
appellant to pay fell on deaf ears. Hence, the complaint.4
After due proceedings, the trial court rendered a Decision in favor of
respondent, the dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of
plaintiff and against the defendant, and the latter is ordered to pay
plaintiff:
(1) The sum of Two Hundred Twenty Thousand (₱220,000.00)
Pesos, with legal interest to be computed from date of the filing of
the herein complaint;
(2) The sum of Twenty Thousand (₱20,000.00) Pesos by way of
attorney’s fees;
 (3) The sum of Ten Thousand (₱10,000.00) Pesos for litigation
expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which,
however, affirmed said decision in toto in its July 16, 2001 Decision.
Petitioner’s Motion for Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause
of respondent’s loss was petitioner’s encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner
was liable for the amount of the checks despite the fact that
petitioner was merely fulfilling its obligation under law and
contract.
B. The Court of Appeals gravely erred in holding that petitioner
had a duty to verify the encashment, despite the absence of any
obligation to do so.
C. The Court of Appeals gravely erred in not applying Section 14
of the Negotiable Instruments Law, despite its clear applicability
to this case;
II. The Court of Appeals gravely erred in not holding that the proximate
cause of respondent’s loss was its own grossly negligent practice of pre-
signing checks without payees and amounts and delivering these pre-
signed checks to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award
of attorney’s fees despite the absence of any applicable ground under
Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s fees,
moral and exemplary damages, and costs of suit in favor of petitioner,
who clearly deserves them.6
From the discussions of both parties in their pleadings, the key issue to
be resolved in the present case is whether the proximate cause of the
wrongful encashment of the checks in question was due to (a) petitioner’s
failure to make a verification regarding the said checks with the
respondent in view of the misplacement of entries on the face of the
checks or (b) the practice of the respondent of pre-signing blank checks
and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections
1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner claims
that its duty as a drawee bank to a drawer-client maintaining a checking
account with it is to pay orders for checks bearing the drawer-client’s
genuine signatures. The genuine signatures of the client’s duly
authorized signatories affixed on the checks signify the order for
payment. Thus, pursuant to the said obligation, the drawee bank has the
duty to determine whether the signatures appearing on the check are the
drawer-client’s or its duly authorized signatories. If the signatures are
genuine, the bank has the unavoidable legal and contractual duty to pay.
If the signatures are forged and falsified, the drawee bank has the
corollary, but equally unavoidable legal and contractual, duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the drawee
bank to inquire from the drawer before encashing a check only when the
check bears a material alteration. A material alteration is defined in
Section 125 of the NIL to be one which changes the date, the sum
payable, the time or place of payment, the number or relations of the
parties, the currency in which payment is to be made or one which adds
a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any
respect. With respect to the checks at issue, petitioner points out that
they do not contain any material alteration.10 This is a fact which was
affirmed by the trial court itself.11
There is no dispute that the signatures appearing on the subject checks
were genuine signatures of the respondent’s authorized joint signatories;
namely, Antonia Reyes and Gregorio Reyes who were respondent’s
President and Vice-President for Finance, respectively. Both pre-signed
the said checks since they were both scheduled to go abroad and it was
apparently their practice to leave with the company accountant checks
signed in black to answer for company obligations that might fall due
during the signatories’ absence. It is likewise admitted that neither of the
subject checks contains any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the
following typewritten words appear: "ONE HUNDRED TEN THOUSAND
PESOS ONLY." Above the same is the typewritten word, "CASH." On the
blank reserved for the amount, the same amount of One Hundred Ten
Thousand Pesos was indicated with the use of a check writer. The
presence of these irregularities in each check should have alerted the
petitioner to be cautious before proceeding to encash them which it did
not do.
It is well-settled that 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 client’s 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.12
Petitioner asserts that it was not duty-bound to verify with the respondent
since the amount below the typewritten word "CASH," expressed in
words, is the very same amount indicated in figures by means of a check
writer on the amount portion of the check. The amount stated in words is,
therefore, a mere reiteration of the amount stated in figures. Petitioner
emphasizes that a reiteration of the amount in words is merely a
repetition and that a repetition is not an alteration which if present and
material would have enjoined it to commence verification with
respondent.13
We do not agree with petitioner’s myopic view and carefully crafted
defense. Although not in the strict sense "material alterations," the
misplacement of the typewritten entries for the payee and the amount on
the same blank and the repetition of the amount using a check writer
were glaringly obvious irregularities on the face of the check. Clearly,
someone made a mistake in filling up the checks and the repetition of the
entries was possibly an attempt to rectify the mistake. Also, if the check
had been filled up by the person who customarily accomplishes the
checks of respondent, it should have occurred to petitioner’s employees
that it would be unlikely such mistakes would be made. All these
circumstances should have alerted the bank to the possibility that the
holder or the person who is attempting to encash the checks did not have
proper title to the checks or did not have authority to fill up and encash
the same. As noted by the CA, petitioner could have made a simple
phone call to its client to clarify the irregularities and the loss to
respondent due to the encashment of the stolen checks would have been
prevented.
In the case at bar, extraordinary diligence demands that petitioner should
have ascertained from respondent the authenticity of the subject checks
or the accuracy of the entries therein not only because of the presence of
highly irregular entries on the face of the checks but also of the decidedly
unusual circumstances surrounding their encashment. Respondent’s
witness testified that for checks in amounts greater than Twenty
Thousand Pesos (₱20,000.00) it is the company’s practice to ensure that
the payee is indicated by name in the check.14 This was not rebutted by
petitioner. Indeed, it is highly uncommon for a corporation to make out
checks payable to "CASH" for substantial amounts such as in this case. If
each irregular circumstance in this case were taken singly or isolated, the
bank’s employees might have been justified in ignoring them. However,
the confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of respondent
should have put petitioner’s employees on guard that the checks were
possibly not issued by the respondent in due course of its business.
Petitioner’s subtle sophistry cannot exculpate it from behavior that fell
extremely short of the highest degree of care and diligence required of it
as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations manager
that in case of an irregularity on the face of the check (such as when
blanks were not properly filled out) the bank may or may not call the
client depending on how busy the bank is on a particular day,15 we are
even more convinced that petitioner’s safeguards to protect clients from
check fraud are arbitrary and subjective. Every client should be treated
equally by a banking institution regardless of the amount of his deposits
and each client has the right to expect that every centavo he entrusts to a
bank would be handled with the same degree of care as the accounts of
other clients. Perforce, we find that petitioner plainly failed to adhere to
the high standard of diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner insists that
pursuant to Sections 1416 and 1617 of the NIL, it could validly presume,
upon presentation of the checks, that the party who filled up the blanks
had authority and that a valid and intentional delivery to the party
presenting the checks had taken place. Thus, in petitioner’s view, the
sole blame for this debacle should be shifted to respondent for having its
signatories pre-sign and deliver the subject checks.18 Petitioner argues
that there was indeed delivery in this case because, following American
jurisprudence, the gross negligence of respondent’s accountant in
safekeeping the subject checks which resulted in their theft should be
treated as a voluntary delivery by the maker who is estopped from
claiming non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject checks
were correctly and properly filled out by the thief and presented to the
bank in good order. In that instance, there would be nothing to give notice
to the bank of any infirmity in the title of the holder of the checks and it
could validly presume that there was proper delivery to the holder. The
bank could not be faulted if it encashed the checks under those
circumstances. However, the undisputed facts plainly show that there
were circumstances that should have alerted the bank to the likelihood
that the checks were not properly delivered to the person who encashed
the same. In all, we see no reason to depart from the finding in the
assailed CA Decision that the subject checks are properly characterized
as incomplete and undelivered instruments thus making Section 1520 of
the NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’ practice
of pre-signing of blank checks should be deemed seriously negligent
behavior and a highly risky means of purportedly ensuring the efficient
operation of businesses. It should have occurred to respondent’s officers
and managers that the pre-signed blank checks could fall into the wrong
hands as they did in this case where the said checks were stolen from
the company accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of
negligent acts that led to the loss, petitioner will still emerge as the party
foremost liable in this case. In instances where both parties are at fault,
this Court has consistently applied the doctrine of last clear chance in
order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in
clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is chargeable
with the consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by
attributing negligence on the part of respondent because, even if we
concur that the latter was indeed negligent in pre-signing blank checks,
the former had the last clear chance to avoid the loss. To reiterate,
petitioner’s own operations manager admitted that they could have called
up the client for verification or confirmation before honoring the dubious
checks. Verily, petitioner had the final opportunity to avert the injury that
befell the respondent. Failing to make the necessary verification due to
the volume of banking transactions on that particular day is a flimsy and
unacceptable excuse, considering that the "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."23 Petitioner’s negligence has been undoubtedly established
and, thus, pursuant to Art. 1170 of the NCC,24 it must suffer the
consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider
respondent’s own negligence to mitigate petitioner’s liability. Article 2179
of the Civil Code provides:
Art. 2179. When the plaintiff’s own negligence was the immediate and
proximate cause of his injury, he cannot recover damages. But if his
negligence was only contributory, the immediate and proximate cause of
the injury being the defendant’s lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded. 1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the Court
held:
The underlying precept on contributory negligence is that a plaintiff who
is partly responsible for his own injury should not be entitled to recover
damages in full but must bear the consequences of his own negligence.
The defendant must thus be held liable only for the damages actually
caused by his negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in blank
whenever its authorized bank signatories would travel abroad was a
dangerous policy, especially considering the lack of evidence on record
that respondent had appropriate safeguards or internal controls to
prevent the pre-signed blank checks from falling into the hands of
unscrupulous individuals and being used to commit a fraud against the
company. We cannot believe that there was no other secure and
reasonable way to guarantee the non-disruption of respondent’s
business. As testified to by petitioner’s expert witness, other corporations
would ordinarily have another set of authorized bank signatories who
would be able to sign checks in the absence of the preferred
signatories.26 Indeed, if not for the fortunate happenstance that the thief
failed to properly fill up the subject checks, respondent would expectedly
take the blame for the entire loss since the defense of forgery of a
drawer’s signature(s) would be unavailable to it. Considering that
respondent knowingly took the risk that the pre-signed blank checks
might fall into the hands of wrongdoers, it is but just that respondent
shares in the responsibility for the loss.

We also cannot ignore the fact that the person who stole the pre-signed
checks subject of this case from respondent’s accountant turned out to
be another employee, purportedly a clerk in respondent’s accounting
department. As the employer of the "thief," respondent supposedly had
control and supervision over its own employee. This gives the Court more
reason to allocate part of the loss to respondent.

Following established jurisprudential precedents,27 we believe the

allocation of sixty percent (60%) of the actual damages involved in this
case (represented by the amount of the checks with legal interest) to
petitioner is proper under the premises. Respondent should, in light of its
contributory negligence, bear forty percent (40%) of its own loss.

Finally, we find that the awards of attorney’s fees and litigation expenses
in favor of respondent are not justified under the circumstances and,
thus, must be deleted. The power of the court to award attorney’s fees
and litigation expenses under Article 2208 of the NCC28 demands factual,
legal, and equitable justification.

An adverse decision does not ipso facto justify an award of attorney’s

fees to the winning party.29 Even when a claimant is compelled to litigate
with third persons or to incur expenses to protect his rights, still attorney’s
fees may not be awarded where no sufficient showing of bad faith could
be reflected in a party’s persistence in a case other than an erroneous
conviction of the righteousness of his cause.30

WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001
and its Resolution dated September 28, 2001 are AFFIRMED with the
following MODIFICATIONS: (a) petitioner Bank of America NT & SA shall
pay to respondent Philippine Racing Club sixty percent (60%) of the sum
of Two Hundred Twenty Thousand Pesos (₱220,000.00) with legal
interest as awarded by the trial court and (b) the awards of attorney’s
fees and litigation expenses in favor of respondent are deleted.

Proportionate costs.

SO ORDERED.