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Manila

SECOND DIVISION

[ G.R. No. 211837. March 16, 2022 ]

THE REAL BANK (A THRIFT BANK), INC., PETITIONER, VS. DALMACIO CRUZ MANINGAS, RESPONDENT.

DECISION

HERNANDO, J.:

This petition for review on certiorari1 assails the November 29, 2013 Decision2 and March 14, 2014 Resolution3 of the Court
of Appeals (CA) in CA-G.R. CV. No. 99817, which affirmed the June 22, 2012 Decision4 and September 13, 2012 Resolution5 of
the Regional Trial Court (RTC), Branch 61, Makati City in Civil Case No. 09-106.

The Factual Antecedents

This case arose from a complaint6 filed by respondent Dalmacio Cruz Maningas (Maningas) against petitioner The Real
Bank (A Thrift Bank), Inc. (Real Bank), and Metropolitan Bank and Trust Co. (Metrobank) for the recovery of a sum of money with
damages. Real Bank and Metrobank are domestic corporations engaged in the business of banking.

Maningas is a Filipino-British national who was living in London, England at the time material to this case.7 He maintained a
savings account and a checking account with Metrobank Greenhills, Eisenhower branch.8 On August 22, 2006, while in London,
Maningas issued two crossed checks with amounts of P550,000.00 and P602,700.00 (with an aggregate amount of
P1,152,700.00) in favor of his friend Bienvenido Rosaria (Rosaria).9 Maningas issued the checks as payment to Rosaria for a
parcel of land he (Maningas) purchased.10 Notably, however, Maningas wrote the name BIENVINIDO ROSARIA as payee of the
two checks.11

As Rosaria was also in London at that time, he instructed Maningas to mail the checks to Maxima Jumawan, Rosaria's sister,
who was residing at that time in Dongalo, Parañaque City, with a request to deposit the checks to Rosaria's account.12

After a week, Maningas inquired if the checks were received; Rosaria informed him that the checks did not arrive.13 But
when Maningas checked his account balance, he discovered that the amount of the checks was already deducted.14 He then
clarified with Metrobank and learned that the checks were paid when a person named BIENVINIDO ROSARIA used the checks
in opening an account with Real Bank in its Bacoor, Cavite branch.15 Thereafter, the full amount was withdrawn.16

It was alleged that the person who represented himself as BIENVINIDO ROSARIA was referred by a retired manager of the
Real Bank branch for the opening of an account.17 This person was interviewed and he presented three valid identification
cards, which showed no signs of tampering and any adverse findings.18 The branch manager at that time then approved the
opening of the account.19 The checks were deposited, and Real Bank sent them to Metrobank for clearing. The checks were
allowed to be withdrawn only after they were cleared by Metrobank.20 Maningas alerted Metrobank of the alleged forgeries; so
Metrobank attempted to return the checks to Real Bank on the ground of "forged endorsement," but to no avail.21 Maningas thus
sent an electronic mail to Real Bank, informing it that the checks were paid to an impostor using the name BIENVINIDO
ROSARIA, who opened an account in the branch; this, however, was also ignored, so he sent a formal demand dated September
15, 2006.22

This resulted to the filing of Maningas' complaint who contended that both banks were negligent in allowing the unauthorized
withdrawal of the amount despite the forged indorsements of the checks.23 As the depository bank, Metrobank has the obligation
to pay the checks to the intended payee only upon a genuine indorsement—the impostor's signature in this case is not a genuine
indorsement.24 He added that Metrobank did not notify him prior to debiting his account.25 Metrobank should therefore return
the amount. For Real Bank, its liability is derived from its implied warranties as a collecting bank and last indorser in guaranteeing
all previous indorsements, including the forged indorsement, and the genuineness of the checks.26 As a result, Real Bank must
bear the consequences.27 Maningas also claimed damages and attorney's fees.28

Real Bank filed an answer with counterclaim.29 It argued that Maningas had no legal standing to file as Rosaria, being the
intended payee, is the real party in interest who had the authority to file the action.30 Real Bank insisted that it followed all rules
and regulations in allowing the opening of the account, as well as the subsequent deposit and encashment of the checks.31 The
alleged payee, BIENVINIDO ROSARIA, presented the required proofs of identification, and the amount was withdrawn only after
the checks were cleared.32 Maningas was therefore precluded from raising the defense of forgery and had no one to blame but
himself for sending the checks to another person knowing that the intended payee was also in London.33 Real Bank added that
the fictitious payee rule is applicable, making the checks bearer instruments; thus, the forgery had no effect.34

Metrobank also filed an answer with crossclaim.35 It argued that the claim for reimbursement should be directed solely
against Real Bank; as the collecting bank and last indorser, Real Bank was duty bound to ascertain the genuineness of all prior
indorsements.36 When the checks were presented for payment, it was presumed that Real Bank performed its duty.37 Real
Bank, however, was remiss in its duty and it should ultimately be responsible for the unlawful withdrawal by reason of the forged
indorsements.38

Ruling of the Regional Trial Court:

In its June 22, 2012 Decision,39 the RTC ruled in favor of Maningas and ordered Real Bank to pay, by itself, Maningas the
aggregate amount of the checks (P1,152,700.00) plus six percent (6%) interest per annum from the date of the filing of the
complaint until full payment thereof.

The RTC ruled that the true intention of Maningas was to issue the checks in favor of Rosaria.40 Real Bank failed to refute
the statement that the typographical error in writing BIENVINIDO as payee was inadvertent on the part of Maningas because he
was in a hurry at that time.41 Real Bank vouched for the validity and genuineness of the prior indorsements when it accepted the
crossed checks.42

The RTC found Real Bank to be negligent as a collecting bank and last indorser in: (a) allowing the opening of the account of
a person using the name BIENVINIDO ROSARIA using the subject checks; (b) not scrutinizing and vetting the IDs presented by
the person; (c) not inquiring as to the conflict in the civil status appearing in the Voter's ID and application form to open the
account; (d) not checking the validity of the IDs presented with the issuing government agency; and, (e) not investigating after
being informed that the person purporting to be BIENVINIDO ROSARIA was not the intended payee.43 On the other hand,
Metrobank, as drawee, did not breach its duty and was not negligent in dealing with Maningas.44 It followed the instructions of
the drawer and relied on the guarantee provided by Real Bank.45 There is nothing negligent in not sending an electronic mail to
notify the drawer prior to the actual debiting of the account.46

Only Real Bank is liable for being the collecting bank and last indorser.47 As such, it is must scrutinize the checks deposited
with it to determine their genuineness and regularity.48 Real Bank, especially in its act of stamping the back of the checks with
"all prior indorsements and/or lack of indorsements are guaranteed" became a general endorser under the law and therefore
cannot escape liability.49 Metrobank, in paying the check, merely relied on this guarantee.50 The RTC thus ruled that Maningas
had no cause of action against Metrobank; it is not solidarily liable with Real Bank in returning the amount of the checks.51

The RTC further ruled that the fictitious payee rule is not applicable.52 The intended payee of the checks, Rosaria, is a living
and existing person.53 Real Bank did not contest the claim that Maningas simply misspelled Rosaria's name on the checks, thus,
the misspelling did not convert the payee to somebody fictitious under the law.54 The checks remained to be order instruments
that necessitate indorsements for transfer.55

The dispositive portion of the RTC Decision reads:

WHEREFORE, apriorisms duly considered, the herein defendant The Real Bank (A Thrift
Bank), Inc. (Real Bank) is hereby DIRECTED to pay the herein plaintiff the sum of One Million
One Hundred Fifty Two Thousand Seven Hundred Pesos (PHP1,152,700.00), with interest at six
percent (6%) per annum from the date the present "Complaint" was filed until the said amount is
fully paid.

The "x x x Cross-Claim" of herein defendant, Metropolitan Bank and Trust Company
(Metrobank), against its co-defendant, The Real Bank (A Thrift Bank), Inc. (Real Bank), is
hereby DISMISSED.

Costs de officio.

SO ORDERED.56

Real Bank moved for reconsideration,57 but this was denied by the RTC in its September 13, 2012 Resolution.58 Thus, Real
Bank appealed to the CA.59

Ruling of the Court of Appeals:

 In its November 29, 2013 Decision,60 the CA affirmed the ruling of the RTC.

Notably, Real Bank argued in its appeal that the RTC erred in allowing additional evidence that were not included in the pre-
trial order despite objections.61 The CA ruled that Real Bank failed to object, thereby waiving the objections and making the
additional evidence admissible.62 Further, the RTC's admission of the additional evidence was justified as the trial court saw the
necessity and declared that the interest of justice and fairness is best served by allowing the additional evidence.63

The CA held that Maningas is not negligent in misspelling the payee's name and in sending the checks by ordinary mail; in
fact, he exercised due diligence in the process by crossing the checks and closely monitoring their arrival.64 On the other hand, it
was Real Bank that failed to exercise the highest degree of care and diligence as a bank in haphazardly reviewing the
documents submitted by the BIENVINIDO person in opening an account.65

Real Bank's liability was cemented by its status as collecting bank, especially when it presented the checks to Metrobank for
payment with a stamp of guarantee of all prior indorsements.66 The CA held that the act of presentment to the drawee bank
connotes that the collecting bank had done its duty with respect to the genuineness and validity of the checks.67 Therefore, Real
Bank cannot escape liability and it cannot set up the defense of forgery.68 Real Bank is solely liable for the value of the
checks.69 Further, it cannot invoke the fictitious payee rule. Rosaria was the intended payee; Real Bank failed to show that
Maningas did not intend for Rosaria to receive the proceeds of the checks.70

Real Bank also contended that Republic Act No. (RA) 1405,71 the law on secrecy of bank deposits, was violated when the
RTC ordered the production of records pertaining to the deposit account of one BIENVINIDO ROSARIA.72 The CA held that
there was no violation because that account was the subject of the instant litigation—the law allows inquiry on bank accounts that
are subject of litigation.73

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision dated June 22, 2012 and the
Resolution dated September 13, 2012 of the Regional Trial Court, Branch 61, Makati City, in Civil
Case No. 09-106 are hereby AFFIRMED.

SO ORDERED.74

Real Bank moved for reconsideration of the Decision,75 but this was denied by the CA in its March 14, 2014 Resolution.76
Hence this petition, which raises the following errors:

1. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings
in sustaining the action of the trial court allowing the admission of documents and testimony of
witnesses not included in the pre-trial order despite objection from petitioner REAL BANK;

2. The Court of Appeals gravely erred in sustaining the ruling of the trial court in not finding that
the writing of the name of the payee "BIENVINIDO ROSARIA" instead of "BIENVENIDO
ROSARIA,["] in the two (2) subject checks was an act of gross negligence on the part of
[Maningas];

3. The Court of Appeals gravely erred in sustaining the trial court in not finding that the sending of
the completely filled up checks from London England to Parañaque City, through ordinary mail
was an act of gross negligence on the part of [Maningas];

4. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings
in sustaining the ruling of the trial court in not finding that [Maningas] is precluded from setting up
the defense of forgery or want of authority against [Real Bank] on account of his own act of gross
negligence;

5. The Court of Appeals gravely erred in sustaining the findings of the trial court that [Real Bank]
was negligent and remiss in its obligation as collecting bank and last endorser of the subject
checks;

6. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings
in sustaining the ruling of the trial court in not finding that the checks drawn by [Maningas] came
within the operation of the fictitious payee rule under Section 09 of the Negotiable Instruments
Law and therefore payable to bearer and negotiable by mere delivery rendering immaterial the
alleged forged [i]ndorsement;

7. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings
in sustaining the action of the trial court directing [Real Bank] to produce the records of the
account of "BIENVINIDO ROSARIA" as it violated the provisions of the Law on Secrecy of Bank
Deposits.77
 Issue

The issue here boils down to whether Real Bank is liable to return the amount of the checks to respondent Maningas.

Our Ruling

The petition has no merit. The Court affirms the rulings of the CA and the RTC. Real Bank is liable to return the amount of
the checks to Maningas.

Real Bank is liable to return the amount of the

checks to Maningas.

Real Bank argues that it should not be liable because Maningas was negligent in misspelling the name of the payees and
sending the checks by registered mail to the Philippines.78 Further, it insists that it was not negligent as a collecting bank in
failing to detect the irregularities in the impostor's application for opening the bank account.79 Maningas counters that Real Bank
was indeed negligent and remiss in its obligation as a collecting bank and last indorser of the checks.80 He also argues that, as
found by the RTC and the CA, he was not negligent in misspelling the name of the payees and sending the checks by registered
mail to the Philippines.81 He can therefore set up the defense of forgery or want of authority and claim payment from Real
Bank.82

It is clear that the instant case is a case of unauthorized payment to a person other than the intended payee named on the
check. Both the RTC and the CA determined that the intended payee of the checks was indeed Rosaria. As found, the checks
made their way to the hands of an impostor who used the name BIENVINIDO ROSARIA for encashment; the intended payee
never received the checks.

At the outset, the Court notes that the pronouncement of Metrobank's non-liability has already become final. Metrobank did
not file a notice of appeal to assail the RTC Decision precisely because the trial court absolved it from liability; and from then on,
it no longer participated in the succeeding proceedings. The CA Decision also notably did not touch upon Metrobank's liability.
Further, upon examination of the appeal briefs83 filed with the CA, neither Real Bank nor Maningas mentioned or raised any
issue as to the liability of Metrobank. Likewise, the pleadings84 filed before this Court no longer raised issues on the liability of
Metrobank. Because of Maningas and Real Bank's failure to appeal the RTC Decision with respect to Metrobank's lack of liability,
the decision became final as to the latter. The Court also considers that Metrobank will be deprived of due process if its liability
will be touched upon at this stage of the proceedings.

Thus, the Court cannot and will no longer disturb Metrobank's non-liability. The pronouncement in this case pertains to Real
Bank's liability.

In the normal course of things, however, case law provides that in cases of unauthorized payments to a person other than
the payee or his order, the drawee bank is liable for the amount of the checks; in turn, the drawee bank may seek reimbursement
from the collecting bank.85 The case of BDO Unibank, Inc. v. Lao86 (BDO Unibank) discusses the nature of liability of the two
banks in cases of unauthorized payments of checks:

The liability of the drawee bank is based on its contract with the drawer and its duty to charge
to the latter's accounts only those payables authorized by him. A drawee bank is under strict
liability to pay the check only to the payee or to the payee's order. When the drawee bank pays a
person other than the payee named in the check, it does not comply with the terms of the check
and violates its duty to charge the drawer's account only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has
good title to it; that all prior parties had capacity to contract; and that the instrument is at the time
of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank 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. If any of the warranties made by the collecting bank turns out to be false, then the
drawee bank may recover from it up to the amount of the check.87

As stated, the drawee bank becomes liable pursuant to its breach of obligation as regards its depositor (drawer) in paying the
amount of the check to a person other than the payee or his order. The drawee bank is under strict liability to pay the check only
to the payee or his order.

On the other hand, a collecting bank is "any bank handling an item for collection except the bank on which the check is
drawn,"88 and it binds itself to "credit the amount in [the depositor's] account or infuse value thereon only after the drawee bank
shall have paid the amount of the check or [after] the check [is] cleared for deposit."89 It becomes liable pursuant to its guarantee
as the last indorser of the check, as provided in Section 66, in relation to Section 65, of the Negotiable Instruments Law (NIL),
which state:90
 Section 65. Warranty Where Negotiation by Delivery and So Forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants —

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

xxxx

Section 66. Liability of General Indorser. — Every indorser who indorses without qualification,
warrants, to all subsequent holders in due course —

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section;
and

(b) That the instrument is at the time of his indorsement valid and subsisting.

And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.

The collecting bank assumes the liabilities of a general indorser when it presents a check to the drawee bank for
payment.91 Thus, if any of these warranties turn out to be false, the collecting bank becomes liable to the drawee bank for any
payments made on the check by virtue of the false warranties.92

Pursuant to the rule, the drawee bank should reimburse the amount to the drawer; subsequently, the drawee bank may seek
reimbursement from the collecting bank.

In the instant case, Metrobank (drawee bank) charged Maningas' account and paid the subject checks to an impostor who
used the name BIENVINIDO ROSARIA after Real Bank (collecting bank) presented the checks stamped with "all prior
indorsements and/or lack of indorsements are guaranteed" for payment.
 Again, as Metrobank's non-liability has become final, the Court cannot disturb the pronouncement and impose upon the
bank.

But assuming that Metrobank's non-liability is not yet final and considering the above principles on liability of banks, the Court
finds that, considering the circumstances, Metrobank is still not liable. As aptly pointed out by Senior Associate Justice Perlas-
Bernabe, Metrobank in fact strictly complied with the drawer's instructions.93 The bank released payment to the named payee in
the checks, although the name was misspelled.94 There is no indication that Metrobank knew of the typographical error in the
name of the stated payee. Thus, Metrobank cannot be faulted in the performance of its duty to the drawer. The trial court is
correct in finding that Metrobank is not liable.

Notwithstanding Metrobank's non-liability, Maningas can still recover the amount of the checks from Real Bank, the collecting
bank. Real Bank guaranteed that the checks were genuine and in all respects what they purport to be, and that the indorser
(payee) had good title to them—which Metrobank relied on for the release of payment. As it turned out, the impostor had no good
title to the checks as he was not the intended payee; it was proven that Rosaria (through his sister) did not receive the checks.
Real Bank's guarantees thus turned out to be false, making it liable to reimburse the drawee the amount of the checks.

Further, Real Bank's own negligence, as found by the CA and the RTC, contributed to the improper payment when it failed to
detect the impostor in opening the account.95 The CA is correct in pointing out that the banking industry is imbued with public
interest; banks are thus expected to always observe the highest degree of care and diligence in their transactions.96 Real Bank
should have detected the irregularities in the documents of the impostor and prevented the unauthorized payment had it
exercised extraordinary diligence.

For these reasons, Real Bank is liable to return the amount of the checks to Maningas.

Now, the Court is not unaware of the exception when liability will not attach to the drawee bank or collecting bank—when the
unauthorized payment was caused by the drawer's own fault or negligence.97

Real Bank insists that Maningas was grossly negligent in misspelling the name of Rosaria in the two checks and in sending
the checks by registered mail from London to the Philippines.98 Real Bank argues that these acts of gross negligence preclude
Maningas from raising the defense of "forgery or want of authority;"99 thus, he should not be allowed to recover the amount of
the checks.100

Negligence is the omission to do something which a reasonable human, guided by those considerations that ordinarily
regulate the conduct of human affairs, would do, or doing of something which a prudent and reasonable human would not
do.101 It is a question of fact that should be resolved on a case-by-case basis.102 It is not presumed and it must be proven by
the party that alleges.103
 The Court agrees with the CA that Maningas was not negligent at that time. The RTC and the CA did not rule that Maningas
was negligent on the issuance of the checks. As the CA duly noted, the contention that Maningas was negligent is not supported
by evidence.104 The RTC also stated that "Real Bank did not offer any proof to countervail the claim of Maningas that it was
sheer inadvertence on his part" in misspelling the name of Rosaria.105 In other words, Real Bank failed to overcome the
presumption that Maningas is not negligent in issuing the checks. Thus, the Court finds no reason to disturb these findings of fact
by the RTC and CA. After all, this Court is not a trier of facts;106 and, the instant case does not fall under any of the exceptions
laid by jurisprudence.107 Maningas can therefore set up the defense of want of authority.

Of course, Real Bank can seek reimbursement from the very person—the impostor—that caused the unauthorized payment
of the checks and was benefitted therefrom. That person may be considered as the one ultimately liable for the unauthorized
payment because of his absolute lack of valid title to the checks he was able to encash.108 As that person was not impleaded in
this case, the Court cannot make a pronouncement on that regard.109 Real Bank may instead file a separate action against that
individual.

At this juncture, the Court notes that direct recourse to Real Bank for payment finds support from the rule on simplification of
the proceedings for recovery in cases of unauthorized payments of checks, where the drawer may seek recovery directly from
the collecting bank without passing through the drawee bank on the sequence of liability.110 As shown, the sequence of
recovery is amply provided in case law. However, there may be exceptional circumstances which would justify simplification of
recovery, such as the finality of the pronouncement on the drawee bank's non-liability and the drawee bank's strict compliance
with its duty notwithstanding the actual lack of authority of the payee,111 as in this case.

Considering all the foregoing, the Court holds Real Bank liable to return the amount of the checks directly to Maningas.

The fictitious payee rule is not applicable in this

case.1âшphi1

Another bone of contention is the applicability of the fictitious payee rule to this case. Real Bank argues that Maningas' act of
misspelling the name of the payee calls for the application of the rule; Maningas knowingly misspelled the name, but he had no
intention of making BIENVINIDO ROSARIA the recipient of the amount of the checks.112 Thus, BIENVINIDO ROSARIA is a
fictitious payee.113 As such, Real Bank claims that it should not have been liable as the checks became bearer instruments and
indorsements are not necessary for it to accept the checks for deposit.114 Maningas, on the other hand, contends that he
intended the checks to be paid to an actual and existing person, Rosaria, despite the misspelling in the name.115

The fictitious payee rule is provided in Section 9 of the NIL, thus:

 Section 9. When Payable to Bearer. — The instrument is payable to bearer —

xxxx

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; x x x

If the payee is fictitious, the negotiable instrument becomes a bearer instrument. Indorsement is therefore not necessary for
valid negotiation and transfer of the instrument.116 The case of Philippine National Bank v. Rodriguez,117 as cited by the lower
courts and the parties, discusses the concept of the fictitious payee rule:

A check that is payable to a specified payee is an order instrument. However, under Section
9 (c) of the NIL, a check payable to a specified payee may nevertheless be considered as a
bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si
Malakas at si "Maganda", who are well-known characters in Philippine mythology, are bearer
instruments because the named payees are fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for
this reason that We look elsewhere for guidance. Court rulings in the United States are a logical
starting point since our law on negotiable instruments was directly lifted from the Uniform
Negotiable Instruments Law of the United States.

A review of US jurisprudence yields that an actual, existing, and living payee may also be
"fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds of
the check. This usually occurs when the maker places a name of an existing payee on the check
for convenience or to cover up an illegal activity. Thus, a check made expressly payable to a
non-fictitious and existing person is not necessarily an order instrument. If the payee is not the
intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and
the check is a bearer instrument.

xxxx

In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that
the payees were actual, existing, and living persons who were members of PEMSLA that had a
 rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in
its broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did
not intend for the named payees to be part of the transaction involving the checks. At most, the
bank's thesis shows that the payees did not have knowledge of the existence of the checks. This
lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention
on the part of respondents-spouses that the payees would not receive the checks' proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not the individual
payees, it is understandable that they relied on the information given by the officers of PEMSLA
that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both
lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-
spouses that the named payees were the intended recipients of the checks' proceeds. The bank
failed to satisfy a requisite condition of a fictitious-payee situation — that the maker of the check
intended for the payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order.
Consequently, the drawee bank bears the loss.118

As can be gleaned, there are two instances when a payee is considered fictitious under the NIL. First is when the payee is
indeed a fictitious (per se) or non-existing person, and such fact is known by the maker or drawer. As stated, examples are
"Prinsipe Abante" or "Si Malakas at si Maganda"119 — these names are indeed fictitious. And, it would be safe to imply that it
would be rare for persons to have names that are widely known to be fictitious.

Second is when the maker or drawer does not intend for the payee indicated — though an existing person — to receive the
proceeds of the instrument. To illustrate, a check made payable to the Chief Justice of the Supreme Court of the United States
(Chief Justice John G. Roberts, Jr. at this time) may be considered a bearer instrument pursuant to the rule if it is shown that the
drawer did not really intend for the Chief Justice to receive the amount of the check. Here, the Chief Justice is indeed an existing
person; but the fictitious payee rule kicks in after determining the drawer's intent. Hence, the maker or drawer's intention is the
primary consideration. In this regard, the party alleging that the payee is fictitious under the second instance should prove that
the maker or the drawer did not intend for that person indicated to be the recipient of the value of the instrument.120

In this case, Real Bank's insistence on the application of the rule is misplaced. The misspelling of Rosaria's name did not
make the payee of the checks fictitious under the law. It must be emphasized that the RTC and CA have determined that
Maningas truly intended for the actual Rosaria to be the payee of the checks. Maningas did not intend to write a different name
from the name of the intended payee. The typographical error was not due to Maningas' negligence as found by the lower courts.
Again, there is no reason for this Court to review findings of fact of the lower courts. Thus, it is proper to state that Rosaria is
indeed the payee despite the misspelling of his name. BIENVINIDO ROSARIA as written on the checks pertains to Rosaria as
Maningas had intended. The fictitious payee rule is not applicable because the payee written on the checks is the same with the
intended payee by the drawer.

As such, the subject checks in the instant case remain to be order instruments. Indorsement is necessary for their valid
negotiation. Liability therefore validly attaches to Real Bank.

There is a violation of the law on secrecy of

bank deposits.

Real Bank contends that the RTC's action directing it to produce the bank records of the impostor violates the law on secrecy
of bank deposits.121 Real Bank posits that the impostor's bank account is not the subject of litigation, and emphasized that the
impostor himself is not a party to the instant case.122 Also, Maningas' cause of action was never to recover from the impostor's
bank account.123 Maningas, however, argues that the money deposited to the impostor's bank account is the subject matter of
litigation (the instant case) as he is seeking to recover that very amount improperly paid to the impostor.124

The Court finds that the RTC erred in ordering the production of the impostor's bank records.

RA 1405125 is enacted to help encourage the public to deposit their money in banking institutions so that it may be used on
loans and eventually assist in the economic development of the country.126 The law protects deposits of whatever nature from
examination and inquiry, subject to certain exceptions:127

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment, or
upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in
cases where the money deposited or invested is the subject matter of the litigation.
 Relevant to this case is the exception where the money deposited or invested is the subject matter of the litigation. The
Court, in Union Bank of the Philippines v. Court of Appeals,128 noted that inquiry will be allowed if the money deposited in the
account is itself the subject matter of litigation.129 In BSB Group, Inc. v. Go,130 the Court elaborated that the subject matter of
the action should be deduced from the indictment and not from the evidence sought to be admitted.131 For civil cases, the
subject matter should be deduced from the allegations in the complaint, and not from the evidence sought to be admitted. For
inquiry to be allowed, the subject matter should be the actual money itself, not the mere money equivalent of the checks.132

In this case, it is clear that Maningas seeks to recover the money that was deposited and encashed by the impostor in Real
Bank Maningas' action, however, was directed against the banks, and not against the impostor who opened an account with Real
Bank. Thus, it is apparent that Maningas is seeking to recover the mere money equivalent of the checks erroneously paid by the
banks, and not the money itself that is already long gone in the hands of the impostor. For this reason, the money deposited is
not the subject matter of the litigation. The exception provided in the law is not present in this case, thus, the inquiry ordered by
the RTC is improper. After all, "[s]hould there be doubts in upholding the absolutely confidential nature of bank deposits against
affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of the former."133

It is important to emphasize that the liabilities of the banks, as already determined, will not be affected even if the information
on the bank account are to be excluded because of a violation of RA 1405. The case can be ruled upon, as it was adjudicated,
even without the information on the bank account of the impostor. To recall, Real Bank's liability is by virtue of the guarantees it
extended being the collecting bank and last indorser of the checks.

The RTC did not err in allowing the admission

of additional evidence not included in the pre-
trial order.

Real Bank again assails the RTC's admission of additional evidence not included in the pre-trial order. It insists that it made
timely objections to the admission of the additional evidence.134 Real Bank argues that Maningas did not present justifiable
reasons for the RTC to relax the rules and admit the additional evidence.135 Maningas contends that the trial court admitted
evidence not included in the pre-trial order in order to aid it in the judicious evaluation of the facts of the case and to serve the
end of justice.136 He adds that Real Bank failed to timely object to the presentation of the additional evidence; Real Bank raised
its objections for the first time on appeal.137

As to this issue, the Court agrees with the CA that the RTC did not err in admitting evidence that were not included in the pre-
trial order.

A.M. No. 03-1-09-SC138 provides for the guidelines to be observed by trial courts including during the pre-trial:
 I. PRE-TRIAL

A. Civil Cases

xxxx

2. The parties shall submit, at least three (3) days before the pre-trial, pre-trial briefs containing
the following:

xxxx

d. The documents or exhibits to be presented, stating the purpose thereof. (No evidence shall be
allowed to be presented and offered during the trial in support of a party's evidence-in-chief other
than those that had been earlier identified and pre-marked during the pre-trial, except if allowed
by the court for good cause shown);

xxxx

f. The number and names of the witnesses, the substance of their testimonies, and the
approximate number of hours that will be required by the parties for the presentation of their
respective witnesses.

xxxx

The rule provides that the parties shall already indicate in their pre-trial briefs the documentary and testimonial evidence that
they intend to present. The briefs will be the basis of the pre-trial order that the court will issue; the order will enumerate the
evidence that each side is allowed to present.139

No documentary evidence shall be presented and offered in trial other than those that had been earlier identified and pre-
marked during the pre-trial, except if allowed by the court for good cause shown. There is no hard and fast rule to determine what
may constitute "good cause," though this Court has previously defined it as any substantial reason "that affords a legal
excuse."140 The good cause exception, however, does not extend to testimonial evidence,141 especially since the Judicial
Affidavit Rule governs presentation of testimonial evidence.142

The Court agrees with the CA. Except on two of the three additional witnesses that Maningas presented, Real Bank failed to
raise timely objections to the offer of the additional documentary and testimonial evidence. Real Bank properly objected to the
presentation of Celia Pineda and Angelita O. Grey as witnesses.143 However, it failed to object on the other documentary and
testimonial evidence on the ground that they were not included in the pre-trial order.144 Indeed there were objections, but the
grounds raised were different.145 Thus, the additional pieces of evidence became admissible.

Regardless of whether these additional pieces of evidence are excluded or not, the liabilities of the banks as already
determined will not be affected. The additional pieces of evidence are not necessary to rule that Real Bank is liable by virtue of
the guarantees it extended being the collecting bank and last indorser of the checks.

Legal interest

Lastly, the Court fixes the legal interest imposable on the amount of the checks to be returned by Real Bank. Legal interest is
imposed as follows: (a) twelve percent (12%) per annum from the filing of the complaint on February 10, 2009 until June 30,
2013; (b) six percent (6%) per annum from July 1, 2013 until finality of the Decision;146 and, (c) the total amount of the foregoing
shall, in turn, earn interest at the rate of six percent (6%) per annum, from finality of the Decision until full payment.

WHEREFORE, the petition is DENIED. The November 29, 2013 Decision and March 14,
2014 Resolution of the Court of Appeals in CA-G.R. CV. No. 99817
are AFFIRMED with MODIFICATION in that legal interest on the amount due is imposed as
follows: (a) twelve percent (12%) per annum from the filing of the complaint on February 10, 2009
until June 30, 2013; (b) six percent (6%) per annum from July 1, 2013 until finality of the Decision;
and, (c) the total amount of the foregoing shall, in turn, earn interest at the rate of six percent
(6%) per annum, from finality of the Decision until full payment.

SO ORDERED.

Perlas-Bernabe, (Chairperson), Zalameda, Rosario, and Marquez, JJ., concur.

Footnotes

1 Rollo, pp. 12-41.

2 Id. at 43-67. Penned by Associate Justice Remedios A. Salazar-Fernando and concurred in by Associate
Justices Samuel H. Gaerlan (now a Member of this Court) and Victoria Isabel A. Paredes.

3 Id. at 69-70. Penned by Associate Justice Remedios A. Salazar-Fernando and concurred in by Associate
Justices Danton Q. Bueser and Eduardo B. Peralta, Jr.

4 CA rollo, pp. 36-58. Penned by Presiding Judge J. Cedrick O. Ruiz.

5 Records, p. 703.

6 Id. at 1-28.

7 Rollo, p. 44.

8 Id. at 44-45.

9 Id. at 45.

10 Id.

11 Id. Note the difference in the spelling of the first name: letters "E" and "I" for the sixth letter of the name.
Bienvenido is the actual name of the intended payee; Bienvinido was the name written as payee of the checks
and the name used for the opening of an account with Real Bank.

12 Id.

13 Id.

14 Id.

15 Id. at 45-46.

16 Id. at 46.
17 Id.

18 Id.

19 Id.

20 Id.

21 Id.

22 Id.

23 Id. at 47.

24 Id.

25 CA rollo, p. 45.

26 Rollo, pp. 47-48.

27 Id. at 48.

28 Id.

29 Records, pp. 43-51.

30 Rollo, p. 48.

31 Id.

32 Id.

33 Id.
34 Id. at 48-49.

35 Records, pp. 56-62.

36 Rollo, p. 49.

37 Id.

38 Id.

39 CA rollo, pp. 36-58.

40 Id. at 40.

41 Id. at 40-41, 57.

42 Id. at 41-42.

43 Id. at 42-43.

44 Id. at 44.

45 Id. at 44-45.

46 Id. at 45.

47 Id. at 45-46.

48 Id.

49 Id. at 46.

50 Id.
51 Id. at 48-50.

52 Id. at 52-57.

53 Id. at 56.

54 Id.

55 Id.

56 Records, p. 633.

57 Id. at 634-647.

58 Id. at 703.

59 CA rollo, pp. 59-61.

60 Rollo, pp. 43-67.

61 Id. at 51-52. See id. at 98 for the list of additional documentary evidence admitted: Certification from the
Professional Regulation Commission (PRC) dated September 23, 2013 (Exhibit "G"); Employee Static Information
issued by the Social Security System (SSS) (Exhibit "H"); Certification from the Commission on Elections
(Comelec) dated October 7, 2010 (Exhibit "I"); purported PRC ID in the name of a certain Bienvinido Rosaria
(Exhibit "J"); purported Bureau of Internal Revenue ID in the name of a certain Bienvinido Rosaria (Exhibit "K");
purported SSS ID in the name of a certain Bienvinido Rosaria (Exhibit "L"); purported Comelec ID name of a
certain Bienvinido Rosaria (Exhibit "M"). See id. at 22 for the list of additional testimonial evidence admitted: Celia
Pineda of the PRC, Angelita O. Grey of the SSS, and Remegio Redaniel of Comelec.

62 Id. at 52.

63 Id.

64 Id. at 53-56.
65 Id. at 57-60.

66 Id. at 61.

67 Id.

68 Id.

69 Id. at 62.

70 Id. at 63-65.

71 Entitled "AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO DEPOSITS WITH ANY BANKING
INSTITUTION AND PROVIDING PENALTY THEREFOR." Approved: September 9, 1955.

72 Rollo, pp. 65-66.

73 Id.

74 Id. at 66.

75 CA rollo, pp. 224-233.

76 Rollo, pp. 69-70.

77 Id. at 19-20.

78 Id. at 24-31.

79 Id. at 31-33.

80 Id. at 111-125.
81 Id. at 125-127.

82 Id. at 127-133.

83 CA rollo, pp. 72-99 (Appellant's Brief), 124-185 (Appellee's Brief), 190-196 (Reply Brief).

84 Rollo, pp. 12-41 (Petition), 78-142 (Comment).

85 Metropolitan Bank & Trust Co. v. Junnel's Marketing Corporation, G.R. Nos. 232044 & 232057, August 27,
2020.

86 811 Phil. 280 (2017).

87 Id. at 293.

88 Yon Mitori International Industries v. Union Bank of the Philippines, G.R. No. 225538, October 14, 2020,
citing Areza v. Express Savings Bank, Inc., 742 Phil. 623, 639 (2014).

89 Id.

90 Act No. 2031, The Negotiable Instruments Law (1911). Enacted: February 3, 1911.

91 Metropolilan Bank & Trust Co. v. Junnel's Marketing Corporation (2020), supra note 85.

92 Id.

93 Letter of Senior Associate Justice Estela Perlas-Bernabe dated March 1, 2022 (Re: Suggested Modifications
[to the instant case]), p. 1.

94 Id.

95 Rollo, pp. 56-60. CA rollo, pp. 42-43.

96 Id. at 57, citing Republic Act No. 8791, AN ACT PROVIDING FOR THE REGULATION OF THE
ORGANIZATION AND OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER
PURPOSES [THE GENERAL BANKING LAW OF 2000 sec. 2 (2000). Approved: May 23, 2000.

97 See Metropolitan Bank and Trust Company v. Junnel’s Marketing Corporation, 833 Phil. 1107, 1124 (2018),
and Allied Banking Corporation v. Lim Sio Wan, 573 Phil. 89, 107 (2008).

98 Rollo, pp. 24-28.

99 Id. at 28-31.

100 Id. at 31.

101 Philippine Savings Bank v. Sakata, G.R. No. 229450, June 17, 2020.

102 Id.

103 Id.

104 Id. at 53.

105 CA rollo, p. 57.

106 Philippine Savings Bank v. Sakata, supra note 101.

107 See id., citing Pascual v. Burgos, 776 Phil. 167, 182-183 (2016).

108 Metropolitan Bank and Trust Company v. Junnel's Marketing Corporation, supra.

109 See id.

110 See BDO Unibank v. Lao, supra note 86.

111 Id.
112 Rollo, pp. 33-36.

113 Id.

114 Id. at 36.

115 Id. at 134-138.

116 See The Negotiable Instruments Law, sec. 30.

117 588 Phil. 196 (2008).

118 Id. at 210-214. Citations omitted.

119 Id. at 210.

120 Id. at 213.

121 Rollo, pp. 36-37.

122 Id. at 37.

123 Id.

124 Id. at 107-110.

125 Entitled "AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO DEPOSITS WITH ANY BANKING
INSTITUTION AND PROVIDING PENALTY THEREFOR." Approved: September 9, 1955.

126 See Section 1 of RA 1405.

127 See Section 2 of RA 1405.

128 378 Phil. 1177 (1999).

129 Id. at 1183.

130 626 Phil. 501 (2010).

131 Id. at 516.

132 See id. at 517.

133 Id. at 517-518.

134 Rollo, p. 22.

135 Id. at 23.

136 Id. at 96-97.

137 Id. at 97-107.

138 Re: Proposed Rule on Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct
of Pre-Trial and Use of Deposition-Discovery Measures (2004). Dated July 13, 2004.

139 See Annex "D" of A.M. No. 03-1-09-SC.

140 Heirs of Lagon v. Ultramax Healthcare Supplies, Inc., G.R. No. 246989, December 7, 2020, citing Cruz v.
People, 810 Phil. 801, 814-815 (2017).

141 Chua v. Spouses Cheng, 821 Phil. 594, 603 (2017).

142 A.M. No. 12-8-8-SC, Judicial Affidavit Rule. Note, however, that this Rule had yet to take effect at the time
the instant case was heard and decided by the RTC. Dated September 4, 2012.

143 Rollo, pp. 52, 190-196.

 144 Id.

145 Id.

146 See Nacar v. Gallery Frames, 716 Phil. 267, 281-283 (2013), and Rivera v. Spouses Chua, 750 Phil. 663,
684-686 (2015).

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 SECOND DIVISION

[ G.R. No. 211837. March 16, 2022 ]

THE REAL BANK (A THRIFT BANK), INC., PETITIONER, VS. DALMACIO CRUZ MANINGAS, RESPONDENT.

DECISION

HERNANDO, J.:

This petition for review on certiorari[1] assails the November 29, 2013 Decision[2] and March 14, 2014 Resolution[3] of the Court of

Appeals (CA) in CA-G.R. CV. No. 99817, which affirmed the June 22, 2012 Decision[4] and September 13, 2012 Resolution[5] of the

Regional Trial Court (RTC), Branch 61, Makati City in Civil Case No. 09-106.

The Factual Antecedents

This case arose from a complaint[6] filed by respondent Dalmacio Cruz Maningas (Maningas) against petitioner The Real Bank (A

Thrift Bank), Inc. (Real Bank), and Metropolitan Bank and Trust Co. (Metrobank) for the recovery of a sum of money with damages.

Real Bank and Metrobank are domestic corporations engaged in the business of banking.

Maningas is a Filipino-British national who was living in London, England at the time material to this case. [7] He maintained a

savings account and a checking account with Metrobank Greenhills, Eisenhower branch. [8] On August 22, 2006, while in London,
Maningas issued two crossed checks with amounts of P550,000.00 and P602,700.00 (with an aggregate amount of P1,152,700.00)

in favor of his friend Bienvenido Rosaria (Rosaria).[9] Maningas issued the checks as payment to Rosaria for a parcel of land he

(Maningas) purchased.[10] Notably, however, Maningas wrote the name BIENVINIDO ROSARIA as payee of the two checks. [11]

As Rosaria was also in London at that time, he instructed Maningas to mail the checks to Maxima Jumawan, Rosaria's sister, who

was residing at that time in Dongalo, Parañaque City, with a request to deposit the checks to Rosaria's account. [12]

After a week, Maningas inquired if the checks were received; Rosaria informed him that the checks did not arrive. [13] But when

Maningas checked his account balance, he discovered that the amount of the checks was already deducted. [14] He then clarified

with Metrobank and learned that the checks were paid when a person named BIENVINIDO ROSARIA used the checks in opening an

account with Real Bank in its Bacoor, Cavite branch.[15] Thereafter, the full amount was withdrawn.[16]

It was alleged that the person who represented himself as BIENVINIDO ROSARIA was referred by a retired manager of the Real

Bank branch for the opening of an account.[17] This person was interviewed and he presented three valid identification cards,

which showed no signs of tampering and any adverse findings.[18] The branch manager at that time then approved the opening of

the account.[19] The checks were deposited, and Real Bank sent them to Metrobank for clearing. The checks were allowed to be

withdrawn only after they were cleared by Metrobank.[20] Maningas alerted Metrobank of the alleged forgeries; so Metrobank

attempted to return the checks to Real Bank on the ground of "forged endorsement," but to no avail. [21] Maningas thus sent an

electronic mail to Real Bank, informing it that the checks were paid to an impostor using the name BIENVINIDO ROSARIA, who

opened an account in the branch; this, however, was also ignored, so he sent a formal demand dated September 15, 2006. [22]
This resulted to the filing of Maningas' complaint who contended that both banks were negligent in allowing the unauthorized

withdrawal of the amount despite the forged indorsements of the checks. [23] As the depository bank, Metrobank has the obligation

to pay the checks to the intended payee only upon a genuine indorsement—the impostor's signature in this case is not a genuine

indorsement.[24] He added that Metrobank did not notify him prior to debiting his account. [25] Metrobank should therefore return the

amount. For Real Bank, its liability is derived from its implied warranties as a collecting bank and last indorser in guaranteeing all

previous indorsements, including the forged indorsement, and the genuineness of the checks. [26] As a result, Real Bank must bear

the consequences.[27] Maningas also claimed damages and attorney's fees.[28]

Real Bank filed an answer with counterclaim.[29] It argued that Maningas had no legal standing to file as Rosaria, being the

intended payee, is the real party in interest who had the authority to file the action. [30] Real Bank insisted that it followed all rules

and regulations in allowing the opening of the account, as well as the subsequent deposit and encashment of the checks. [31] The

alleged payee, BIENVINIDO ROSARIA, presented the required proofs of identification, and the amount was withdrawn only after the

checks were cleared.[32] Maningas was therefore precluded from raising the defense of forgery and had no one to blame but

himself for sending the checks to another person knowing that the intended payee was also in London. [33] Real Bank added that the

fictitious payee rule is applicable, making the checks bearer instruments; thus, the forgery had no effect. [34]

Metrobank also filed an answer with crossclaim.[35] It argued that the claim for reimbursement should be directed solely against

Real Bank; as the collecting bank and last indorser, Real Bank was duty bound to ascertain the genuineness of all prior

indorsements.[36] When the checks were presented for payment, it was presumed that Real Bank performed its duty. [37] Real Bank,
however, was remiss in its duty and it should ultimately be responsible for the unlawful withdrawal by reason of the forged

indorsements.[38]

Ruling of the Regional Trial Court:

In its June 22, 2012 Decision,[39] the RTC ruled in favor of Maningas and ordered Real Bank to pay, by itself, Maningas the aggregate

amount of the checks (P1,152,700.00) plus six percent (6%) interest per annum from the date of the filing of the complaint until

full payment thereof.

The RTC ruled that the true intention of Maningas was to issue the checks in favor of Rosaria. [40] Real Bank failed to refute the

statement that the typographical error in writing BIENVINIDO as payee was inadvertent on the part of Maningas because he was in

a hurry at that time.[41] Real Bank vouched for the validity and genuineness of the prior indorsements when it accepted the crossed

checks.[42]

The RTC found Real Bank to be negligent as a collecting bank and last indorser in: (a) allowing the opening of the account of a

person using the name BIENVINIDO ROSARIA using the subject checks; (b) not scrutinizing and vetting the IDs presented by the

person; (c) not inquiring as to the conflict in the civil status appearing in the Voter's ID and application form to open the account;

(d) not checking the validity of the IDs presented with the issuing government agency; and, (e) not investigating after being

informed that the person purporting to be BIENVINIDO ROSARIA was not the intended payee. [43] On the other hand, Metrobank, as

drawee, did not breach its duty and was not negligent in dealing with Maningas. [44] It followed the instructions of the drawer and
relied on the guarantee provided by Real Bank.[45] There is nothing negligent in not sending an electronic mail to notify the drawer

prior to the actual debiting of the account.[46]

Only Real Bank is liable for being the collecting bank and last indorser. [47] As such, it is must scrutinize the checks deposited with

it to determine their genuineness and regularity. [48] Real Bank, especially in its act of stamping the back of the checks with "all

prior indorsements and/or lack of indorsements are guaranteed" became a general endorser under the law and therefore cannot

escape liability.[49] Metrobank, in paying the check, merely relied on this guarantee. [50] The RTC thus ruled that Maningas had no

cause of action against Metrobank; it is not solidarily liable with Real Bank in returning the amount of the checks. [51]

The RTC further ruled that the fictitious payee rule is not applicable. [52] The intended payee of the checks, Rosaria, is a living and

existing person.[53] Real Bank did not contest the claim that Maningas simply misspelled Rosaria's name on the checks, thus, the

misspelling did not convert the payee to somebody fictitious under the law.[54] The checks remained to be order instruments that

necessitate indorsements for transfer.[55]

The dispositive portion of the RTC Decision reads:

WHEREFORE, apriorisms duly considered, the herein defendant The Real Bank (A Thrift Bank), Inc. (Real Bank) is hereby DIRECTED

to pay the herein plaintiff the sum of One Million One Hundred Fifty Two Thousand Seven Hundred Pesos (PHP1,152,700.00), with

interest at six percent (6%) per annum from the date the present "Complaint" was filed until the said amount is fully paid.
 The "x x x Cross-Claim" of herein defendant, Metropolitan Bank and Trust Company (Metrobank), against its co-defendant, The

Real Bank (A Thrift Bank), Inc. (Real Bank), is hereby DISMISSED.

Costs de officio.

SO ORDERED.[56]

Real Bank moved for reconsideration,[57] but this was denied by the RTC in its September 13, 2012 Resolution.[58] Thus, Real Bank

appealed to the CA.[59]

Ruling of the Court of Appeals:

In its November 29, 2013 Decision,[60] the CA affirmed the ruling of the RTC.

Notably, Real Bank argued in its appeal that the RTC erred in allowing additional evidence that were not included in the pre-trial

order despite objections.[61] The CA ruled that Real Bank failed to object, thereby waiving the objections and making the additional

evidence admissible.[62] Further, the RTC's admission of the additional evidence was justified as the trial court saw the necessity

and declared that the interest of justice and fairness is best served by allowing the additional evidence. [63]

The CA held that Maningas is not negligent in misspelling the payee's name and in sending the checks by ordinary mail; in fact, he
exercised due diligence in the process by crossing the checks and closely monitoring their arrival. [64] On the other hand, it was

Real Bank that failed to exercise the highest degree of care and diligence as a bank in haphazardly reviewing the documents

submitted by the BIENVINIDO person in opening an account. [65]

Real Bank's liability was cemented by its status as collecting bank, especially when it presented the checks to Metrobank for

payment with a stamp of guarantee of all prior indorsements. [66] The CA held that the act of presentment to the drawee bank

connotes that the collecting bank had done its duty with respect to the genuineness and validity of the checks. [67] Therefore, Real

Bank cannot escape liability and it cannot set up the defense of forgery. [68] Real Bank is solely liable for the value of the checks.

[69]
Further, it cannot invoke the fictitious payee rule. Rosaria was the intended payee; Real Bank failed to show that Maningas did

not intend for Rosaria to receive the proceeds of the checks. [70]

Real Bank also contended that Republic Act No. (RA) 1405,[71] the law on secrecy of bank deposits, was violated when the RTC

ordered the production of records pertaining to the deposit account of one BIENVINIDO ROSARIA. [72] The CA held that there was no

violation because that account was the subject of the instant litigation—the law allows inquiry on bank accounts that are subject

of litigation.[73]

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision dated June 22, 2012 and the Resolution dated September 13, 2012 of the

Regional Trial Court, Branch 61, Makati City, in Civil Case No. 09-106 are hereby AFFIRMED.
SO ORDERED.[74]

Real Bank moved for reconsideration of the Decision,[75] but this was denied by the CA in its March 14, 2014 Resolution.[76]

Hence this petition, which raises the following errors:

1. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings in sustaining the action of the

trial court allowing the admission of documents and testimony of witnesses not included in the pre-trial order despite objection

from petitioner REAL BANK;

2. The Court of Appeals gravely erred in sustaining the ruling of the trial court in not finding that the writing of the name of the

payee "BIENVINIDO ROSARIA" instead of "BIENVENIDO ROSARIA,["] in the two (2) subject checks was an act of gross negligence

on the part of [Maningas];

3. The Court of Appeals gravely erred in sustaining the trial court in not finding that the sending of the completely filled up checks

from London England to Parañaque City, through ordinary mail was an act of gross negligence on the part of [Maningas];

4. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings in sustaining the ruling of the trial

court in not finding that [Maningas] is precluded from setting up the defense of forgery or want of authority against [Real Bank] on

account of his own act of gross negligence;

5. The Court of Appeals gravely erred in sustaining the findings of the trial court that [Real Bank] was negligent and remiss in its

obligation as collecting bank and last endorser of the subject checks;

6. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings in sustaining the ruling of the trial

court in not finding that the checks drawn by [Maningas] came within the operation of the fictitious payee rule under Section 09 of

the Negotiable Instruments Law and therefore payable to bearer and negotiable by mere delivery rendering immaterial the alleged

forged [i]ndorsement;

7. The Court of Appeals gravely erred and departed from the usual course of judicial proceedings in sustaining the action of the

trial court directing [Real Bank] to produce the records of the account of "BIENVINIDO ROSARIA" as it violated the provisions of

the Law on Secrecy of Bank Deposits.[77]

Issue

The issue here boils down to whether Real Bank is liable to return the amount of the checks to respondent Maningas.

Our Ruling

The petition has no merit. The Court affirms the rulings of the CA and the RTC. Real Bank is liable to return the amount of the
checks to Maningas.

Real Bank is liable to return

the amount of the checks to
Maningas.

Real Bank argues that it should not be liable because Maningas was negligent in misspelling the name of the payees and sending

the checks by registered mail to the Philippines.[78] Further, it insists that it was not negligent as a collecting bank in failing to

detect the irregularities in the impostor's application for opening the bank account. [79] Maningas counters that Real Bank was

indeed negligent and remiss in its obligation as a collecting bank and last indorser of the checks. [80] He also argues that, as found

by the RTC and the CA, he was not negligent in misspelling the name of the payees and sending the checks by registered mail to

the Philippines.[81] He can therefore set up the defense of forgery or want of authority and claim payment from Real Bank. [82]

It is clear that the instant case is a case of unauthorized payment to a person other than the intended payee named on the check.

Both the RTC and the CA determined that the intended payee of the checks was indeed Rosaria. As found, the checks made their

way to the hands of an impostor who used the name BIENVINIDO ROSARIA for encashment; the intended payee never received the

checks.

At the outset, the Court notes that the pronouncement of Metrobank's non-liability has already become final. Metrobank did not file

a notice of appeal to assail the RTC Decision precisely because the trial court absolved it from liability; and from then on, it no
longer participated in the succeeding proceedings. The CA Decision also notably did not touch upon Metrobank's liability. Further,

upon examination of the appeal briefs[83] filed with the CA, neither Real Bank nor Maningas mentioned or raised any issue as to the

liability of Metrobank. Likewise, the pleadings[84] filed before this Court no longer raised issues on the liability of Metrobank.

Because of Maningas and Real Bank's failure to appeal the RTC Decision with respect to Metrobank's lack of liability, the decision

became final as to the latter. The Court also considers that Metrobank will be deprived of due process if its liability will be touched

upon at this stage of the proceedings.

Thus, the Court cannot and will no longer disturb Metrobank's non-liability. The pronouncement in this case pertains to Real Bank's

liability.

In the normal course of things, however, case law provides that in cases of unauthorized payments to a person other than the

payee or his order, the drawee bank is liable for the amount of the checks; in turn, the drawee bank may seek reimbursement from

the collecting bank.[85] The case of BDO Unibank, Inc. v. Lao[86] (BDO Unibank) discusses the nature of liability of the two banks in

cases of unauthorized payments of checks:

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter's accounts only those

payables authorized by him. A drawee bank is under strict liability to pay the check only to the payee or to the payee's order. When

the drawee bank pays a person other than the payee named in the check, it does not comply with the terms of the check and

violates its duty to charge the drawer's account only for properly payable items.
On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of the check. Under

Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all respects what it

purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of

his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank 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. If any of

the warranties made by the collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of the

check.[87]

As stated, the drawee bank becomes liable pursuant to its breach of obligation as regards its depositor (drawer) in paying the

amount of the check to a person other than the payee or his order. The drawee bank is under strict liability to pay the check only to

the payee or his order.

On the other hand, a collecting bank is "any bank handling an item for collection except the bank on which the check is

drawn,"[88] and it binds itself to "credit the amount in [the depositor's] account or infuse value thereon only after the drawee bank

shall have paid the amount of the check or [after] the check [is] cleared for deposit." [89] It becomes liable pursuant to its guarantee

as the last indorser of the check, as provided in Section 66, in relation to Section 65, of the Negotiable Instruments Law (NIL),

which state:[90]
Section 65. Warranty Where Negotiation by Delivery and So Forth. — Every person negotiating an instrument by delivery or by a

qualified indorsement warrants —

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

xxxx

Section 66. Liability of General Indorser. — Every indorser who indorses without qualification, warrants, to all subsequent holders

in due course —

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and

(b) That the instrument is at the time of his indorsement valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its

tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the

holder, or to any subsequent indorser who may be compelled to pay it.

The collecting bank assumes the liabilities of a general indorser when it presents a check to the drawee bank for payment.

[91]
Thus, if any of these warranties turn out to be false, the collecting bank becomes liable to the drawee bank for any payments

made on the check by virtue of the false warranties.[92]

Pursuant to the rule, the drawee bank should reimburse the amount to the drawer; subsequently, the drawee bank may seek

reimbursement from the collecting bank.

In the instant case, Metrobank (drawee bank) charged Maningas' account and paid the subject checks to an impostor who used the

name BIENVINIDO ROSARIA after Real Bank (collecting bank) presented the checks stamped with "all prior indorsements and/or

lack of indorsements are guaranteed" for payment.

Again, as Metrobank's non-liability has become final, the Court cannot disturb the pronouncement and impose upon the bank.

But assuming that Metrobank's non-liability is not yet final and considering the above principles on liability of banks, the Court

finds that, considering the circumstances, Metrobank is still not liable. As aptly pointed out by Senior Associate Justice Perlas-

Bernabe, Metrobank in fact strictly complied with the drawer's instructions. [93] The bank released payment to the named payee in

the checks, although the name was misspelled.[94] There is no indication that Metrobank knew of the typographical error in the

name of the stated payee. Thus, Metrobank cannot be faulted in the performance of its duty to the drawer. The trial court is correct

in finding that Metrobank is not liable.

Notwithstanding Metrobank's non-liability, Maningas can still recover the amount of the checks from Real Bank, the collecting

bank. Real Bank guaranteed that the checks were genuine and in all respects what they purport to be, and that the indorser

(payee) had good title to them—which Metrobank relied on for the release of payment. As it turned out, the impostor had no good

title to the checks as he was not the intended payee; it was proven that Rosaria (through his sister) did not receive the checks.

Real Bank's guarantees thus turned out to be false, making it liable to reimburse the drawee the amount of the checks.

Further, Real Bank's own negligence, as found by the CA and the RTC, contributed to the improper payment when it failed to detect

the impostor in opening the account.[95] The CA is correct in pointing out that the banking industry is imbued with public interest;

banks are thus expected to always observe the highest degree of care and diligence in their transactions. [96] Real Bank should

have detected the irregularities in the documents of the impostor and prevented the unauthorized payment had it exercised

extraordinary diligence.

For these reasons, Real Bank is liable to return the amount of the checks to Maningas.

Now, the Court is not unaware of the exception when liability will not attach to the drawee bank or collecting bank—when the

unauthorized payment was caused by the drawer's own fault or negligence. [97]

Real Bank insists that Maningas was grossly negligent in misspelling the name of Rosaria in the two checks and in sending the

checks by registered mail from London to the Philippines.[98] Real Bank argues that these acts of gross negligence preclude

Maningas from raising the defense of "forgery or want of authority;" [99] thus, he should not be allowed to recover the amount of the
checks.[100]

Negligence is the omission to do something which a reasonable human, guided by those considerations that ordinarily regulate the

conduct of human affairs, would do, or doing of something which a prudent and reasonable human would not do. [101] It is a question

of fact that should be resolved on a case-by-case basis.[102] It is not presumed and it must be proven by the party that alleges. [103]

The Court agrees with the CA that Maningas was not negligent at that time. The RTC and the CA did not rule that Maningas was

negligent on the issuance of the checks. As the CA duly noted, the contention that Maningas was negligent is not supported by

evidence.[104] The RTC also stated that "Real Bank did not offer any proof to countervail the claim of Maningas that it was sheer

inadvertence on his part" in misspelling the name of Rosaria. [105] In other words, Real Bank failed to overcome the presumption

that Maningas is not negligent in issuing the checks. Thus, the Court finds no reason to disturb these findings of fact by the RTC

and CA. After all, this Court is not a trier of facts;[106] and, the instant case does not fall under any of the exceptions laid by

jurisprudence.[107] Maningas can therefore set up the defense of want of authority.

Of course, Real Bank can seek reimbursement from the very person—the impostor—that caused the unauthorized payment of the

checks and was benefitted therefrom. That person may be considered as the one ultimately liable for the unauthorized payment

because of his absolute lack of valid title to the checks he was able to encash. [108] As that person was not impleaded in this case,

the Court cannot make a pronouncement on that regard.[109] Real Bank may instead file a separate action against that individual.

At this juncture, the Court notes that direct recourse to Real Bank for payment finds support from the rule on simplification of the
proceedings for recovery in cases of unauthorized payments of checks, where the drawer may seek recovery directly from the

collecting bank without passing through the drawee bank on the sequence of liability. [110] As shown, the sequence of recovery is

amply provided in case law. However, there may be exceptional circumstances which would justify simplification of recovery, such

as the finality of the pronouncement on the drawee bank's non-liability and the drawee bank's strict compliance with its duty

notwithstanding the actual lack of authority of the payee, [111] as in this case.

Considering all the foregoing, the Court holds Real Bank liable to return the amount of the checks directly to Maningas.

The fictitious payee rule is

not applicable in this case.

Another bone of contention is the applicability of the fictitious payee rule to this case. Real Bank argues that Maningas' act of

misspelling the name of the payee calls for the application of the rule; Maningas knowingly misspelled the name, but he had no

intention of making BIENVINIDO ROSARIA the recipient of the amount of the checks. [112] Thus, BIENVINIDO ROSARIA is a fictitious

payee.[113] As such, Real Bank claims that it should not have been liable as the checks became bearer instruments and

indorsements are not necessary for it to accept the checks for deposit. [114] Maningas, on the other hand, contends that he intended

the checks to be paid to an actual and existing person, Rosaria, despite the misspelling in the name. [115]

The fictitious payee rule is provided in Section 9 of the NIL, thus:

Section 9. When Payable to Bearer. — The instrument is payable to bearer —

xxxx

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so

payable; x x x

If the payee is fictitious, the negotiable instrument becomes a bearer instrument. Indorsement is therefore not necessary for valid

negotiation and transfer of the instrument.[116] The case of Philippine National Bank v. Rodriguez,[117] as cited by the lower courts

and the parties, discusses the concept of the fictitious payee rule:

A check that is payable to a specified payee is an order instrument. However, under Section 9 (c) of the NIL, a check payable to a

specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing

person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si

"Maganda", who are well-known characters in Philippine mythology, are bearer instruments because the named payees are

fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look elsewhere for

guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted

from the Uniform Negotiable Instruments Law of the United States.

A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did

not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an

existing payee on the check for convenience or to cover up an illegal activity. Thus, a check made expressly payable to a non--

fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of

the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.

xxxx

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable

to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of

PEMSLA that had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to

be part of the transaction involving the checks. At most, the bank's thesis shows that the payees did not have knowledge of the

existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on

the part of respondents-spouses that the payees would not receive the checks' proceeds. Considering that respondents-spouses

were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the

officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present

sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks'

proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation — that the maker of the check intended for

the payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply. Thus,

the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss. [118]

As can be gleaned, there are two instances when a payee is considered fictitious under the NIL. First is when the payee is indeed a

fictitious (per se) or non-existing person, and such fact is known by the maker or drawer. As stated, examples are "Prinsipe Abante"

or "Si Malakas at si Maganda"[119] — these names are indeed fictitious. And, it would be safe to imply that it would be rare for

persons to have names that are widely known to be fictitious.

Second is when the maker or drawer does not intend for the payee indicated — though an existing person — to receive the

proceeds of the instrument. To illustrate, a check made payable to the Chief Justice of the Supreme Court of the United States

(Chief Justice John G. Roberts, Jr. at this time) may be considered a bearer instrument pursuant to the rule if it is shown that the

drawer did not really intend for the Chief Justice to receive the amount of the check. Here, the Chief Justice is indeed an existing

person; but the fictitious payee rule kicks in after determining the drawer's intent. Hence, the maker or drawer's intention is the

primary consideration. In this regard, the party alleging that the payee is fictitious under the second instance should prove that the
maker or the drawer did not intend for that person indicated to be the recipient of the value of the instrument. [120]

In this case, Real Bank's insistence on the application of the rule is misplaced. The misspelling of Rosaria's name did not make the

payee of the checks fictitious under the law. It must be emphasized that the RTC and CA have determined that Maningas truly

intended for the actual Rosaria to be the payee of the checks. Maningas did not intend to write a different name from the name of

the intended payee. The typographical error was not due to Maningas' negligence as found by the lower courts. Again, there is no

reason for this Court to review findings of fact of the lower courts. Thus, it is proper to state that Rosaria is indeed the payee

despite the misspelling of his name. BIENVINIDO ROSARIA as written on the checks pertains to Rosaria as Maningas had intended.

The fictitious payee rule is not applicable because the payee written on the checks is the same with the intended payee by the

drawer.

As such, the subject checks in the instant case remain to be order instruments. Indorsement is necessary for their valid

negotiation. Liability therefore validly attaches to Real Bank.

There is a violation of the

law on secrecy of bank
deposits.

Real Bank contends that the RTC's action directing it to produce the bank records of the impostor violates the law on secrecy of

bank deposits.[121] Real Bank posits that the impostor's bank account is not the subject of litigation, and emphasized that the
impostor himself is not a party to the instant case.[122] Also, Maningas' cause of action was never to recover from the impostor's

bank account.[123] Maningas, however, argues that the money deposited to the impostor's bank account is the subject matter of

litigation (the instant case) as he is seeking to recover that very amount improperly paid to the impostor. [124]

The Court finds that the RTC erred in ordering the production of the impostor's bank records.

RA 1405[125] is enacted to help encourage the public to deposit their money in banking institutions so that it may be used on loans

and eventually assist in the economic development of the country. [126] The law protects deposits of whatever nature from

examination and inquiry, subject to certain exceptions:[127]

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds

issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an

absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or

office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of

bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the

litigation.

Relevant to this case is the exception where the money deposited or invested is the subject matter of the litigation. The Court,

in Union Bank of the Philippines v. Court of Appeals,[128] noted that inquiry will be allowed if the money deposited in the account is

itself the subject matter of litigation.[129] In BSB Group, Inc. v. Go,[130] the Court elaborated that the subject matter of the action

should be deduced from the indictment and not from the evidence sought to be admitted. [131] For civil cases, the subject matter
should be deduced from the allegations in the complaint, and not from the evidence sought to be admitted. For inquiry to be

allowed, the subject matter should be the actual money itself, not the mere money equivalent of the checks. [132]

In this case, it is clear that Maningas seeks to recover the money that was deposited and encashed by the impostor in Real Bank

Maningas' action, however, was directed against the banks, and not against the impostor who opened an account with Real Bank.

Thus, it is apparent that Maningas is seeking to recover the mere money equivalent of the checks erroneously paid by the banks,

and not the money itself that is already long gone in the hands of the impostor. For this reason, the money deposited is not the

subject matter of the litigation. The exception provided in the law is not present in this case, thus, the inquiry ordered by the RTC

is improper. After all, "[s]hould there be doubts in upholding the absolutely confidential nature of bank deposits against affirming

the authority to inquire into such accounts, then such doubts must be resolved in favor of the former." [133]

It is important to emphasize that the liabilities of the banks, as already determined, will not be affected even if the information on

the bank account are to be excluded because of a violation of RA 1405. The case can be ruled upon, as it was adjudicated, even

without the information on the bank account of the impostor. To recall, Real Bank's liability is by virtue of the guarantees it

extended being the collecting bank and last indorser of the checks.

The RTC did not err in

allowing the admission of
additional evidence not
included in the pre-trial
order.
Real Bank again assails the RTC's admission of additional evidence not included in the pre-trial order. It insists that it made timely

objections to the admission of the additional evidence.[134] Real Bank argues that Maningas did not present justifiable reasons for

the RTC to relax the rules and admit the additional evidence. [135] Maningas contends that the trial court admitted evidence not

included in the pre-trial order in order to aid it in the judicious evaluation of the facts of the case and to serve the end of justice.

[136]
He adds that Real Bank failed to timely object to the presentation of the additional evidence; Real Bank raised its objections

for the first time on appeal.[137]

As to this issue, the Court agrees with the CA that the RTC did not err in admitting evidence that were not included in the pre-trial

order.

A.M. No. 03-1-09-SC[138] provides for the guidelines to be observed by trial courts including during the pre-trial:

I. PRE-TRIAL

A. Civil Cases

xxxx

2. The parties shall submit, at least three (3) days before the pre-trial, pre-trial briefs containing the following:
xxxx

d. The documents or exhibits to be presented, stating the purpose thereof. (No evidence shall be allowed to be presented and

offered during the trial in support of a party's evidence-in-chief other than those that had been earlier identified and pre-marked

during the pre-trial, except if allowed by the court for good cause shown);

xxxx

f. The number and names of the witnesses, the substance of their testimonies, and the approximate number of hours that will be

required by the parties for the presentation of their respective witnesses.

xxxx

The rule provides that the parties shall already indicate in their pre-trial briefs the documentary and testimonial evidence that they

intend to present. The briefs will be the basis of the pre-trial order that the court will issue; the order will enumerate the evidence

that each side is allowed to present.[139]

No documentary evidence shall be presented and offered in trial other than those that had been earlier identified and pre-marked

during the pre-trial, except if allowed by the court for good cause shown. There is no hard and fast rule to determine what may

constitute "good cause," though this Court has previously defined it as any substantial reason "that affords a legal
excuse."[140] The good cause exception, however, does not extend to testimonial evidence, [141] especially since the Judicial

Affidavit Rule governs presentation of testimonial evidence. [142]

The Court agrees with the CA. Except on two of the three additional witnesses that Maningas presented, Real Bank failed to raise

timely objections to the offer of the additional documentary and testimonial evidence. Real Bank properly objected to the

presentation of Celia Pineda and Angelita O. Grey as witnesses. [143] However, it failed to object on the other documentary and

testimonial evidence on the ground that they were not included in the pre-trial order. [144] Indeed there were objections, but the

grounds raised were different.[145] Thus, the additional pieces of evidence became admissible.

Regardless of whether these additional pieces of evidence are excluded or not, the liabilities of the banks as already determined

will not be affected. The additional pieces of evidence are not necessary to rule that Real Bank is liable by virtue of the guarantees

it extended being the collecting bank and last indorser of the checks.

Legal interest

Lastly, the Court fixes the legal interest imposable on the amount of the checks to be returned by Real Bank. Legal interest is

imposed as follows: (a) twelve percent (12%) per annum from the filing of the complaint on February 10, 2009 until June 30, 2013;

(b) six percent (6%) per annum from July 1, 2013 until finality of the Decision;[146] and, (c) the total amount of the foregoing shall,

in turn, earn interest at the rate of six percent (6%) per annum, from finality of the Decision until full payment.
WHEREFORE, the petition is DENIED. The November 29, 2013 Decision and March 14, 2014 Resolution of the Court of Appeals in

CA-G.R. CV. No. 99817 are AFFIRMED with MODIFICATION in that legal interest on the amount due is imposed as follows: (a)

twelve percent (12%) per annum from the filing of the complaint on February 10, 2009 until June 30, 2013; (b) six percent (6%)

per annum from July 1, 2013 until finality of the Decision; and, (c) the total amount of the foregoing shall, in turn, earn interest at

the rate of six percent (6%) per annum, from finality of the Decision until full payment.

SO ORDERED.

Perlas-Bernabe, (Chairperson), Zalameda, Rosario, and Marquez, JJ., concur.

[1]
Rollo, pp. 12-41.

[2]
Id. at 43-67. Penned by Associate Justice Remedios A. Salazar-Fernando and concurred in by Associate Justices Samuel H.

Gaerlan (now a Member of this Court) and Victoria Isabel A. Paredes.

[3]
Id. at 69-70. Penned by Associate Justice Remedios A. Salazar-Fernando and concurred in by Associate Justices Danton Q.

Bueser and Eduardo B. Peralta, Jr.

[4]
CA rollo, pp. 36-58. Penned by Presiding Judge J. Cedrick O. Ruiz.
[5]
Records, p. 703.

[6]
Id. at 1-28.

[7]
Rollo, p. 44.

[8]
Id. at 44-45.

[9]
Id. at 45.

[10]
Id.

[11]
Id. Note the difference in the spelling of the first name: letters "E" and "I" for the sixth letter of the name. Bienvenido is the

actual name of the intended payee; Bienvinido was the name written as payee of the checks and the name used for the opening of

an account with Real Bank.

[12]
Id.

[13]
Id.
[14]
Id.

[15]
Id. at 45-46.

[16]
Id. at 46.

[17]
Id.

[18]
Id.

[19]
Id.

[20]
Id.

[21]
Id.

[22]
Id.

[23]
Id. at 47.
[24]
Id.

[25]
CA rollo, p. 45.

[26]
Rollo, pp. 47-48.

[27]
Id. at 48.

[28]
Id.

[29]
Records, pp. 43-51.

[30]
Rollo, p. 48.

[31]
Id.

[32]
Id.

[33]
Id.
[34]
Id. at 48-49.

[35]
Records, pp. 56-62.

[36]
Rollo, p. 49.

[37]
Id.

[38]
Id.

[39]
CA rollo, pp. 36-58.

[40]
Id. at 40.

[41]
Id. at 40-41, 57.

[42]
Id. at 41-42.

[43]
Id. at 42-43.
[44]
Id. at 44.

[45]
Id. at 44-45.

[46]
Id. at 45.

[47]
Id. at 45-46.

[48]
Id.

[49]
Id. at 46.

[50]
Id.

[51]
Id. at 48-50.

[52]
Id. at 52-57.

[53]
Id. at 56.
[54]
Id.

[55]
Id.

[56]
Records, p. 633.

[57]
Id. at 634-647.

[58]
Id. at 703.

[59]
CA rollo, pp. 59-61.

[60]
Rollo, pp. 43-67.

[61]
Id. at 51-52. See id. at 98 for the list of additional documentary evidence admitted: Certification from the Professional

Regulation Commission (PRC) dated September 23, 2013 (Exhibit "G"); Employee Static Information issued by the Social Security

System (SSS) (Exhibit "H"); Certification from the Commission on Elections (Comelec) dated October 7, 2010 (Exhibit "I"); purported

PRC ID in the name of a certain Bienvinido Rosaria (Exhibit "J"); purported Bureau of Internal Revenue ID in the name of a certain

Bienvinido Rosaria (Exhibit "K"); purported SSS ID in the name of a certain Bienvinido Rosaria (Exhibit "L"); purported Comelec ID
name of a certain Bienvinido Rosaria (Exhibit "M"). See id. at 22 for the list of additional testimonial evidence admitted: Celia

Pineda of the PRC, Angelita O. Grey of the SSS, and Remegio Redaniel of Comelec.

[62]
Id. at 52.

[63]
Id.

[64]
Id. at 53-56.

[65]
Id. at 57-60.

[66]
Id. at 61.

[67]
Id.

[68]
Id.

[69]
Id. at 62.

[70]
Id. at 63-65.
[71]
Entitled "AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO DEPOSITS WITH ANY BANKING INSTITUTION AND

PROVIDING PENALTY THEREFOR." Approved: September 9, 1955.

[72]
Rollo, pp. 65-66.

[73]
Id.

[74]
Id. at 66.

[75]
CA rollo, pp. 224-233.

[76]
Rollo, pp. 69-70.

[77]
Id. at 19-20.

[78]
Id. at 24-31.

[79]
Id. at 31-33.
[80]
Id. at 111-125.

[81]
Id. at 125-127.

[82]
Id. at 127-133.

[83]
CA rollo, pp. 72-99 (Appellant's Brief), 124-185 (Appellee's Brief), 190-196 (Reply Brief).

[84]
Rollo, pp. 12-41 (Petition), 78-142 (Comment).

[85]
Metropolitan Bank & Trust Co. v. Junnel's Marketing Corporation, G.R. Nos. 232044 & 232057, August 27, 2020.

[86]
811 Phil. 280 (2017).

[87]
Id. at 293.

[88]
Yon Mitori International Industries v. Union Bank of the Philippines , G.R. No. 225538, October 14, 2020, citing Areza v. Express

Savings Bank, Inc., 742 Phil. 623, 639 (2014).

[89]
Id.
[90]
Act No. 2031, The Negotiable Instruments Law (1911). Enacted: February 3, 1911.

[91]
Metropolilan Bank & Trust Co. v. Junnel's Marketing Corporation (2020), supra note 85.

[92]
Id.

[93]
Letter of Senior Associate Justice Estela Perlas-Bernabe dated March 1, 2022 (Re: Suggested Modifications [to the instant

case]), p. 1.

[94]
Id.

[95]
Rollo, pp. 56-60. CA rollo, pp. 42-43.

[96]
Id. at 57, citing Republic Act No. 8791, AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF

BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES [THE GENERAL BANKING LAW OF 2000] sec. 2 (2000).

Approved: May 23, 2000.

[97]
See Metropolitan Bank and Trust Company v. Junnel's Marketing Corporation , 833 Phil. 1107, 1124 (2018), and Allied Banking

Corporation v. Lim Sio Wan, 573 Phil. 89, 107 (2008).

[98]
Rollo, pp. 24-28.

[99]
Id. at 28-31.

[100]
Id. at 31.

[101]
Philippine Savings Bank v. Sakata, G.R. No. 229450, June 17, 2020.

[102]
Id.

[103]
Id.

[104]
Id. at 53.

[105]
CA rollo, p. 57.

[106]
Philippine Savings Bank v. Sakata, supra note 101.

[107]
See id., citing Pascual v. Burgos, 776 Phil. 167, 182-183 (2016).
[108]
Metropolitan Bank and Trust Company v. Junnel's Marketing Corporation , supra.

[109]
See id.

[110]
See BDO Unibank v. Lao, supra note 86.

[111]
Id.

[112]
Rollo, pp. 33-36.

[113]
Id.

[114]
Id. at 36.

[115]
Id. at 134-138.

[116]
See The Negotiable Instruments Law, sec. 30.

[117]
588 Phil. 196 (2008).
[118]
Id. at 210-214. Citations omitted.

[119]
Id. at 210.

[120]
Id. at 213.

[121]
Rollo, pp. 36-37.

[122]
Id. at 37.

[123]
Id.

[124]
Id. at 107-110.

[125]
Entitled "AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO DEPOSITS WITH ANY BANKING INSTITUTION AND

PROVIDING PENALTY THEREFOR." Approved: September 9, 1955.

[126]
See Section 1 of RA 1405.
[127]
See Section 2 of RA 1405.

[128]
378 Phil. 1177 (1999).

[129]
Id. at 1183.

[130]
626 Phil. 501 (2010).

[131]
Id. at 516.

[132]
See id. at 517.

[133]
Id. at 517-518.

[134]
Rollo, p. 22.

[135]
Id. at 23.

[136]
Id. at 96-97.
[137]
Id. at 97-107.

[138]
Re: Proposed Rule on Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-Trial and Use

of Deposition-Discovery Measures (2004). Dated July 13, 2004.

[139]
See Annex "D" of A.M. No. 03-1-09-SC.

[140]
Heirs of Lagon v. Ultramax Healthcare Supplies, Inc., G.R. No. 246989, December 7, 2020, citing Cruz v. People, 810 Phil. 801,

814-815 (2017).

[141]
Chua v. Spouses Cheng, 821 Phil. 594, 603 (2017).

[142]
A.M. No. 12-8-8-SC, Judicial Affidavit Rule. Note, however, that this Rule had yet to take effect at the time the instant case was

heard and decided by the RTC. Dated September 4, 2012.

[143]
Rollo, pp. 52, 190-196.

[144]
Id.

[145]
Id.
[146]
See Nacar v. Gallery Frames, 716 Phil. 267, 281-283 (2013), and Rivera v. Spouses Chua, 750 Phil. 663, 684-686 (2015).

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FIRST DIVISION

[ G.R. No. 232044, August 27, 2020 ]

 METROPOLITAN BANK & TRUST CO., PETITIONER, VS. JUNNEL'S MARKETING CORPORATION, ET AL.,
RESPONDENTS.

G.R. NO. 232057

ASIA UNITED BANK CORPORATION, PETITIONER, VS. JUNNEL'S MARKETING CORPORATION, METROBANK & TRUST
CO., PURIFICATION C. DELIZO, & ZENAIDA CASQUERO, RESPONDENTS.

DECISION

REYES, J. JR., J.:

This resolves the consolidated Petitions for Review1 under Rule 45 of the Revised Rules of Court, seeking the reversal of the
Decision2 dated September 20, 2016 and Resolution3 dated May 31, 2017, issued by the Court of Appeals in CA G.R. CV No.
102964.

The Facts

JunnePs Marketing Corporation (JMC) is a depositor of Metropolitan Bank & Trust Co. (Metrobank) F.B. Harrison branch, under
Current Account no. 00730-150091-9, against which it draws company checks. In 1998 to 1999, JMC wrote the following checks
payable to the following payees, as follows:

DATE CHECK NUMBER PAYEE AMOUNT

1/12/1998 3010049202 Brown Forman Php 64,284.00
10/12/1998 3010048904 Charlie Choy 48,330.00
10/27/1998 3010048880 Ramon Victor Ranee 46,260.00
11/8/1998 3010048994 Brown Forman 96,426.00
11/11/1998 3010048995 Brown Forman 96,426.00
11/24/1998 3010048931 Emmie Malana 70,200.00
12/10/1998 3010049229 Nina Valdez 163,600.00
 1/8/1999 3010049203 Brown Forman 64,284.00
TOTAL Php 649,810.00
In an audit conducted by JMC, the above checks were found to be stolen and encashed. These checks found their way to the
Pasay City branch of Asiatrust Bank, now Asia United Bank Corporation (AUB), where they were deposited to account no. 1-506-
22208-0, in the name of Zenaida Casquero (Casquero).

Casquero allegedly received the checks from a certain Virginia Rosales as payment for the use of her credit line. The checks,
according to AUB, contain the indorsement at the back by the payees. AUB then required Casquero to sign a Deed of
Undertaking, where she assumed full responsibility for the correctness, genuineness and validity of all the checks and of the
indorsement appearing thereon. Thereafter, the checks were presented to Metrobank, which cleared and authorized the payment
thereof.

On April 30, 2000, Purificacion Delizo (Delizo) confessed that while she was employed as an Accountant, at JMC, she stole
several company checks drawn against JMC's Metrobank current account. The stolen checks were not delivered to the named
payee therein, but were instead given to a certain Lita Bituin and an unidentified bank manager with whom Delizo colluded and
connived in encashing said checks, and shared in the proceeds thereof.

Ruling of the RTC

The RTC, in its Decision dated January 14, 2014, ruled that the defendants are jointly and severally liable to JMC. According to
the RTC, JMC was able to establish that it lost an amount of P649,810.00, representing the total value of the checks subject of
litigation. The RTC also found that AUB allowed Casquero to deposit in her checking account the eight checks despite the fact
that she is not the named payee therein. Also, the checks, being crossed checks, are meant for payees account only. Moreover,
the RTC found that Metrobank cleared the said checks; thereby, allowing AUB to convert the said checks and credit their value to
Casquero's account. The dispositive portion of this Decision reads:

WHEREFORE foregoing considered (sic) the defendant (sic) are hereby held jointly and severally liable to pay plaintiff the total
amount of Six Hundred Forty Nine Thousand Eight Hundred Ten (Php 649,810.00) Pesos plus legal interest computed at the
prevailing legal rate of twelve percent (12%), attorney's fees in the amount of Php 100,000.00 and the cost of suit. The
counterclaims, crossclaim filed by the parties/defendants herein are hereby dismissed for lack of merit.

SO ORDERED.4

Ruling of the Court of Appeals

Aggrieved, Delizo, Casquero, AUB and Metrobank appealed before the CA. The CA, however, found no merit in the appeal. It
ruled that the fiduciary nature of banking requires the banks to observe the highest standard of integrity and diligence in the
exercise of their function. Both Metrobank and AUB, in handling the subject checks, acted inconsistently with the standard
required of them.

The CA pointed out that the checks with numbers 3010048880 and 301004229 are crossed-checks, and as such, they serve as
a warning to the holder that the checks have been issued for a definite purpose such that the holder must inquire if the checks
have been received pursuant to that purpose. The crossing of a check gives some measure of protection to the drawer and
drawee bank inasmuch as it ensures that the check will be encashed by the rightful payee. The subject crossed checks,
however, were deposited to the account of Casquero in AUB, and not to the account of the named payees. Metrobank, as the
drawee bank is under strict liability to pay the check only to the payee named therein; otherwise, it would be violating the
instructions of the drawer. By paying the value of the crossed checks and charging JMC's account therefore, Metrobank violated
the latter's instructions. Thus, it should be held liable for the amount charged to JMC's account. On the other hand, the CA ruled
that AUB, the collecting bank, is an indorser, and as such, it has the duty to ascertain the genuineness of all prior indorsements.
When AUB allowed its client to collect on crossed checks issued in the name of another, it committed negligence. Thus, the CA
ruled that AUB is liable to JMC for the amount of these checks.

With regard to the checks with numbers 3010049202, 3010048904, 3010048994, 3010048995, and 3010049203, the CA ruled
that as these checks are payable to order, AUB, the collecting bank which indorsed the check upon presentment with the drawee
bank, is bound by its warranties as indorser. Metrobank, on the other hand, is under strict liability to follow the instructions of the
drawer as reflected on the face of the checks, that is, to pay the checks to the order of the payee named therein. By allowing the
checks to be encashed in favor of Casquero, Metrobank failed to follow JMC's instructions; hence, it must suffer the
consequence thereof.

As regards check number 3010048931, the CA ruled that since this is payable to bearer, Casquero acquired title to said
instrument and is authorized to encash the same.

The CA also ruled that Delizo, whose action made it possible for the subject checks to end up in the hands of Casquero, and
Casquero, who received the proceeds of the checks, are liable to AUB for the payment of the amount reimbursed by the latter to
Metrobank.

The dispositive portion of the Decision dated September 20, 2016 states:

WHEREFORE, We DENY the appeal. The January 14, 2014 Decision of the RTC, Branch 108, Pasay City in Civil Case No. 02-
0194 is hereby AFFIRMED with MODIFICATION that Metropolitan Bank and Trust Co. is ordered to pay Junnel's Marketing
Corporation the sum of Five Hundred Seventy-Nine Thousand Six Hundred and Ten Pesos (Php579,610.00) plus an interest of
six percent (6%) per annum. Asia United Bank is ordered to reimburse Metrobank the above-mentioned amount. Purificacion C.
Delizo and Zenaida Casquero are also ordered to pay Asiatrust the above-mentioned amount. All defendants-appellants are
ordered to pay jointly and severally, plaintiff-appellee attorney's fees in the amount of Phpl 00,000.00 and the cost of suit. In all
other respects, the said decision is AFFIRMED.

SO ORDERED.5

JMC filed a Motion for Partial Reconsideration of the above Decision, arguing that the prevailing interest rate of 6% shall not
apply to the instant case, and instead submitted that it is entitled to 12% interest from April 30, 2002, and 6% from July 1, 2013
up to the finality of the decision.

Delizo, Metrobank and AUB also filed their motions for reconsideration of the CA Decision.

The CA, however, in its Resolution dated May 31, 2017, denied the motions of Delizo, Metrobank and AUB, but granted JMC's
Motion for Partial Reconsideration. The decretal portion of said Resolution reads:

WHEREFORE, premises considered we:

a. DENY Purificacion Delizo's motion for reconsideration;

b. DENY Metrobank's motion for partial reconsideration;

c. DENY AUB's motion for reconsideration; and

d. GRANT Junnel's Marketing Corporation's motion for partial reconsideration. The Court hereby orders Metrobank to pay
Junnel's Marketing Corporation the sum of Five Hundred Seventy-Nine Thousand Six Hundred and Ten Pesos Php579,610.00)
(sic) plus an interest from April 30, 2002 of 12% per annum and 6% per annum from July 1, 2013 until full payment. In all other
respects, the September 20, 2016 Decision of this Court is AFFIRMED.

SO ORDERED. 6

Hence, Metrobank and AUB appealed before this Court through a Petition for Review under Rule 45.

In G.R. No. 232044, Metrobank raised the following grounds:

 I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE DRAWEE
BANK, METROBANK HEREIN, TO PAY RESPONDENT JUNNEL'S MARKETING CORP. THE AMOUNT OF FIVE HUNDRED
SEVENTY-NINE THOUSAND SIX HUNDRED AND TEN PESOS (Php 579,610.00) DESPITE EXISTING JURISPRUDENCE
WHICH STATES THAT IN CHECK TRANSACTIONS, THE COLLECTING BANK OR LAST ENDORSER, GENERALLY
SUFFERS THE LOSS BECAUSE IT HAS THE DUTY TO ASCERTAIN THE GENUINENESS OF ALL PRIOR
ENDORSEMENTS.

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AWARDING A TWELVE PERCENT
(12%) PER ANNUM ON THE JUDGMENT AWARD FROM APRIL 30, 2002 AND SIX PERCENT (6%) PER ANNUM FROM
JULY 1, 2013 UNTIL FULL PAYMENT.

Metrobank argues that as the drawee bank, it is only obliged to confirm the due execution of the checks and to verify the
signature on the checks vis-a-vis the signature on the signature cards of the account holder. It insists that it had no way of
knowing that the checks were not deposited to the intended payee's account, precisely because the checks were not presented
to it for deposit, but to the presenting bank, AUB. Metrobank also maintained that JMC's own negligence is the proximate cause
of its loss. According to Metrobank, had JMC formulated an efficient accounting system, it would have discovered right away that
the subject checks were missing. Thus, Metrobank argues that JMC is liable for its own loss.

Metrobank also maintained that AUB was negligent by allowing the deposit of eight checks in the account of a person who was
not the named payee thereof. According to Metrobank, AUB, as the collecting bank, has the responsibility of ensuring that the
crossed checks were deposited to the account of the rightful payee considering that it holds the account of the depositor and is in
the position to identify the latter's identity. Metrobank likewise posits that a collecting bank which indorses the check upon
presentment with the drawee bank is an indorser. As such, under Section 66 of the Negotiable Instruments Law (NIL), AUB
warrants that the instrument is genuine and in all respect what it purports to be; that it has a good title to it and all prior parties
had the capacity to contract; and the instrument is, at the time of the indorsement, valid and subsisting. Metrobank, thus, argues
that AUB, in presenting the checks for clearing and payment, made an express guaranty on the validity of all prior indorsements.

Finally, Metrobank questions the interest rate imposed on the judgment award. It argues that when an obligation not constituting
a loan or forbearance of money is breached, the imposable interest rate should be 6% per annum, as clearly explained in the
case of Nacar v. Gallery Frames7
In G.R. No. 232057, AUB raised the following issues:

I.

WHETHER OR NOT JUNNEL'S IS ENTITLED TO RELY ON THE INDORSEMENT OF AUB ON THE CHECK.

II.

WHETHER OR NOT NEGOTIABILITY IS DESTROYED EVEN IF THE SUBJECT INSTRUMENT IS A CROSSED CHECK.

III.

WHETHER OR NOT AUB IS THE RIGHT PARTY TO BE HELD LIABLE FOR THE IRREGULARITIES AND LOSSES
RESULTING FROM THE CLEARANCE OF THE SEVEN (7) CHECKS.

IV.

WHETHER OR NOT JUNNEL'S, BEING THE PROXIMATE CAUSE OF THE LOSS, IS SOLELY RESPONSIBLE AND SHOULD
SUFFER THE LOSSES IT INCURRED.

V.

WHETHER OR NOT JUNNEL'S IS LIABLE TO PETITIONER FOR ATTORNEY'S FEES.

AUB argues that JMC is not entitled to rely on its indorsement. The warranty of an endorser under Article 66 of the NIL benefits
all subsequent holders in due course, or the holders of the check to whom it is thereafter presented. JMC, according to AUB, is a
drawer, not a holder in due course nor the entity to whom the subject checks were presented after the alleged indorsement by
AUB. Thus, AUB argues that JMC cannot hinge its claim on Section 66 of the NIL.

AUB also reasons that negotiability is not destroyed by the fact that the check was crossed. It argues that crossed checks may
be negotiated only once to one who has an account with a bank. In this case, the checks were negotiated once to Casquero, an
account holder in AUB. Thus, the deposit of the checks to her account is allowed.

AUB maintains that it exercised the proper diligence and caution when it allowed the deposit of the checks to Casquero's
account. It followed the normal banking protocol of confirming the deposit with Metrobank, which gave clearance for the funding.
It also required Casquero to sign a Deed of Undertaking where she assumed full responsibility for the endorsed checks.

AUB also argues that Metrobank should be held liable for the irregularities and losses resulting from the clearance of the seven
other checks. AUB alleged that as the collecting bank, it credited the amount of the checks to Casquero's account only after
Metrobank cleared the checks for deposit. Thus, AUB claims that Metrobank, as the drawee bank, is responsible for the lapses in
verification and liable for the amount charged to the drawer's account.

AUB also urges this Court to enforce the Deed of Undertaking executed by Casquero, where she assumed full responsibility over
the indorsed checks; thereby, absolving AUB from liability arising from the transaction and holding Casquero as the party
ultimately liable for the final amount to the Court. According to AUB, contracts such as this Deed should be upheld, unless it
clearly contravenes public right or welfare.

AUB likewise maintains that JMC's failure to prevent the fraud and its subsequent act of allowing the clearance of the checks are
the proximate causes of its own loss. It also argued that the doctrine of contributory negligence, pursuant to the case
of Associated Bank v. Court of Appeals,8 applies in the instant case. JMC's failure to exercise due care contributed to a
significant degree to the loss it suffered. Hence, AUB claims that JMC is not entitled to relief and must bear the consequence of
its own negligence.

The Ruling of the Court

We deny the consolidated Petitions. The CA correctly ruled that Metrobank and AUB are sequentially liable for the entire amount
of the seven checks.

Sequence of Recovery in Unauthorized Payment of Checks

We agree with the appellate court that in cases of unauthorized payment of checks to persons other than the named payee
therein or his order, the drawee bank is liable to the drawer for the amount of the checks. In turn, the drawee bank may seek
reimbursement from the collecting bank. This rule is already embedded in our jurisprudence.9

In BDO Unibank v. Lao,10 this Court explained:

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter's accounts only those
payables authorized by him. A drawee bank is under strict liability to pay the check only to the payee or to the payee's order.
When the drawee bank pays a person other than the payee named in the check, it does not comply with the terms of the check
and violates its duty to charge the drawer's account only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of the check. Under
Section. 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of
his endorsement valid and subsisting." (Citations omitted)

Metrobank is Liable to JMC

The drawee bank, or the bank on which a check is drawn, is bound by its contractual obligation to its client, the drawer, to pay
the check only to the payee or to the payee's order. The drawee bank is duty-bound to follow strictly the instructions of its client,
which is reflected on the face of, and by the terms of, the check. When the drawee bank pays a person other than the named
payee on the check, the drawee bank violates its contractual obligation to its client. Thus, it shall be held liable for the amount
charged to the drawer's account.11 When an unauthorized payment on the checks is made, the liability of Metrobank to JMC
attaches even if it merely acted upon the guarantee of the collecting bank.12

Metrobank, in this case, allowed the payment of eight checks to Casquero. Two of these checks were crossed and were payable
to Ramon Victor Ranee and Nila Valdes. Five checks were payable to the orders of specified persons, while one check was
payable to bearer. With regard to the check payable to bearer, the CA correctly ruled that Casquero acquired title to the said
ℒαwρhi ৷

instrument and was authorized to encash the same.

Metrobank, however, denies liability over the payment of the seven other checks. It argues that it has no way of knowing whether
or not these checks were deposited to the named payee therein as these checks were not presented to it for deposit.

We are not convinced.

A crossed check is one where two parallel lines are drawn across its face or across its corner, and carries with it 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 cheek 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.13 The crossing of a check, thus, means that the check should be deposited only in the account of the
payee.14

It is undisputed that the checks with numbers 3010048880 and 3010049229 are crossed checks. As such, the drawer's
instruction is that they should be deposited only to the account of the payees named therein. By paying the checks to the person
who is not the named payee thereof, Metrobank violated the instructions of JMC, and is, therefore liable for the amount charged
to JMC's account.

As regards the checks payable to the order of specific persons, Metrobank is also under strict liability to pay the checks to the
named payee therein. JMC's instruction to pay these checks to the named payee is clearly written on the checks. Metrobank
violated this instruction when it paid the amount of the checks deposited to Casquero's account. Hence, Metrobank should suffer
the consequence of this wrongful encashment.

AUB is liable to Metrobank

The liability, however, does not fall entirely upon Metrobank. Metrobank which merely relied upon the guaranty of the collecting
bank, AUB, may seek reimbursement from the latter.

A collecting bank where a check is deposited, and which endorses the check upon presentment with the drawee bank, is an
endorser.15 Under Section 66 of the Negotiable Instruments Law, an endorser warrants: (1) that the instrument is genuine and in
all respects what it purports to be; (2) that the endorser has good title to it; (3) that all prior parties had capacity to contract; and
(4) that the instrument is, at the time of the indorsement, valid and subsisting. When a collecting bank presents a check to the
drawee bank for payment, the former thereby assumes the same warranties assumed by an endorser of a negotiable instrument
and if any of these warranties turn out to be false, the collecting bank becomes liable to the drawee bank for the payments made
under these false warranties.16

When AUB presented the subject checks to Metrobank for payment, it guaranteed that the checks were genuine and in all
respect what it purports to be and deposited to an account that has a good title to these checks. These guaranties, however,
turned out to be false as Delizo admitted that she stole the subject checks and that they were not delivered to the named payee
therein. These checks were instead deposited to Casquero's account, who was not the named payee thereof. Since these
checks were paid under these false guaranties, AUB is liable to reimburse Metrobank with the value of the checks.

AUB cannot absolve itself from liability by arguing that it credited the amount of the checks to Casquero's account only after
Metrobank cleared them for payment. Since the subject checks were deposited in Casquero's account in AUB, AUB also has the
opportunity to determine whether the checks will be paid to the rightful payee. The fact that two of the checks were crossed
should have alerted AUB that these checks are meant to be deposited only to the payee's account.

As regards the checks payable to order, AUB, as the last indorser, is liable for the payment of the checks even if the previous
indorsements were forged. This Court has ruled in a long line of cases17 that "a collecting bank which indorses a check bearing
a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement
itself, and ultimately should be held liable therefor."
Thus, AUB should be liable to reimburse Metrobank for the amount of the seven checks.

Time and again, this Court has emphasized that the banking business is imbued with public interest.18 The stability of banks
largely depends on the confidence of the people in the honesty and efficiency of banks.19 Hence, banks are required to exercise
the highest standard of diligence, as well as high standards of integrity and performance in all its transactions.20

This said, Metrobank cannot pass the blame upon its depositor, JMC. Owing to the fiduciary nature of their relationship,
Metrobank is under obligation to treat the account of JMC with utmost fidelity and meticulous care.21 It is Metrobank's failure to
uphold this obligation which caused the unauthorized payment of the checks, to the prejudice of JMC.

Neither can AUB impute liability upon JMC by invoking the doctrine of contributory negligence, as pronounced in the case
of Associated Bank v. Court of Appeals.22 Associated Bank is not on all fours with this case. In Associated Bank, the alleged
contributory negligence was sufficiently established. The drawer, Province of Tarlac, allowed a retired cashier of the payee to
collect the check, and had been releasing the checks to him for nearly three years, despite the fact that the new cashier of the
payee was also collecting the check. This Court ruled that the fact that there are two people collecting the check should have
alerted the employees in the Treasurer's Office of the fraud being committed. Evidence in Associated Bank, however, suggests
that the provincial employees were aware of the retirement of the cashier and his consequent dissociation from the payee
hospital, but nevertheless allowed him to collect the checks.

Here, the alleged contributory negligence was not established. AUB's mere allegation cannot overcome the fact that AUB, as
collecting bank, is remiss in its obligations.

The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining
their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the
expert and the law holds it to a high standard of conduct.23 AUB's negligence and false guaranty, however, violate this duty.

Thus, Metrobank is liable to JMC for the unauthorized encashment of the seven checks. AUB, in turn, is liable to Metrobank for
the amount it paid to JMC.

Liability of Casquero and Delizo

It is settled that the collecting bank which reimbursed the drawee bank may in turn seek reimbursement from the persons who
caused the checks to be deposited and received the unauthorized payments.24 The CA affirmed the RTC's findings that Delizo's
participation was established by her own written confession and that Casquero received the proceeds of the checks as they were
deposited in her account. Thus, the CA correctly ruled that Casquero and Delizo should reimburse AUB of the amount it paid to
Metrobank.
Interest

Metrobank asserts that the CA erred in imposing upon the monetary award the interest rate of 12% from April 30, 2002, and 6%
from July 1, 2013 up to the finality of the decision. According to Metrobank, an obligation not constituting a loan or forbearance of
money is breached, the imposable interest rate should be 6% per annum, as clearly explained in the case of Nacar v. Gallery
Frames.

We agree. Thus, this Court modifies the interest imposed upon the liability of Metrobank and AUB.

The case of Nacar v. Gallery Frames,25 states: xxxx

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:

xxxx

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

xxxx

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and
shall continue to be implemented applying the rate of interest fixed therein.

Metrobank's obligation here is to return to JMC the amount wrongfully charged to the latter's current account, while AUB's
obligation consists in reimbursing Metrobank of this amount. Applying the guidelines in Nacar, Metrobank's and AUB's
obligations are subject to the legal interest rate of 6%, per annum from the time of extra-judicial or judicial demand. The legal
interest rate then against Metrobank's liability shall start to run from the time JMC instituted the civil case in the RTC on April 30,
2002. The interest rate imposed upon AUB's obligation, on the other hand, shall start to run on March 13, 2003, the date when
Metrobank filed its Answer with crossclaim against AUB.

Thus, the CA's imposition of interest rate is modified as follows:

1. Metrobank's liability to JMC in the amount of Five Hundred Seventy-Nine Thousand Six Hundred and Ten
Pesos (Php579,610.00) is subject to a legal interest at the rate of 6% per annum from April 30, 2002 until full
satisfaction.

2. AUB's liability to Metrobank in the amount of Php579,610.00, is also subject to a legal interest at the rate of 6%
per annum from March 13, 2003 until full payment.

Attorney's Fees

We deny AUB's prayer for attorney's fees against JMC for lack of merit. As there is nothing on record which supports AUB's
claim, we find no basis for the grant thereof.

WHEREFORE, the consolidated Petitions are PARTIALLY GRANTED. The Decision dated September 20, 2016 and the
Resolution dated May 31, 2017 are hereby AFFIRMED with the following MODIFICATIONS:

1. Metropolitan Bank & Trust Co. is ORDERED to PAY Junnel's Marketing Corporation the amount of Five
Hundred Seventy-Nine Thousand Six Hundred and Ten Pesos (P579,610.00), subject to a legal interest at the
rate of 6% per annum from April 30, 2002 until satisfaction.

2. Asia United Bank Corporation is ORDERED to REIMBURSE Metropolitan Bank & Trust Co. the amount of Five
Hundred Seventy-Nine Thousand Six Hundred and Ten Pesos (P579,610.00), plus legal interest at the rate of 6%
per annum from March 13, 2003 until satisfaction.

All other aspects of the Decision dated September 20, 2016 and Resolution dated May 31, 2017 that are not in conflict with this
Decision are AFFIRMED.
SO ORDERED.

Peralta, C.J., (Chairperson), Caguioa, Lazaro-Javier, and Lopez, JJ., concur.

Footnotes

1 Rollo, pp. 9-35.

2 Penned by Associate Justice Ma. Luisa C. Quijano-Padilla, with Asociate Justices Normandie B. Pizzaro and
Samuel H. Gaerlan (now a Member of the Court), concurring, id. at 38-53.

3 Id. at 56-60.

4 Id. at 92.

5 Id. at 52-53.

6 Id. at 59-60.

7 Nacar v. Gallery Frames, 716 Phil. 267 (2013).

8 322 Phil. 677(1996).

9 BDO Unibank, Inc. v. Lao, 811 Phil. 280 (2017), Bank of America, NT & SA v. Associated Citizens Bank, 606
Phil. 35, 42-48 (2009); Traders Royal Bank v. Radio Philippines Network, Inc., 439 Phil. 475, 482-484 (2002).

10 Id.

11 Id.
 12 Supra note 6.

13 Philippine Deposit Insurance Corp. v. Gidwani, 606 Phil. 35, 43 (2018).

14 Id.

15 Supra note 10.

16 Metropolitan Bank and Trust Co. v. Junnel's Marketing Corp., G.R. Nos. 235511 & 235565, June 20, 2018.

17 Allied Banking Corp. v. Lim Sio Wan, 573 Phil. 89, 108 (2008), Traders Royal Bank v. Radio Philippines
Network, Inc., 439 Phil 475, 485 (2002), Associated Bank v. Court of Appeals, supra note 8, Bank of the
Philippine Islands v. Court of Appeals, 290 Phil 452-487 (1992), Banco De Oro v. Equitable Banking Corp., 241
Phil 188-202(1988).

18 Citystale Savings Bank v. Tobias, G.R. No. 227990, March 7, 2018. See also BDO Unibank, Inc. v. Cruz, G.R.
No. 229465 (Minute Resolution), March 22, 2017.

19 Philippine Banking Corporation v. Court of Appeals, 464 Phil. 614, 641 (2004).

20 Section 2 of Republic Act No. 8791, or The General Banking Law of 2000. See also Citystate Savings Bank v.
Tobias, supra note 18.

21 Philippine Banking Corp. v. Court of Appeals, supra note 19.

22 322 Phil. 623(1996).

23 Id.

24 Bank of America v. Associated Citizens Bank, 606 Phil. 35 (2009).

25 Supra note 7.

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322 Phil. 677

 SECOND DIVISION

[ G.R. No. 107382. January 31, 1996 ]

ASSOCIATED BANK, PETITIONER, VS. HON. COURT OF APPEALS, PROVINCE OF TARLAC AND PHILIPPINE NATIONAL

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. [2] The allotment checks for said

government hospital are drawn to the order of "Concepcion. Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion

Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the

hospital by its administrative officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then

discovered that the hospital did not receive several allotment checks drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were

issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial

Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank

acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on

February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or

helping the hospital follow up the release of the checks and had official receipts. [3] Pangilinan sought to encash the first

check[4] with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check

in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and
paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the

second check, in the amount of P5,000.00 and dated April 20, 1978, [5] as well as for twenty-eight other checks, of various amounts

and on various dates. The last check negotiated by Pangilinan was for P8,000.00 and dated February 10, 1981. [6] All the checks

bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain

projects with the hospital.[7] He did not find as irregular the fact that the checks were not payable to Pangilinan but to the

Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan’s wife are first cousins, the manager denied

having given Pangilinan preferential treatment on this account. [8]

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts

debited from the current account of the Province.[9]

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. [10]

As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as

third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. [11]
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the

latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon

from March 20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party

defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three

Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against 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. [13] Respondent court affirmed the trial court’s decision in toto on

September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate court’s decision.

PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability

when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then

already retired as the hospital’s cashier and administrative officer. PNB also maintains its innocence and alleges that as between

two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated

Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability

directly to the Province of Tarlac to avoid circuity. [14]

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely

and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No.
580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. [15] The PCHC Rules are

merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against

Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory

requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank

will be in a "no-win" situation and will always bear the loss as against the drawee bank. [16]

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now

estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the

primary duty to verify the genuineness of payee’s indorsement before paying the check. [17]

While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss

because it cleared and paid the forged checks.

xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued

and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee’s
(Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order

instruments.

Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the

drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. - When a signature is forged or made without authority of the person whose signature it

purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment

thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to

enforce such right is precluded from setting up the forgery or want of authority.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument

through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which

allegedly gave rise to such instrument.[18] Section 23 does not avoid the instrument but only the forged signature. [19] Thus, a forged

indorsement does not operate as the payee’s indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from
setting up the forgery or want of authority. "Parties who warrant or admit the genuineness of the signature in question and those

who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this

defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the

instIument.[20]

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the

indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course.

[21]

The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a

forged indorsement on an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful

holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder’s indorsement is forged, all

parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. [22]

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a

good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and

subsisting."[23] He cannot interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an

indorser. So even if the indorsement on the check deposited by the banks’s client is forged, the collecting bank is bound by his

warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee.

The drawer’s instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to

the drawer’s order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and

violates its duty to charge its customer’s (the drawer) account only for properly payable items. Since the drawee bank did not pay a

holder or other person entitled to receive payment, it has no right to reimbursement from the drawer.24 The general rule then is

that the drawee bank may not debit the drawer’s account and is not entitled to indemnification from the drawer. [25] The risk of loss

must perforce fall on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to

the making of the forged signature, the drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from

the forgery can be apportioned between the negligent drawer and the negligent bank. [26]

In cases involving a forged check, where the drawer’s signature is forged, the drawer can recover from the drawee bank. No

drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the
drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer’s signature since the latter is

its customer.[27]

In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the

drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the

collection chain to the party who took from the forger and, of course, to the forger himself, if available. [28] In other words, the

drawee bank can seek reimbursement or a return of the amount it paid from the presentor bank or person. [29] Theoretically, the

latter can demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who took the

check from the forger, or on the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will

necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee’s or holder’s

indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must

necessarily return the money paid by the latter because it was paid wrongfully. [30]

More importantly, by reason of the statutory warranty of a general indorser in Section 66 of the Negotiable Instruments Law, a

collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior

indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will

be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting

bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to

ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is

an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." [31]

The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of

any indorsement.[32] The drawee bank’s duty is but to verify the genuineness of the drawer’s signature and not of the indorsement

because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him,

his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect

forgery, fraud or irregularity in the indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank.

However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in

informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is

deemed negligent and can no longer recover from the presentor.[33]

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac

because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of

substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and 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,[35] six crossed checks with forged indorsements were deposited in the forger’s account

with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be

negligent and held:

"The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the

proceeds of the checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they were

issued for deposit only to the private respondent’s account. xxx"

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 bahk’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-four (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. [37] Had Associated Bank decided to

debit Pangilinan’s account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated

Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented

him as its rebuttal witness.[38] Hence, Associated Bank was not prejudiced by PNB’s failure to comply with the twenty-four-hour

return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the

checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from

Associated Bank. This is true even if the payee’s Chief Officer who was supposed to have indorsed the checks is also a customer of

the drawee bank.[39] PNB’s duty was to verify the genuineness of the drawer’s signature and not the genuineness of payee’s

indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee’s

indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the

amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the
award. The drawer, Province of Tarlac, is a client or customer of the PNB, not of Associated Bank. There is no privity of contract

between the drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand

made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in

its current account with the PNB. Bank deposits are considered under the law as loans. [40] Central Bank Circular No. 416

prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express

stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage

of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the Province of

Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court’s use of the legal interest rate,

or six percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicial or extrajudicial

demand.[41] The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the

Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to

receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital

cashier was collecting checks for the payee hospital in addition to the hospital’s real cashier, respondent Province contributed to

the loss amounting to. P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac

can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as

indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements,

including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the

genuineness of the payee’s indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY

GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court

is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal

interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the

Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.

SO ORDERED.

Regalado (Chairman), Puno and Mendoza, JJ., concur.

[1]
Penned by Justice Asaali S. Isnani, with Associate, Justices Arturo B. Buena and Ricardo P. Galvez, concurring, dated September

30, 1992. Rollo, p. 22.

[2]
Provincial aid was given irregularly. Hospital staff would often call the provincial treasurer’s office to inquire whether there was

an allotment check for the hospital. The hospital’s administrative officer and cashier would then go to the provincial treasurer’s
office to pick up the check.

Checks received by the hospital are deposited in the account of the National Treasury with the PNB. All income of the hospital in

excess of the amount which the National Government has directed it to raise, is excess income. The latter is given back to the

hospital after a supplemental budget is prepared. When the latter is approved, an advice of allotment is made. Then the hospital

requests a cash disbursement ceiling. When approved, this is brought to the Ministry of Health. The regional office of said Ministry

then prepares a check for the hospital. The check will be deposited in the hospital’s current account at the PNB. (Culled from the

testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp. 43-44).

[3]
TSN., March 13, 1984, pp. 5 1-60.

[4]
Check No. 530863 K, dated January 17, 1978 for P10,000.00.

[5]
Check No. 526788 K.

[6]
Check No. 391351 L.

[7]
TSN, July 10, 1985, pp. 14-15.

[8]
TSN, July 10, 1985, pp. 20-21; 34-35; September 24, 1985.
[9]
Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its request in another letter to PNB.

Associated Bank was allegedly furnished with a copy of this letter. (Records, pp. 246-247) PNB requested the Province to return the

checks in a letter dated March 31, 1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG) On April24, 1981, PNB

gave the checks to Associated Bank. (Exhibit 5) Associated Bank returned the checks to PNB on April 28, 1981, along with a letter

stating its refusal to return the money paid by PNB. (Exhibit 6)

[10]
Exhibit "MM" for Province of Tarlac.

[11]
Civil Case No. 6227, "Province of Tarlac v. Philippine National Bank; Philippine National Bank v. Associated Bank; Associated

Bank v. Fausto Pangilinan and Adena G. Canlas," Regional Trial Court Branch 64, Tarlac, Tarlac.

[12]
Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.

[13]
CA-G.R. CV No. 17962.

[14]
Petition, pp.6-7; Rollo, pp. 13-14, G.R. No. 107612.

[15]
Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p. 9, Rollo, p. 10.
[16]
Associated Bank’s Petition, p. 13.

[17]
Id., at 12.

[18]
J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW, 227-230(4th ed., 1990).

[19]
I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES 198(1989 ed.).

[20]
Id.,at199.

[21]
J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 5 1-53 (Revised., 1990).

[22]
Id.

[23]
Section 66, Negotiable Instruments Law.

[24]
S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED COMMERCIAL PAPER 416(2nd ed., 1993).

[25]
Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage

Bank v. Equitable Banking Corporation, G.R. No. L-749 17, January 20, 1988,157 SCRA 188; CAMPOS & LOPEZ-CAMPOS, op cit. note
18 at 283, citing La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan

748.

[26]
R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND LETTERS OF CREDIT 216 (1992).

[27]
Id.

[28]
Id., at 216-235; VITUG, op. cit. note 21 at 53.

[29]
Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.

[30]
Article 2154 of the Civil Code provides: “If Something is received when there is no right to demand it, and it was unduly

delivered through mistake, the obligation to return it arises.” Banco de Oro v. Equitable Banking Corp., supra.

[31]
Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992,216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking

Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.

[32]
CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and

Shanghai Banking Corp. v. People’s Bank and Trust Co., supra.

[33]
JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283.

[34]
TSN., June 19, 1984, pp. 10-11.

[35]
G.R. No. 89802, May 7, 1992, 208 SCRA 465.

[36]
See footnote 9.

[37]
Exhibit “3-G” for Associated Bank.

[38]
TSN., January 8, 1987.

[39]
San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.

[40]
Article 1980 of the Civil Code reads: Fixed savings, and current deposits of money in banks and similar institutions shall be

governed by the provisions concerning simple loan.

[41]
Eastern Shipping Lines, Inc. v. CA, G.R. No.97412, July 12, 1994,234 SCRA 78.
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 SECOND DIVISION

[G.R. No. 107382. January 31, 1996.]

ASSOCIATED BANK, Petitioner, v. HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, Respondents.

[G.R. No. 107612. January 31, 1996.]

PHILIPPINE NATIONAL BANK, Petitioner, v. HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, Respondents.

Jose A. Saluta, Jr. and Associates, Associated Bank.

Santiago, Jr., Vidas, Corpus & Associates, for PNB.

The Solicitor-General, for public Respondent.

SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; A FORGED SIGNATURE IS WHOLLY INOPERATIVE AND NO ONE CAN GAIN TITLE TO THE
INSTRUMENT THROUGH IT — 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 signature. Thus, a forged
indorsement does not operate as the payee’s indorsement.

2. ID.; ID.; ID.; EXCEPTION — 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.

3. ID.; ID.; BEARER INSTRUMENT; SIGNATURE OF PAYEE OR HOLDER, NOT NECESSARY TO PASS TITLE TO THE INSTRUMENT. — 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.

4. ID.; ID.; ORDER INSTRUMENT; SIGNATURE OF HOLDER, ESSENTIAL TO TRANSFER TITLE TO THE INSTRUMENT; EFFECT OF FORGED
INDORSEMENT OF HOLDER. — 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 forgery may raise the real defense of forgery against all parties subsequent thereto.

5. ID.; ID.;I ID.; LIABILITY OF GENERAL ENDORSER — 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 interpose the defense that signatures prior to him are forged.

6. ID.; ID.; ID.; ID.; COLLECTING BANK WHERE CHECK IS DEPOSITED AND INDORSES CHECK, AND ENDORSER. — 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 of the indorsement
on the check deposited by the bank’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.

7. ID,; ID.; ID.; PAYMENT UNDER A FORGED INDORSEMENT IS NOT TO THE DRAWERS’ ORDER; REASON. — The bank on which a check is
drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer’s instructions are reflected
on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer’s order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and violates its duty to charge its customer’s (the drawer)
account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no
right to reimbursement from the drawer. The general rule then is that the drawee bank may not debit the drawer’s account and is not entitled
to indemnification from the drawer. The risk of loss must perforce fall on the drawee bank.

8. ID.; ID.; ID.; ID.; EXCEPTIONS — 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.

9. ID.; ID.; ID.; WHERE THE DRAWERS’ SIGNATURE IS FORGED THE DRAWER CAN RECOVER FROM THE DRAWEE BANK — 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.

10. ID.; ID.; ID.; IN CASES OF FORGED INDORSEMENT, THE LOSS FALLS ON THE PARTY WHO TOOK THE CHECK FROM THE FORGER OR THE
FORGER HIMSELF. — 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 words, the drawee bank can seek
reimbursement or a return of the amount if paid from the presentor bank or person. Theoretically, the latter can demand reimbursement from
the person who indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself.
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.
11. ID.; ID.; ID.; ID.; CASE AT BAR. — 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.

12. ID.; ID.; ID.; GENERAL ENDORSER; COLLECTING BANK OR LAST ENDORSER SUFFERS LOSS ON FORGED INDORSEMENT; REASON. —
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 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 indorsements 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." Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows
him. his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery,
fraud or irregularity in the indorsement.

13. ID.; ID.; ID.; DRAWEE BANK NOT LIABLE FOR LOSS ON FORGED INDORSEMENT; REASON. — 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 the drawee’s signature and not of the indorsement because the drawee is its client.

14. ID.; ID.; ID.; ID.; DUTY OF DRAWEE BANK TO PROMPTLY INFORM PRESENTOR OF THE FORGERY UPON DISCOVERY; EFFECT OF FAILURE
TO PROMPTLY INFORM. — 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.

15. ID.; ID.; ID.; ID.; ID.; ID.; EFFECT OF CONTRIBUTORY NEGLIGENCE IN CASE AT BAR. — 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 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 at 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. 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.
The Court finds as reasonable, the proportionate sharing of the 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.

16. ID.; ID.; ID.; FORGERY; DELAY IN INFORMING COLLECTING BANK OF FORGERY BY THE DRAWEE BANK SIGNIFIES NEGLIGENCE. — 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 prelude it from claiming reimbursement.

17. ID.; ID.; ID.; RETURN OF FORGED INDORSEMENT; 24-HOUR PERIOD BUT NOT BEYOND PERIOD FOR FILING LEGAL ACTION FOR BANKS
OUTSIDE METRO MANILA; CASE AT BAR. — Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned
within twenty four (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 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. Clealy then, the CB circular was applicable when the forgery of the checks
was discovered in 1981.

18. ID.; ID.; ID.; ID.; RATIONALE. — 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 the 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.

19. ID.; ID.; ID.; ID.; FAILURE TO RETURN FORGED INDORSEMENT WITHIN 24 HOURS FROM DISCOVERY DOES NOT PREJUDICE
COLLECTING BANK WHICH PRESENTED FORGER AS ITS REBUTTAL WITNESS. — 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. 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, 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 comply with the twenty-four-hour return rule.

20. REMEDIAL LAW; ACTIONS; ESTOPPEL; WILL NOT APPLY TO DRAWEE BANK WHO PAID AND CLEARED CHECKS WITH FORGED
INDORSEMENT. — 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 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.

21. CIVIL LAW; OBLIGATIONS AND CONTRACT; THERE IS NO PRIVITY OF CONTRACT BETWEEN THE DRAWEE AN COLLECTING BANK;
DRAWEE CAN RECOVER FROM DRAWEE BANK AND DRAWEE BANK CAN SEEK REIMBURSEMENT FROM COLLECTING BANK. — PNB also avers
that respondent court erred in adjudicating 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 client or customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank.

22. COMMERCIAL LAW; BANKS; BANK DEPOSITS ARE LOANS; RECOVERY OF AMOUNT DEPOSITED IN CURRENT ACCOUNT GIVEN 6%
INTEREST PER ANNUM. — The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of
extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of
Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. Central Bank Circular No. 416 prescribes a
twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally,
current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No 416. In this
case, however, the actual interest rate, if any, for the current opened by the Province of Tarlac with PNB was not given in evidence. Hence,
the Court deem 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 legal interest from
March 20, 1981, the date of extrajudicial demand.

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: chanroblesvirtuallawlibrary

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are
deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary
of the Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government hospital
are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and
cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the
hospital did not receive several allotment checks drawn by the Province. chanroblesvirtuallawlibrary

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. 3 Pangilinan sought to encash the first check 4 with Associated Bank. However, the
manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank.
Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second
check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and on various
dates. The last check negotiated by Pangilinan was for P8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated
Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK." chanroblesvirtuallawlibrary

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects
with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency
Hospital. While he admitted that his wife and Pangilinan’s wife are first cousins, the manager denied having given Pangilinan preferential
treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from
the current account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10 chanroblesvirtuallawlibrary

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: jgc:chanrobles.com.ph

"WHEREFORE, in view of the foregoing, judgment is hereby rendered: chanroblesvirtuallawlibrary

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. chanroblesvirtuallawlibrary

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. 13 Respondent court affirmed the trial court’s decision in toto on September 30,
1992.chanroblesvirtuallawlibrary

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
chanroblesvirtuallawlibrary

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and
ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No. 580,
which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual
stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated
Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing
and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and
will always bear the loss as against the drawee bank. 16 chanroblesvirtuallawlibrary

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.

x x x

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. chanroblesvirtuallawlibrary

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: chanrob1es virtual 1aw library

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. chanroblesvirtuallawlibrary

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it.
A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to
such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate
as the payee’s indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting up the
forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence
or negligence are estopped from setting up the defense of forgery, are precluded from using this 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 chanroblesvirtuallawlibrary

The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged
indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here,
the payee hospital) is essential to transfer title to the same instrument. When the holder’s indorsement is forged, all parties prior to the
forgery may raise the real defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title
to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He
cannot interpose the defense that signatures prior to him are forged. chanroblesvirtuallawlibrary

A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So
even if the indorsement on the check deposited by the banks’ client is forged, the collecting bank is bound by his warranties as an indorser
and cannot set up the defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The
drawer’s instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer’s
order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer’s (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other person
entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee bank may not
debit the drawer’s account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the
making of the forged signature, the drawer is precluded from asserting the forgery. chanroblesvirtuallawlibrary

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 re-credit the amount of the check to the account of the drawer. The liability chain
ends with the drawee bank whose responsibility it is to know the drawer’s signature since the latter is its customer. 27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee bank.
The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who
took from the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank can seek reimbursement or a
return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand reimbursement from the person who
indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself. chanroblesvirtuallawlibrary

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. chanroblesvirtuallawlibrary

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31

The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any
indorsement. 32 The drawee bank’s duty is but to verify the genuineness of the drawer’s signature and not of the indorsement because the
drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address
and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or
irregularity in the indorsement.chanroblesvirtuallawlibrary

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. chanroblesvirtuallawlibrary

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: chanroblesvirtuallawlibrary

"ATTY. MORGA: chanrob1es virtual 1aw library

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: chanroblesvirtuallawlibrary

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 chanroblesvirtuallawlibrary

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. chanroblesvirtuallawlibrary

In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger’s account with the
collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and
held:jgc:chanrobles.com.ph

"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. . . ." cralaw virtua1aw library

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. chanroblesvirtuallawlibrary
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-four (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. chanroblesvirtuallawlibrary

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 may be 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 chanroblesvirtuallawlibrary

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. 37 Had Associated Bank decided to debit
Pangilinan’s account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a
fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal
witness. 38 Hence, Associated Bank was not prejudiced by PNB’s failure to comply with the twenty-four-hour return rule.
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 the checks, it can still recover from Associated Bank. This is true even if the payee’s Chief
Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB’s duty was to verify the genuineness of
the drawer’s signature and not the genuineness of payee’s indorsement. Associated Bank, as the collecting bank, is the entity with the duty to
verify the genuineness of the payee’s indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the amount of
the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer,
Province of Tarlac, is a client or customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the
collecting bank.chanroblesvirtuallawlibrary

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the
Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with
the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest
per annum for loans, forbearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise
interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual
interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it
wise to affirm the trial court’s use of the legal interest rate, or six percent (6%) per annum. The interest rate shall be computed from the date
of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the
date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent — fifty percent (50%-50%). Due to the negligence of the Province of
Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for
the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for
the payee hospital in addition to the hospital’s real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall
be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from
PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of
the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the
chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee’s
indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED.
The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The
Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until
the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal
interest from March 20, 1981 until payment is made. chanroblesvirtuallawlibrary

SO ORDERED
Regalado, Puno and Mendoza, JJ., concur.

Endnotes:

1. Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and Ricardo P. Galvez, concurring, dated September 30, 1992, Rollo, p. 22.

2. Provincial aid was given irregularly. Hospital staff would often call the provincial treasurer’s office to inquire whether there was an allotment check for the hospital. The
hospital’s administrative officer and cashier would then go to the provincial treasurer’s office to pick up the check.

Checks received by the hospital are deposited in the account of the National Treasury with the PNB. All income of the hospital in excess of the amount which the National
Government has directed it to raise, is excess income. The latter is given back to the hospital after a supplemental budget is prepared. When the latter is approved, an
advice of allotment is made. Then the hospital requests a cash disbursement ceiling. When approved, this is brought to the Ministry of Health. The regional office of said
Ministry then prepares a check for the hospital. The check will be deposited in the hospital’s current account at the PNB. (Culled from the testimony of Dr. Adena Canlas,
TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp. 43-44). chanroblesvirtuallawlibrary

3. TSN, March 13, 1984, pp. 51-60.

4. Check No. 530863 K, dated January 17, 1978 for P10,000.00.

5. Check No. 526788 K. chanroblesvirtuallawlibrary

6. Check No. 391351 L.

7. TSN, July 10, 1985, pp. 14-15.

8. TSN, July 10, 1985, p. 20-21, 34-35; September 24, 1985. chanroblesvirtuallawlibrary

9. Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its request in another letter to PNB. Associated Bank was allegedly furnished with
a copy of this letter. (Records, pp. 246-247) PNB requested the Province to return the checks in a letter dated March 31, 1981. The checks were returned to PNB on April
22, 1981. (Exhibit GG) On April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5) Associated Bank returned the checks to PNB on April 28, 1981, along with
a letter stating its refusal to return the money paid by PNB. (Exhibit 6)

10. Exhibit "MM" for Province of Tarlac.

11. Civil Case No. 6227, "Province of Tarlac v. Philippine National Bank; Philippine National Bank v. Associated Bank; Associated Bank v. Fausto Pangilinan and Adena G.
Canlas," Regional Trial Court Branch 64, Tarlac, Tarlac. chanroblesvirtuallawlibrary

12. Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.

13. CA-G.R. CV No. 17962.

14. Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612. chanroblesvirtuallawlibrary

15. Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, Et Al., Petition, p. 9, Rollo, p. 10.
16. Associated Bank’s Petition, p. 13.

17. Id., at 12. chanroblesvirtuallawlibrary

18. J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW, 227-230 (4th ed., 1990).

19. I. A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).

20. Id., at 199. chanroblesvirtuallawlibrary

21. J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 51-53 (Rev. ed., 1990).

22. Id.

23. Section 66, Negotiable Instruments Law. chanroblesvirtuallawlibrary

24. S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED COMMERCIAL PAPER 416 (2nd ed., 1993).

25. Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation,
G.R. No. L-74917, January 20, 1988, 157 SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank, 73 Ark 561; Wills v.
Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan 748.

26. R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND LETTERS OF CREDIT 216 (1992). chanroblesvirtuallawlibrary

27. Id.

28. Id., at 216-235; VITUG, op. cit. note 21 at 53.

29. Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.

30. Article 2154 of the Civil Code provides: "If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to
return it arises." Banco de Oro v. Equitable Banking Corp., supra. chanroblesvirtuallawlibrary

31. Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life
Insurance Co. v. HSBC, supra.

32. CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter- state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and Shanghai Banking Corp. v.
People’s Bank and Trust Co., supra.

33. JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283.

34. TSN, June 19, 1984, pp. 10-11. chanroblesvirtuallawlibrary

35. G.R. No. 89802, May 7, 1992, 208 SCRA 465.

36. See footnote 9.

37. Exhibit "3-G" for Associated Bank.

38. TSN, January 8, 1987. chanroblesvirtuallawlibrary

39. San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.

40. Article 1980 of the Civil Code reads: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loan.

41. Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA 78. chanroblesvirtuallawlibrary

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 SUPREME COURT
Manila

EN BANC

G.R. No. L-43596 October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.

L. D. Lockwood for appellant.

Camus and Delgado for appellee.

RECTO, J.:

This case was submitted for decision to the court below on the following stipulation of facts:

1. That plaintiff is a banking corporation organized and existing under and by virtue of a special act of the
Philippine Legislature, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P.
I.; that the defendant National City Bank of New York is a foreign banking corporation with a branch office duly
authorized and licensed to carry and engage in banking business in the Philippine Islands, with branch office and
place of business in the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor Service
Company, Inc., is a corporation organized and existing under and by virtue of the general corporation law of the
Philippine Islands, with office and principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged
in the purchase and sale of automobile spare parts and accessories.

2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service
Company, Inc., the checks marked as Exhibits A and A-1, respectively, which are made parts of the stipulation, in
payment for automobile tires purchased from said defendant's stores, purporting to have been issued by the
"Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank
and in favor of the International Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed by
said unknown persons in the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the
 time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc., on both
checks were genuine.

3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company, Inc,
at the National City Bank of New York and the former was accordingly credited with the amounts thereof, or
P144.50 and P215.75.

4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National Bank
credited the National City Bank of New York for the amounts thereof, believing at the time that the signatures of
the drawer were genuine, that the payee is an existing entity and the endorsement at the back thereof regular and
genuine.

5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as Manager and
Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A and A-1 were forged when so
informed by the said Company, and it accordingly demanded from the defendants the reimbursement of the
amounts for which it credited the National City Bank of New York at the clearing house and for which the latter
credited the Motor Service Co., but the defendants refused, and continue to refuse, to make such
reimbursements.

6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted from their
deposit.

7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming
part of the record of the present case, are admitted by the parties as genuine and are made part of this stipulation
as well as Exhibit H hereto attached and made a part hereof.

Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of New York. a decision was
thereafter rendered giving plaintiff judgment for the total amount of P360.25, with interest and costs. From this decision the
instant appeal was taken.

Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the municipal court
of Manila where this case originated, became perfected because of plaintiff's failure to attach to the record within 15 days from
receipt of notice of said decision, the certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not
disputed that both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time. The
issue is whether the mere failure to file the official receipt showing that such deposit was made within the said period is a
sufficient ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of Blanco vs. Bernabe and
lawyers Cooperative Publishing Co. (page 124, ante), and no further consideration. No error was committed in allowing said
appeal.

We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee has the
right to recover from the appellant, under the circumstances of this case, the value of the checks on which the signatures of the
drawer were forged. The appellant maintains that the question should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be examined carefully.

I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an "acceptance",
and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law, which says:

SEC. 62. Liability of acceptor. —The acceptor by accepting the instrument engages that he will pay it according
to the tenor of his acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw
the instrument; and

(b) The existence of the payee and his then capacity to indorse.

This contention is without merit. A check is a bill of exchange payable on demand and only the rules governing bills of exchange
payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that
acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the
provisions relative to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent negotiation of the
instrument, which is not true in case of the payment of a check because from the moment a check is paid it is withdrawn from
circulation. The warranty established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee
bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders
who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, "acceptance"
means "an acceptance completed by delivery or notification" and this concept is entirely incompatible with payment, because
when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party
receiving the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.)
There can be no such thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and on
demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand
from the bank anything but payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. (5
R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business calls for acceptance. The holder
can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on Banks and
Banking, 6th ed., pp. 898, 899.)

There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are
paid, in which case we have a "certification" equivalent to "acceptance" according to section 187, which provides that "where a
check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the
warranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the
order of the drawer, which must not express that the drawee will perform his promise by any other means than the payment of
money. (Sec. 132.) When the holder of a check procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the check operates as an assignment of a part of the funds to the credit of
the drawer with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically precludes its acceptance, in
like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is
frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the
obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will
imperatively imply such valid promise or undertaking. The most ordinary form which such an act assumes is the acceptance by
the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898,
899; 5 R. C. L., p. 520.)

No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this
is not an "acceptance" of the check in the true sense of that term. Although a check does not call for acceptance, and the holder
can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking,
and its effects and consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and
certified, enter largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment
of debts, the purchase of property, and in the transfer of balances from one house and one bank to another. In the great
commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and an
almost indispensable office. The purpose of procuring a check to be certified is to impart strength and credit to the paper by
obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and
securing the engagement of the bank that the check will be paid upon presentation. A certified check has a distinctive character
as a species of commercial paper, and performs important functions in banking and commercial business. When a check is
certified, it ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit,
payable to the holder on demand. The check becomes a basis of credit — an easy mode of passing money from hand to hand,
and answers the purposes of money. (5 R. C. L., pp. 516, 517.) lâwphi1.nêt

All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law
merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or
any other obligation it can assume. The object of certifying a check, as regards both parties is to enable the holder to use it as
money. The transferee takes it with the same readiness and sense of security that he would take the notes of the bank. It is
available also to him for all the purposes of money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank
intended these consequences, and it is liable accordingly. To hold otherwise would render these important securities only a
snare and a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-regulated
banks the practice is at once to charge the check to the account of the drawer, to credit it in a certified check account, and, when
the check is paid, to debit that account with the amount. Nothing can be simpler or safer than this process. (Merchants'
Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)

Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words
"good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay
it. We will pay it now if you will receive it. The holder says, No, I will not take the money; you may certify the check and retain the
money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to be
left with the bank for the accommodation of the holder without discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive the pay, and for his own convenience has the money appropriated to
that check subject to its future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)

The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact that they take the word
"acceptance" in its ordinary meaning and not in the technical sense in which it is used in the Negotiable Instruments Law.
Appellant says that when payment is made, such payment amounts to an acceptance, because he who pays accepts. This is
true in common parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant case there was payment but no acceptatance, or what
is equivalent to acceptance, certification.

With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance".

In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere promise to pay a
check is binding on a bank, why should not the absolute payment of the check have the same effect? In response, it is submitted
that the two things, — that is acceptance and payment, — are entirely different. If the drawee accepts the paper after seeing it,
and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up
forgery to defeat liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of the conflicting arguments which have been advanced by the
courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)

In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:

We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be
confounded with payment. . . .

Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability
only of the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by
the negotiator if the check is discharged by acceptance, certification, or payment. But clearly the statute does not
say that the contract of warranty of the negotiator, created by section 65, is discharged by these acts.

The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an acceptance so as to
make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited,
Annotation at 69 A. L. R., 1076, 1077 [1930].)

Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to
render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8;
Annotation at 69 A. L. R., 1077, [1930].)

In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:

The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more
definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of
the Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check,
and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which
extinguishes a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National
Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an
acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7
L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time
when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States
seems more logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this
statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the account of the drawer, do not
constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg.
Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R.
Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R.,
pp. 989, 991, 992.)

Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on
unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S. E.,
860 [1932].)

The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the
stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.
W., 351, 352 [1932].)

Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49;
143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)

In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows:

. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain.
This suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of
the United States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language
of the opinion in that case is so apt in the present case that we quote it:

"It is further contended that such an acceptance of a check as creates a privity between the payee and the bank
is established by the payment of the amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its
duty, and there would be an end to the claim against it. The bank supposed that it had paid the check, but this
was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. . . .
We cannot recognize the argument that payment of the amount of the check or sight draft under such
circumstances amounts to an acceptance creating a privity of contract with the real owner.

"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual may
be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at
a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise when
required. The difference between the transactions is essential and inherent."

And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
 It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance
of the check so as to authorize an action by the real owner to recover its amount from the drawee bank. (Michie
on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found in a
footnote to the foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L.
R., 1068.)

In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable
length. The court said:

In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and did not write anything else
except the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as
indorser and passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been
presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank
had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be illogical and unsound to say that the payment of a check by the
drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel correctly states that the theory upon which the numerous courts
hold that the payment of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be
done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites
the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that
the acceptance of a check was necessary in order to give the holder thereof a right of action thereon against the bank, and
further held in a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a right of
action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the amount to the
drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National Bank
of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having such a
case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer
and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of
justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (See National Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would be inequitable and
unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby
lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of
the check, and proceeded to hold that no particular kind of writing was necessary to constitute an acceptance and that it became
a question of fact, and the bank became liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in
support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am.
Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).

This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from
the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin
Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the
contrary, called attention to the fact that the Dodge case was no longer the law, and proceeded to announce that,
whatever might have been the law before the passage of the Negotiable Instrument Act in that state, it was no
longer the law; that the rule announced in the Dodge case had been "discarded." The court, in the latter case,
expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule announced in the
Pickle case, quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the
Supreme Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U. S., 343,
347; 24 L. ed., 229), where the bank, without any knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended that by the payment the privity of contract existing between
the drawer and drawee was imparted to the payee, said:

"It is further contended that such an acceptance of the check as creates a privity between the payee and the bank
is established by the payment of the amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its
duty, and there would be an end of the claim against it. The bank supposed that it had paid the check; but this
was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. The
real indorsement of the payee was as necessary to a valid payment as the real signature of the drawer; and in
law the check remains unpaid. Its pretended payment did not diminish the funds of the drawer in the bank, or put
money in the pocket of the person entitled to the payment. The state of the account was the same after the
pretended payment as it was before.

"We cannot recognize the argument that a payment of the amount of a check or sight draft under such
circumstances amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to
construe a payment as an acceptance under any circumstances. The two things are essentially different. One is a
promise to perform an act, the other an actual performance. A banker or an individual may be ready to make
actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time.
Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The
difference between the transactions is essential and inherent."

Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of the
amount thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases cited
 hold that it is in compliance with the Negotiable Instruments Act; paying the check and stamping same is not the
equivalent of accepting the check in writing signed by the drawee. The cases holding that payment as indicated
above constituted acceptance were rendered prior to the adoption of the Negotiable Instruments Act in the
particular state, and these decisions are divided into two classes: the one holding that the check delivered by the
drawer to the holder and presented to the bank or drawee constitutes an assignment pro tanto; the other holding
that the payment of the check and the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.

We have already seen that our own court has repudiated the assignment pro tanto theory, and since the adoption
of the Negotiable Instrument Act by this state we are compelled to say that payment of a check is not equivalent
to accepting a check in writing and signing the name of the acceptor thereon. Payment of the check and the
charging of same to the drawer does not constitute an acceptance. Payment of the check is the end of the
voyage; acceptance of the check is to fuel the vessel and strengthen it for continued operation on the commercial
sea. What we have said applies to the holder and not to the drawer of the check. On this question we conclude
that the general rule is that an action cannot be maintained by a payee of the check against the bank on which is
draw unless the check has been certified or accepted by the bank in compliance with the statute, even though at
the time the check is that an action cannot be maintained by a payee of the drawer of the check out of which the
check is legally payable; and that the payment of the check by the bank on which it is drawn, even though paid on
the unauthorized indorsement of the name of the holder (without notice of the defect by the bank), does not
constitute a certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract between the drawee bank and the payee, or holder of the
check. Neither is there an assignment pro tanto of the funds where the check is not drawn on a particular fund, or
does not show on its face that it is an assignment of a particular fund. The above rule as stated seems to have
been the rule in the majority of the states even before the passage of the uniform Negotiable Instruments Act in
the several states.

The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12,
13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816,
817), in the following language:

In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The
payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a
payment has all the efficacy of an acceptance, is founded upon the principle that the greater includes the less."
We are unable to agree with this statement as there is no similarity between acceptance and payment; payment
discharges the instrument, and no one else is expected to advance anything on the faith of it; acceptance,
contemplates further circulation, induced by the fact of acceptance. The rule that the acceptor made certain
admissions which will inure to the benefit of subsequent holders, has no applicability to payment of the instrument
 where subsequent holders can never exist.

II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover money paid
upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery and it must bear the
consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in misconception of the
fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)

Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the
purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank money paid
under a mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This doctrine has been freely
criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to effectuate
justice between the drawee and the drawer. (5 R.C.L., p. 556.)

The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354), elicited the
following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of Dedham
National Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an impression of convenience
rather than for any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to
payments under a mistake of fact by the assumption that a holder who simply presents negotiable paper for payment makes no
representation as to the signature, and that the drawee pays at his peril."

Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in the case
of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180),
it was held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation that the signature of
the drawer is genuine", and in Lisbon First National Bank vs. Wyndmere Bank (15 N. D., 299), it was also held that "the drawee
of a forged check who has paid the same without detecting the forgery, may upon discovery of the forgery, recover the money
paid from the party who received the money, even though the latter was a good faith holder, provided the latter has not been
misled or prejudiced by the drawee's failure to detect the forgery."

Daniel, in his treatise on Negotiable Instruments, has the following to say:

In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's
name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill
to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before
he received it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the
drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer
more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously
ascertaining its genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting
upon faith and confidence induced by his honoring the draft, would be placed in a worse position by according such privilege to
him. This view has been applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty,
who says it is going a great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless some bona
fide holder has purchased the paper on the faith of such an act." Negligence in making payment under a mistake of fact is not
now deemed a bar to recovery of it, and we do not see why any exception should be made to the principle, which would apply as
well as to release an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)

III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has
paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair
to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902],
56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's signature,
is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead
the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra;
De Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A.
[N. S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in
not doing something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one,
he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of
Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L.
R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann.
Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724;
Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of
a forged check to retain the money obtained he must be able to show that the whole responsibility of determining the validity of
the signature was upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution
which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had
taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429;
First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively negligent in failing
to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all probability have been detected and the
fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of
actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery
will not preclude his recovery from one who took the check under circumstances of suspicion without proper precaution, or
whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other
precautions against mistake or fraud. (National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank,
30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151
Mass., 280.) Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or
fault of either, it is unreasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of
Salem, supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving
and paying the check or draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his
suspicions the indorser according to the reasoning of some courts will be held liable to the drawee upon his implied warranty that
the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia,
93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound to satisfy
himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on his part,
paid the forged demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs. Wyndmere
Bank, supra.) Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault. (See
also 5 R. C. L., pp. 556-558.)

So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover
the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945.)

But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check
which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself
given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287;
Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)

In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A
holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the drawee to commit. . . . The
holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by
misleading him. . . . If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that
he has failed to detect the forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then he is not
precluded from recovery from a holder whose conduct has been such as to mislead the drawee or induce him to pay the check or
bill of exchange without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the
holder was negligent in not making due inquiry concerning the validity of the check before he took it, and if the drawee can be
said to have been excused from making inquiry before taking the check because of having had a right to, presume that the
holder had made such inquiry."

The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is genuine should
not be allowed to retain the proceeds of the draft or check from the drawee, whose sole fault was that he did not discover the
forgery before he paid the draft or check, has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank
[1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)

Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it, generally, and
presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its mistake in having failed to
detect the forgery, since its mistake, did not mislead the purchaser or bring about a change in position. (Security Commercial &
Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited
by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had
paid the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check,
and was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it
was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)

Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery,
from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and
payee without making any inquiry as to who he was although he was a stranger, after which the check reached, and was paid by,
the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)

In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made:

We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting
the check in circulation, was not discharged by payment of the check by the drawee (First National Bank), nor was the Brule
National Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its indorsement and delivery
warranted its own identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National
Bank was such as to assign the title to the check to its assignee, the Whitbeck National Bank, and the amount was credited to
the indorser. The check bore no indication that it was deposited for collection, and was not in any manner restricted so as to
constitute the indorsee the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in
trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the
warrant of genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the
statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36
N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's
Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"

The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully
examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule
of Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance, and that a bank drawee paying
a check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable Instruments Act.
Moreover in a more recent decision, that of Louisa National Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided
in 1931, the Court of Appeals of Kentucky held the following:

The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to
know the signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check
sufficient attention and examination to enable it to discover instantly the forgery. The appellant, when the check
was presented to it by Banfield, failed to make an inquiry of or about him and did not cause or have him to be
identified. Its act in so paying to him the check is a degree of negligence on its part equivalent to positive
negligence. It indorsed the check, and, while such indorsement may not be regarded within the meaning of the
Negotiable Instrument Law as amounting to a warranty to appellant of that which it indorsed, it at least
substantially served as a representation to it that it had exercised ordinary care and had complied with the rules
and customs of prudent banking. Its indorsement was calculated, if it did not in fact do so, to lull the drawee bank
into indifference as to the drawer's signature to it when paying the check and charging it to its customer's account
and remitting its proceeds to appellant's correspondent.

If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be
had of the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.) Or
the rule may be more accurately stated that, where the drawee pays the money, he cannot recover it back from a
holder in good faith, for value and without fault.

If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had by the
drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to
cause or to have him identified before it parted with its money on the forged check, may be regarded as the
primary and proximate cause of the loss. Its negligence in this respect reached in its effect the appellee, and
induced incaution on its part. In comparison of the degrees of the negligence of the two, it is apparent that of the
appellant excels in culpability. Both appellant and appellee inadvertently made a mistake, doubtless due to a
hurry incident to business. The first and most grievous one was made by the appellant , amounting to its
disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot on account thereof
retain as against the appellee the money which it so received. It cannot shift the loss to the appellee, for such
disregard of its duty inevitably contributed to induce the appellee to omit its duty critically to examine the signature
of Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers' Bank of
Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)

IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give
the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was not itself negligent,
except for its constructive fault in not knowing the signature of the drawer and detecting the forgery.

We quote with approval the following conclusions of the court a quo:

Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number
637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is
however, issued on a later date. This circumstance must have aroused at least the curiosity of the Motor Service
Co., Inc.

The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A
is indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co., Inc.,
made no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said
once that "any person taking checks made payable to a corporation, which can act only by agents, does so at his
peril, and must abide by the consequences if the agent who indorses the same is without authority" (Insular Drug
Co. vs. National Bank, 58, Phil., 684).

xxx xxx xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop is
crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning
that the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp.,
179, 180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check
in payment for merchandise.

. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated
the following:

"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every
month in payment of their account. The two checks in question seem to be exactly similar to the checks which we
received from the Pangasinan Transportation Co. every month."

If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may
be considered as an omission in good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service Co.,
 Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)

We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank
and the holder, and that they are governed by the authorities already cited and also the following:

The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not
that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself
been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own
he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the
banker. The courts have shown a steadily increasing disposition to extend the application of this rule over the
new conditions of fact which from time to time arise, until it can now rarely happen that the holder, payee, or
presenter can escape the imputation of having been in some degree contributory towards the mistake. Without
any actual change in the abstract doctrines of the law, which are clear, just, and simple enough, the gradual but
sure tendency and effect of the decisions have been to put as heavy a burden of responsibility upon the payee as
upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and
466, pp. 82-85 and 86, 87.)

In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the concurring
opinion:

What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not rest
upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake,
unless defendant could show some equitable reason, such as changed condition since, and relying upon,
payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that this rule giving right to recover
money paid under mistake should extend to negotiable paper, and it rejects in its entirety the theory of estoppel
and puts a case of this kind on exactly the same basis as the ordinary case of payment under mistake. But the
great weight of authority, and that based on the better reasoning, holds that the exigencies of business demand a
different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel against the drawee in
favor of a holder, no matter how negligent such holder has been? It surely is not. The correct rule recognizes the
fact that, in case of payment without a prior acceptance or certification, the holder takes the paper upon the of the
prior indorsers and the credit of the drawer, and not upon the credit of the drawee, in making payment, has a right
to rely upon the assumption that the payee used due diligence, especially where such payee negotiated the bill or
check to a holder, thus representing that it had so fully satisfied itself as to the identity and signature of the maker
that it was willing to warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such
correct rule denies the drawee the right to recover when the holder was without fault or when there has been
 some change of position calling for equitable relief. When a holder of a bill of exchange uses all due care in the
taking of bill or check and the drawee thereafter pays same, the transaction is absolutely closed — modern
business could not be done on any other basis. While the correct rule promotes the fluidity of two recognized
mediums of exchange, those mediums by which the great bulk of business is carried on, checks and drafts, upon
the other hand it encourages and demands prudent business methods upon the part of those receiving such
mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849;
136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36
N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E.,
761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American
Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National
Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)

That the defendant bank did not use reasonable business prudence is clear. It took this check from a
stranger without other identification than that given by another stranger; its cashier witnessed the mark of such
stranger thus vouching for the identity and signature of the maker; and it indorsed the check as "Paid," thus
further throwing plaintiff off guard. Defendant could not but have known, when negotiating such check and putting
it into the channel through which it would finally be presented to plaintiff for payment, that plaintiff, if it paid such
check, as defendant was asking it to do, would have to rely solely upon the apparent faith and credit that
defendant had placed in the drawer. From the very circumstances of this case plaintiff had to act on the facts as
presented to it by defendant, upon such facts only.

But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good
conscience" plaintiff should not recover — it says it did not pay over any money to the forger until after plaintiff
had paid the check. There would be merit in such contention if defendant had indorsed the check for "collection,"
thus advising plaintiff that it was relying on plaintiff and not on the drawer. It stands in court where it would have
been if it had done as it represented.

In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:

. . . If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent, misled
or deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results
of his own carelessness by asserting that the drawee was bound in law to know his drawer's signature.

V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the
person whose signature it purports to be, is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by its
acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not be said that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to retain the amount of the forged check paid to it by the appellee.

VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's signature may recover
the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in
if the discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
Forgeries often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)

In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse than if the
drawee had refused the payment of these checks upon their presentation. The appellant has lost nothing by anything which the
drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any
representation made to it by the drawee. It purchased them from unknown persons and under suspicious circumstances. It had
no valid title to them, because the persons from whom it received them did not have such title. The appellant could not have
compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the forgery. By
making a refund, the appellant would only returning what it had received without any title or right. And when appellant pays back
the money it had received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why
the accidental payment made by the appellant should inure to the benefit of the appellant. If there were injury to the appellant
said injury was caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making inquiry as to their genuineness.

In the light of the foregoing discussion, we conclude:

1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the
genuineness of the drawer's signature and his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it
cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof;

3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in
section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not
recover from a holder in due course not chargeable with any act of negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that
the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of
the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature
of the drawer and detecting the forgery will nor preclude his recovery from one who took the check under
circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the
drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud;

7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by
indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that
he performed his duty;

8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder
the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely,
drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of
those receiving such mediums of exchange;

9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the
knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the
appellant as of the appellee, the presumption that a drawee bank is bound to know more than any indorser the
signature of its depositor does not hold;

10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from
unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and
indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the
forgery;

11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change
of position as to the injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is hereby, affirmed, with costs
against the appellant. So ordered.

Avanceña, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Laurel, JJ., concur.

The Lawphil Project - Arellano Law Foundation

I just received my account statement and noticed

there were forged checks. When I notified the bank, it
claimed the forgeries were due to my negligence.
What can I do?
You should review your deposit account agreement for any applicable language. Generally, the bank
will require you to complete an affidavit stating that you did not authorize the check. It may also
request that you file a police report. If you have an account with multiple forgeries (for example, stolen
checks), you should consider closing the account.

Banks are generally required to reimburse customers for forged checks. However, based on individual
circumstances, a bank can investigate to determine if the customer is entitled to a reimbursement.

Generally, a bank is liable for accepting a check that has been forged, altered, or improperly endorsed.
However, the bank may not be liable if

 it accepted the check in good faith, and

 the customer's failure to exercise ordinary care substantially contributed to an alteration or
forgery.

If your actions—the way the check or checkbook was handled, issued, completed, or made payable—
contributed to the making of the forgery, you may be at least partially liable. However, even if you were
negligent, the bank may still be required to reimburse you if you can show that the bank failed to
exercise ordinary care in handling the check.

Contact the bank immediately if you believe there is an error on your statement, as there are required
timeframes for notifying the bank of an error. If your bank is a national bank or federal savings
association, and you are unable to resolve the issue with the bank, file a written complaint with the
Office of the Comptroller of the Currency's (OCC) Customer Assistance Group.

If your bank is not a national bank or federal savings association, you should file a complaint with the
appropriate regulator.

Last Reviewed: April 2021

Please note: The terms "bank" and "banks" used in these answers generally refer to national banks, federal savings
associations, and federal branches or agencies of foreign banking organizations that are regulated by the Office of
the Comptroller of the Currency (OCC). Find out if the OCC regulates your bank. Information provided on
HelpWithMyBank.gov should not be construed as legal advice or a legal opinion of the OCC.

Check Fraud – Who is Liable for a Fake Forged Check?

Mary Dunham
ERAI, Inc.

You may be surprised to learn that depending on the circumstances and your state’s laws, the person who cashes or deposits
the fraudulent check may be held responsible.

The Federal Trade Commission reports that not only are counterfeit check scams occurring more frequently, the counterfeit
checks are becoming harder to identify. High quality printers and scanners, authentic-looking watermarks, copied facsimile
signatures, authentic names and addresses of legitimate financial institutions, as well as real routing numbers and account
numbers are all being used to perpetrate this fraud. These counterfeits range from cashier’s checks and money orders to
corporate and personal checks.

You may be asking yourself why can you be held responsible and the bank not. Under federal law, banks are required to make
funds available to you within 1-5 days. Official checks, such as US Treasury checks, government checks and bank checks
[cashier’s checks, certified checks, and teller’s checks] are usually made available one day after deposit. The problem is, while
the funds are available, the funds are not really yours until the check “clears”.

Processing a payment actually takes longer than 1-5 days. Your bank accepts the deposit based on your identification – they
have no information about the source of the check. Your bank then sends the check to the source. Say for example that the
check allegedly came from a real company (as was the case in a blog post recently made by ERAI titled: Bad check scam – ERAI
Members’ identities being used to commit fraud). The real company does not become aware of these charges until they
appear on their statement. In the meantime, you’re responsible because it is assumed that you are in the best position to
determine the risk of accepting the check – you dealt with the person who gave it to you. Until the bank confirms that the
funds were actually deposited into your account, you are responsible for any funds drawn against that check.

In addition to collecting funds from you, the bank may also charge a fee, particularly if the reversal results in NSF checks, etc.
Banks may also freeze or close your account or take money from other accounts you have at that bank, bring suit against you
to recover the funds, or report you to a checking account abuse databasei. In some cases it is possible that law enforcement
could bring charges against victims because it may look like they were involved in the scam and knew the check was
counterfeit.ii FDIC insurance does not cover losses due to theft or fraud.

What rights do you have? Ordinarily, you would seek repayment from the person who wrote the check to you. Realistically,
however, if the scammer lives in a foreign country, has disguised his identity or has disappeared, your chances of recovering
the money are not good.

Under the Uniform Commercial Code, a payor bank may only debit a drawer’s account for checks that are “properly payable”.
Let’s define some important terms. A customer is the person with the account at the bank. A drawer or maker is the person
writing the check. A drawee is a party, typically a bank, required to pay out money when the check is presented. A payee is the
party entitled to receive funds from the payor bank, usually the drawee.

In most cases, a drawee is liable for claims involving the signature on the face of the check and the depository bank is liable for
claims involving the payee’s endorsement on the back of the check. A drawee’s liability for forged signatures of the drawer
arises because the drawee bank keeps the drawer’s signature card on file and is held responsible for verifying the signature.
This is not always the case when facsimile signatures are used, as will be discussed later in this article. iii

According to the National Check Fraud Center, revisions to the UCC define responsibilities for check issuers and paying banks
under the term ordinary care. Under Sections 3-403(a) and 4-401(a), a bank can charge items against a customer’s account
only if they are “properly payable” and the check is signed by an authorized individual. However, if a signature is forged, the
corporate account may be liable if one of the following exceptions applies:

• According to UCC Section 3-103(7), ordinary care requires account holders to follow "reasonable commercial standards"
prevailing in the area for their industry or business. Under §3-406, if they fail to exercise ordinary care, they may be restricted
from seeking restitution from the payee bank if their own failures contributed to a forged check signature or an alteration (for
example, raising a check amount from $50 to $5000).
• Section 4-406 also requires customers to reconcile their bank statements within a reasonable time to detect unauthorized
checks. This typically means reconciling statements as soon as they are received. (*Note: If you have any chance of recovering
the funds from the bank, you must reconcile your accounts as soon as possible, preferably within 30 days of receipt.)
• The concept of comparative fault - Sections 3-406(b) and 4-406(e) - can shift liability to the check issuer. If both the bank and
corporate account holder have failed to exercise ordinary care, a loss can be allocated based upon the extent that each party's
failure contributed to the loss. Since banks are not required to physically examine every check, companies may be held liable
for all or a substantial portion of any given loss - even if the bank did not verify the signature on a fraudulent check.
• Liability for counterfeits that are virtually identical to originals will be examined on a case-by-case basis. The process used
when issuing the check will be reviewed to determine if the company exercised ordinary care or contributed to the loss. iv

A 2000 court case, Spear Insurance Co. v. Bank of America, N.A., 40 UCC RepServ 2nd 807 (IL 2000), ruled that a bank may
escape liability for its payment of counterfeit checks bearing a customer’s forged facsimile signature if the bank and customer
have agreed that the bank can honor checks purporting to bear the customer’s facsimile signature. In this particular case, a
publishing company had several accounts with Bank of America (BOA). In one month, BOA paid seven (7) counterfeit checks
drawn on one of the accounts bearing the forged signature of the company’s Chief Financial Officer. When this was
discovered, the company demanded reimbursement from the bank. The bank refused and the company's insurance carrier
paid the company for its loss and sued the bank to recover the funds.

There was an agreement between the company and BOA that expressly authorized the bank to pay checks bearing facsimile
signatures resembling the authorized signatures on file with the bank. The court found that the facsimile signature on the
counterfeit checks closely resembled the facsimile signature of the CFO. Thus, the court held that the bank was not
responsible for the company’s losses.v

In order to minimize your potential losses, you should:

1. Make sure your bank is kept current on who is authorized to issue and sign checks for your company.
2. Limit the number of people authorized to issue and sign checks.
3. Review your canceled checks and statements as soon as possible after receipt, in order to be sure they have been properly
issued and paid.vi

Further steps you can take to protect yourself:

• Know the difference between funds being available for withdrawal and a check having cleared.
• Know who you are dealing with and never wire money to strangers. Be cautious when accepting checks, even cashier’s
checks, from people you don’t know, as recovery can be difficult or impossible if things go wrong.
• When selling, never accept more than the price of the goods.
• If a buyer insists on using a particular escrow service or online payment service, check it out for yourself. Go to the official
website, familiarize yourself with their terms and conditions and call the customer service line. If in doubt, don’t use the
service.
• If you accept checks, stipulate that it be drawn on a local bank or a bank with a local branch. Then call or visit the bank to
verify the validity of the check. Be sure when doing so to get the bank’s phone number yourself and do not use the number
provided by your customer.
• If a buyer insists that you wire back funds, end the transaction immediately.
• Be wary of taking action before you can be sure that the payment is good.
• Save all your documents.

What do you do if you are a victim?

The first thing to do is contact the issuing bank directly to report receipt of the check. Then contact your bank and explain that
you’ve been scammed. Ask that they not take any negative action against you or if they’ve already done so, ask if they can
reverse these actions. File a report with your local police. If you’ve already sent the cash and do not have enough money in
your account to pay it back, try to negotiate a repayment plan with your bank. It is also recommended that you contact the
Federal Trade Commission at 1-877-FTC-HELP or www.ftc.gov; The FBI Internet Fraud Complaint Center at www.ic3.gov; and if
the scam involves the US mail, the U.S. Postal Inspector Service, by phone at 1-888-877-7644 or www.uspis.gov/report.

___________________________________________

i) http://fakechecks.org/prevention-faqs01.html (website no longer available)

ii) https://fraud.org/fake-check-scams/
iii) http://www.thenortongroup.net/nnotes1.html (website no longer available)
iv) National Check Fraud Center; “Check Fraud – Who is Liable?”, www.ckfraud.org/liable.html (website no longer available)
v) http://business.cch.com/banking/news/dln4-8-00.htm; “Court Rules Bank Not Liable for Paying Counterfeit Checks”, by Craig
W. Smith, J.D., Authori, CCH Deposit Law Notes.
vi) http://www.thenortongroup.net/nnotes1.html(website no longer available)