LIABILITIES OF PERSONS AND FORGERY

91 Phil 756 Mercantile Law Negotiable Instruments Law Liabilities of Parties Parties
Secondarily Liable
In 1948, Gan Yek Kiao drew a check in the amount of P5,000.00 payable to cash or to bearer. The check
was delivered to Benito Seeto. Seeto presented the check to Philippine National Bank for payment. PNB
gave Seeto the amount of the check. The check was later dishonored. PNB asked Seeto to refund the
amount given to him but Seeto refused because he said the cause of the dishonor was PNBs unreasonable
delay in encashing it. PNB invoked Section 84 of the Negotiable Instruments Law which states:
SEC. 84.

Liability of person secondarily liable, when instrument dishonored. Subject to the provisions of

this Act, when the instrument is dishonored by nonpayment, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
ISSUE: Whether or not PNB is correct.
HELD: No. Section 84 of the Negotiable Instruments Law must be coupled with Section 186 of the same
law which states:
SEC. 186.

Within what time a check must be presented. A check must be presented for payment within

a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the
loss caused by the delay.
In effect, Seeto was discharged from liability as a secondary party. Section 186 expressly requires that a
check must be presented for payment within a reasonable time after issue. It has been ruled in a lot of
cases that unreasonable delay in the presentment of a negotiable instrument discharges a drawer only to
the extent of the loss caused thereby but an indorser is wholly discharged thereby irrespective of any
question of loss or injury. Only when there is affirmative proof that the indorser knew when he cashed the
check that there would be no funds in the bank to meet it can this rule be avoided.

252 SCRA 620 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Collecting Bank vs Drawee Bank
The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks drawn against its
account with the Philippine National Bank (PNB). These checks were drawn payable to the order of
Concepcion Emergency Hospital. Fausto Pangilinan was the cashier of Concepcion Emergency Hospital in
Tarlac until his retirement in 1978. He used to handle checks issued by the provincial government of Tarlac
to the said hospital. However, after his retirement, the provincial government still delivered checks to him
until its discovery of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his account with the
Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the said amount.
PNB in turn demanded Associated Bank to reimburse said amount. PNB averred that Associated Bank is
liable to reimburse because of its indorsement borne on the face of the checks:
All prior endorsements guaranteed ASSOCIATED BANK.

ISSUE: What are the liabilities of each party?

HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
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 holders indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is deposited and which indorses the check
upon presentment with the drawee bank (PNB), is such an indorser. So even if the indorsement on the
check deposited by the bankss client is forged, Associated Bank is bound by its warranties as an indorser
and cannot set up the defense of forgery as against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in notifying the
collecting bank (Associated Bank) of the fact of the forgery so much so that the latter can no longer collect
reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict liability to pay the
check to the order of the payee (Provincial Government of Tarlac). Payment under a forged indorsement is
not to the drawers 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 customers (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 drawers account and is not entitled to indemnification from the drawer. The risk of loss
must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac Province) to
exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties of prior indorsements as a party after
the forgery, it is liable to refund the amount to PNB. The Province of Tarlac can ask reimbursement from
PNB because the Province is a party prior to the forgery. Hence, the instrument is inoperative. HOWEVER, it
has been proven that the Provincial Government of Tarlac has been negligent in issuing the checks
especially when it continued to deliver the checks to Pangilinan even when he already retired. Due to this
contributory negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of Associated Banks
warranties), PNB can ask the 50% reimbursement from Associated Bank. Associated Bank can ask
reimbursement from Pangilinan but unfortunately in this case, the court did not acquire jurisdiction over
him.

158 SCRA 582 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Liability of the Drawee Bank

In June 1973, Francisco Gozon II went to the Philippine National Bank (Caloocan City) accompanied by his
friend Ernesto Santos. Gozon left Santos in his car and while Gozon was at the bank, Santos took a check
from Gozons checkbook. Santos forged Gozons signature and filled out the check with the amount of
P5,000.00. Santos was able to encash the check that day with PNB. Gozon learned of this when his
statement arrived. Santos eventually admitted to forging Gozons signature. Gozon then demanded the
PNB to refund him the amount. PNB refused. Judge Romulo Quimpo ruled in favor of Gozon.
ISSUE: Whether or not PNB is liable.
HELD: Yes. A bank is bound to know the signatures of its customers; and if it pays a forged check, it must
be considered as making the payment out of its own funds, and cannot ordinarily change the amount so
paid to the account of the depositor whose name was forged. PNB failed to meet its obligation to know the
signature of its correspondent (Gozon). Further, it was found by the court that there are glaring differences
between Gozons authentic specimen signatures and that of the forged check.

143 SCRA 20 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Negligence of Drawer
Metropolitan Waterworks and Sewerage System (MWSS) had an account with PNB. When it was still called
NAWASA, MWSS made a special arrangement with PNB so that it may have personalized checks to be
printed by Mesina Enterprises. These personalized checks were the ones being used by MWSS in its
business transactions.
From March to May 1969, MWSS issued 23 checks to various payees in the aggregate amount of
P320,636.26. During the same months, another set of 23 checks containing the same check numbers
earlier issued were forged. The aggregate amount of the forged checks amounted to P3,457,903.00. This
amount was distributed to the bank accounts of three persons: Arturo Sison, Antonio Mendoza, and Raul
Dizon.
MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused. The trial court ruled in
favor of MWSS but the Court of Appeals reversed the trial courts decision.
ISSUE: Whether or not PNB should restore the said amount.
HELD: No. MWSS is precluded from setting up the defense of forgery. It has been proven that MWSS has
been negligent in supervising the printing of its personalized checks. It failed to provide security measures
and coordinate the same with PNB. Further, the signatures in the forged checks appear to be genuine as
reported by the National Bureau of Investigation so much so that the MWSS itself cannot tell the difference
between the forged signature and the genuine one. The records likewise show that MWSS failed to provide
appropriate security measures over its own records thereby laying confidential records open to
unauthorized persons. Even if the twenty-three (23) checks in question are considered forgeries,
considering the MWSSs gross negligence, it is barred from setting up the defense of forgery under Section
23 of the Negotiable Instruments Law.
The Supreme Court further emphasized that forgery cannot be presumed. It must be established by clear,
positive, and convincing evidence. This was not done in the present case.

25 SCRA 693 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Forged Check Warranties

In November 1961, GSIS advised PNB that a check bearing check number 645915- B has been lost.
On January 15, 1962, Augusto Lim, holding GSIS Check No. 645915- B which was in the amount of
P57,415.00, went to PCIB to have the check deposited in his PCIB account. Apparently, the check was
indorsed to him by Manuel Go, which was previously indorsed by Mariano Pulido to Go. Pulido was the
named payee in the check.
PCIB did not encash the check in favor of Augusto Lim but rather it deposited the amount to Lims PCIB
account. Lim cannot withdraw the amount yet as it needs clearing. PCIB stamped the check with All prior
indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank. PCIB
then sent the check to PNB for clearing. PNB did not act on the check but it paid PCIB the amount of the
check. PCIB considered this as a manifestation that the check was good hence it cleared Lim to withdraw
the amount.
On January 31, 1962, GSIS demanded PNB to restore the amount and PNB complied. PNB then demanded
PCIB to refund the amount of the check. PCIB refused. The lower court ruled in favor of PCIB. This was
affirmed by the Court of Appeals. PNB argued that the indorsements are forged hence it has no liability.
ISSUE: Whether or not PCIB should refund the amount to PNB.
HELD: No. The question whether or not the indorsements have been falsified is immaterial to PNBs liability
as a drawee or to its right to recover from the PCIB for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer, since the forgery of the indorsement
is not the cause of the loss.
With respect to the warranty on the back of the check, it should be noted that the PCIB thereby guaranteed
all prior indorsements, not the authenticity of the signatures of the officers of the GSIS who signed on its
behalf, because the GSIS is not an indorser of the check, but its drawer. Further, PNB has been negligent. It
has been notified months before about the lost check.

182 SCRA 251 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Forged Signatures of Indorser
From January 1960 to June 1961, Augusto Perez, collector of the Manila Lighter Transportation (MLT),
collected 49 checks from MLTs clients. The checks amounted to P91,153.11. The checks were subsequently
indorsed and the signature of Luis Gaskell, MLTs general manager, appeared on the checks as indorser. The
checks were indorsed to three persons who deposited the checks with their respective accounts with China
Bank.
Gaskell later disowned the signatures as they were actually forged. MLT then demanded China Bank to
refund the aggregate amount of the checks. The trial court ruled that both MLT and China Bank are
negligent hence they should share the loss at 50-50 basis. The Court of Appeals absolved China Bank of its
liabilities.
ISSUE: Whether or not China Bank should refund the checks.
HELD: No. Since MLT was not a client of China Bank, i.e., did not maintain an account in said Bank, the
latter had no way of ascertaining the authenticity of its indorsements on the checks which were deposited
in the accounts of the third-party defendants in said Bank. China Bank was not negligent because, in
accordance with banking practice, it caused the checks to pass through the clearing house before it allowed
their proceeds to be withdrawn by the three depositors.

196 SCRA 100 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
24 Hour Clearing House Rule
On January 25, 1966, San Miguel Corporation (SMC) issued a P240.00 check in favor of Roberto Delgado
against SMCs account with the First National City Bank (FNCB). Delgado fraudulently changed the amount
written on the check to P9,240.00. Delgado made a check deposit with Republic Bank. Republic Bank
accepted the check and endorsed it to FNCB by stamping on the back of the check all prior and/or lack of
indorsement guaranteed. The check cleared and FNCB paid Republic Bank P9,240.00.
On April 19, 1966, SMC notified FNCB that the check involved was forged. FNCB refunded SMC the amount
of the check. On May 19, 1966, FNCB informed Republic bank about the forgery, by then Delgado withdrew
his account from Republic Bank. On August 15, 1966, FNCB demanded Republic Bank to refund the amount
of the check.
ISSUE: Whether or not Republic Bank should refund the amount to FNCB.
HELD: No. The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as
amended, applies to this case. This rule mandates banks that after a clearing, all cleared items must be
returned not later than 3:00 PM of the following business day.
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears
the loss. But the unqualified endorsement of the collecting bank on the check should be read together with
the 24-hour regulation on clearing house operation. Thus, when the drawee bank (FNCB) fails to return a
forged or altered check to the collecting bank (Republic Bank) within the 24-hour clearing period, the
collecting bank is absolved from liability.

252 SCRA 620 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Collecting Bank vs Drawee Bank
The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks drawn against its
account with the Philippine National Bank (PNB). These checks were drawn payable to the order of
Concepcion Emergency Hospital. Fausto Pangilinan was the cashier of Concepcion Emergency Hospital in
Tarlac until his retirement in 1978. He used to handle checks issued by the provincial government of Tarlac
to the said hospital. However, after his retirement, the provincial government still delivered checks to him
until its discovery of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his account with the
Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the said amount.
PNB in turn demanded Associated Bank to reimburse said amount. PNB averred that Associated Bank is
liable to reimburse because of its indorsement borne on the face of the checks:
All prior endorsements guaranteed ASSOCIATED BANK.
ISSUE: What are the liabilities of each party?
HELD: The checks involved in this case are order instruments.
Liability of Associated Bank

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 holders indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is deposited and which indorses the check
upon presentment with the drawee bank (PNB), is such an indorser. So even if the indorsement on the
check deposited by the bankss client is forged, Associated Bank is bound by its warranties as an indorser
and cannot set up the defense of forgery as against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in notifying the
collecting bank (Associated Bank) of the fact of the forgery so much so that the latter can no longer collect
reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict liability to pay the
check to the order of the payee (Provincial Government of Tarlac). Payment under a forged indorsement is
not to the drawers 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 customers (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 drawers account and is not entitled to indemnification from the drawer. The risk of loss
must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac Province) to
exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties of prior indorsements as a party after
the forgery, it is liable to refund the amount to PNB. The Province of Tarlac can ask reimbursement from
PNB because the Province is a party prior to the forgery. Hence, the instrument is inoperative. HOWEVER, it
has been proven that the Provincial Government of Tarlac has been negligent in issuing the checks
especially when it continued to deliver the checks to Pangilinan even when he already retired. Due to this
contributory negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of Associated Banks
warranties), PNB can ask the 50% reimbursement from Associated Bank. Associated Bank can ask
reimbursement from Pangilinan but unfortunately in this case, the court did not acquire jurisdiction over
him.

218 SCRA 682 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery
Forged Indorsements
Natividad Gempesaw is a businesswoman who entrusted to her bookkeeper, Alicia Galang, the preparation
of checks about to be issued in the course of her business transactions. From 1984 to 1986, 82 checks
amounting to P1,208,606.89, were prepared and were supposed to be delivered to Gempesaws clients as
payees named thereon. However, through Galang, these checks were never delivered to the supposed
payees. Instead, the checks were fraudulently indorsed to Alfredo Romero and Benito Lam.
ISSUE: Whether or not the bank should refund the money lost by reason of the forged indorsements.

HELD: No. Gempesaw cannot set up the defense of forgery by reason of her negligence. As a rule, a
drawee bank (in this case the Philippine Bank of Communications) who has paid a check on which an
indorsement has been forged cannot charge the drawers (Gempesaws) account for the amount of said
check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer
cannot possibly discover the forged indorsement by mere examination of his cancelled check. A different
situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the
active participation of the latter.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of
the depositor to act as a prudent businessman would under the circumstances. In the case at bar,
Gempesaw relied implicitly upon the honesty and loyalty of Galang, and did not even verify the accuracy of
amounts of the checks she signed against the invoices attached thereto. Furthermore, although she
regularly received her bank statements, she apparently did not carefully examine the same nor the check
stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the documents serving as bases for the
checks. With such discovery, the subsequent forgeries would not have been accomplished. It was not until
two years after Galang commenced her fraudulent scheme that Gempesaw discovered that eighty-two (82)
checks were wrongfully charged to her account, at which she notified the Philippine Bank of
Communications.