35. Vicente R. De Ocampo and Co. Vs.

Anita Gatchalian

Facts

Gonzales accompanied by Fajardo who was known to Gatchalian offered to sell

a car in favor of the latter. According to Gonzales he was duly authorized by Ocampo
to negotiate and sell the said car which facts were now known to the plaintiff.

Gatchalian requested Gonzales to bring the car before her and the certification
for registration. However, Gonzales, demanded that Gatchalian issued a check which
will be shown allegedly to the owner of the car as a proof of goodfaith with the
assurance by Gonzales that the same will be in his safekeeping and will be return after
the car is shown to them.

Gonzales failed to bring the car. So Gatchalian issued a Stop-Payment Order

on the check with the drawee bank. However, Gonzales used the check to pay his
obligation with De Ocampo Hospital for the release of his wife in the hospital. The
same was encashed. Gatchalian filed a case for estafa against Gonzales, alleging that
the check is not a negotiable instrument because of the absence of delivery. And even
assuming that there was actual delivery, Gonzales was not a holder in due course
because there was no negotiation prior to De-Ocampo s acquiring the possession of
the check and petitioner acquired with notice of the defect in the title of the holder,
Manuel Gonzales.

Issue: WON petitioner is a holder in due course

Ruling

The Supreme Court ruled in the negative. Section 52 of the NIL laid down the
requirements for a holder to be considered as holder in due course and one of the
requirements is that That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.

The record shows that indicates that appellants had no obligation or liability to
the Ocampo Clinic; that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could
only be deposited but may not be converted into cash all these circumstances
should have put the plaintiff-appellee to inquiry as to the why and wherefore of the
possession of the check by Manuel Gonzales, and why he used it to pay Matilde's
account. It was payee's duty to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature of his possession. Having
failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect
in not finding out the nature of the title and possession of Manuel Gonzales,
amounting to legal absence of good faith, and it may not be considered as a holder of
the check in good faith. To such effect is the consensus of authority.
 In order to show that the defendant had "knowledge of such facts that his action
in taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's
assignor, it being sufficient to show that the defendant had notice that there was
something wrong about his assignor's acquisition of title, although he did not have notice
of the particular wrong that was committed.

In the case at bar the rule that a possessor of the instrument is prima faciea
holder in due course does not apply because there was a defect in the title of the
holder (Manuel Gonzales), because the instrument is not payable to him or to bearer.

Case # 36: Cely Yang vs. CA and PCIB et al.

Facts

Petitioner Cely Yang and private respondent Prem Chandiramani entered into
an agreement whereby the latter was to give Yang a PCIB managers check in the
amount of 4.2 million in exchange for two (2) of Yangs managers checks, each in the
amount of 2.087 million, both payable to the order of private respondent Fernando
David. Yang and Chandiramani agreed that the difference of 26,000.00 in the
exchange would be their profit to be divided equally between them.

Yang and Chandiramani also further agreed that the former would secure from
FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU
Account No. 4195-01165-2, which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong.

Yang through his deliveryman, Ranigo brought the PCIB managers check
together with FEBTC dollar draft in the meeting place of exchange. However,
Chandiramani did not appear and the checks and dollar draft were allegedly lost by
Ranigo. It was later on reported to the police.

However, the checks and the dollar draft were not lost, for Chandiramani was
able to get hold of said instruments, without delivering the exchange consideration
consisting of the PCIB managers check and the Hang Seng Bank dollar draft.

Chandiramani delivered to respondent Fernando David at China Banking

Corporation the checks and was able to obtained from David $360,000.00 and
$200,000 which later on deposited on the savings account of the wife and mother of
Chandiramani respectively.

Meanwhile, Yang requested FEBTC and Equitable to stop payment on the

instruments she believed to be lost. Both banks complied with her request, but upon
the representation of PCIB, FEBTC subsequently lifted the stop payment order on
FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No.
4195-01165-2 to receive the amount of US$200,000.00.
 Yang lodged a Complaint against Chandiramani, David and the banks.
Petitioner posits that the last two requisites of Section 52 are missing, thereby
preventing David from being considered a holder in due course. (FOR VALUE and NO
KNOWLEDGE OF ANY INFIRMITY)

Issue: WON David is a holder in due course

Ruling

YES. Every holder of a negotiable instrument is deemed prima facie a holder in

due course. However, this presumption arises only in favor of a person who is a holder
as defined in Section 191 of the Negotiable Instruments Law, meaning a "payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof."

In the present case, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder in
due course. Hence, the presumption that he is a prima facie holder in due course
applies in his favor. However, said presumption may be rebutted. Hence, what is vital
to the resolution of this issue is whether David took possession of the checks under
the conditions provided for in Section 52 of the Negotiable Instruments Law. All the
requisites provided for in Section 52 must concur in Davids case, otherwise he cannot
be deemed a holder in due course.

David is a holder in due course because; first, with respect to consideration,

Section 24 of the Negotiable Instruments Law creates a presumption that every party
to an instrument acquired the same for a consideration or for value. Thus, the law
itself creates a presumption in Davids favor that he gave valuable consideration for
the checks in question. In alleging otherwise, the petitioner has the onus to prove that
David got hold of the checks absent said consideration. In other words, the petitioner
must present convincing evidence to overthrow the presumption. Our scrutiny of the
records, however, shows that the petitioner failed to discharge her burden of proof.

Second, petitioner fails to point any circumstance which should have put David
on inquiry as to the why and wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction between petitioner and
Chandiramani. Instead, Chandiramani and David had a separate dealing in which it
was precisely Chandiramanis duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner admits
that David took the step of asking the manager of his bank to verify from FEBTC and
Equitable as to the genuineness of the checks and only accepted the same after being
assured that there was nothing wrong with said checks. At that time, David was not
aware of any "stop payment" order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the nature of the latters title to the
checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of
gross neglect amounting to legal absence of good faith, absent any showing that there
was something amiss about Chandiramanis acquisition or possession of the checks.
David did not close his eyes deliberately to the nature or the particulars of a fraud
allegedly committed by Chandiramani upon the petitioner, absent any knowledge on
his part that the action in taking the instruments amounted to bad faith
RESTRICTIVE INDORSEMENT

Case 37. Natividad Gempesaw vs. CA and Philippine Bank of Communication

Facts

Gempesaw owns and operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. She maintained check account with the
respondent bank.

For a period of 2 years, she issued 82 checks, all of which were debited in her
account as notified by her bank. Practically, all the checks issued and honored by the
respondent drawee bank were crossed checks.3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her with a
monthly statement of her transactions, attaching thereto all the cancelled checks she
had issued and which were debited against her current account. It was only after the
lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper. Practically, all the checks issued and honored by
the respondent drawee bank were crossed checks.

The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover, check or
stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent
drawee Bank, only a Branch Manager and no other official of the respondent drawee
bank, may accept a second indorsement on a check for deposit. In the case at bar, all
the deposit slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. Petitioner completed the checks by signing
them as drawer and thereafter authorized her employee Alicia Galang to deliver the
eighty-two (82) checks to their respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It
was established that the signatures of the payees as first indorsers were forged.

The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names of
Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged
holders. All the eighty-two (82) checks bearing the forged indorsements of the payees
and the genuine second indorsements of Alfredo Y. Romero and Benito Lam were
accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of
their respective savings accounts in the Buendia, Ongpin and Elcao branches of the
same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks,
were credited and paid out by respondent drawee Bank to Alfredo Y. Romero and
Benito Lam, and debited against petitioner's checking account.
 Petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for
having been wrongfully charged against her account. Respondent drawee Bank
refused to grant petitioner's demand.

So petitioner filed the instant case on the basis of the negligence of the bank,
and petitioner likewise contends that banking rules prohibit the drawee bank from
having checks with more than one indorsement.

Issue: WON a check with more than one indorsement is not a valid instrument

WON the depositor is precluded to raise the defense of forgery

Ruling

No. The banking rule banning acceptance of checks for deposit or cash payment
with more than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or transfer of the
said check. In effect, this rule destroys the negotiability of bills/checks by limiting
their negotiation by indorsement of only the payee. Under the NIL, the only kind of
indorsement which stops the further negotiation of an instrument is a restrictive
indorsement which prohibits the further negotiation thereof.

Sec. 36. When indorsement restrictive. An indorsement is restrictive

which either

(a) Prohibits further negotiation of the instrument;

In this kind of restrictive indorsement, the prohibition to transfer or negotiate

must be written in express words at the back of the instrument, so that any
subsequent party may be forewarned that ceases to be negotiable. However, the
restrictive indorsee acquires the right to receive payment and bring any action thereon
as any indorser, but he can no longer transfer his rights as such indorsee where the
form of the indorsement does not authorize him to do so.

Although the holder of a check cannot compel a drawee bank to honor it

because there is no privity between them, as far as the drawer-depositor is concerned,
such bank may not legally refuse to honor a negotiable bill of exchange or a check
drawn against it with more than one indorsement if there is nothing irregular with the
bill or check and the drawer has sufficient funds. The drawee cannot be compelled to
accept or pay the check by the drawer or any holder because as a drawee, he incurs
no liability on the check unless he accepts it. But the drawee will make itself liable to
a suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.

YES. As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot charge the drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such negligence which causes
the bank to honor such a check or checks. If a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged indorsement by
mere examination of his cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his cancelled checks for forgery
of his own signature, he has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an employee or agent of the
drawer, or done with the active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's indorsement. The drawer and
the payee often time shave business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for
the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is discovered.
This is specially true when the agent perpetrates a series of forgeries as in the case at
bar.

One thing is clear from the records that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after
receiving her bank statements. Had the petitioner examined her records more
carefully, particularly the invoice receipts, cancelled checks, check book stubs, and
had she compared the sums written as amounts payable in the eighty-two (82) checks
with the pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales invoices. Had she
noticed these discrepancies, she should not have signed those checks, and should
have conducted an inquiry as to the reason for the irregular entries. Likewise had
petitioner been more vigilant in going over her current account by taking careful note
of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at
the close of each month, she could have easily discovered the fraud being perpetrated
by Alicia Galang, and could have reported the matter to the respondent drawee Bank.
The respondent drawee Bank then could have taken immediate steps to prevent
further commission of such fraud. Thus, petitioner's negligence was the proximate
cause of her loss. And since it was her negligence which caused the respondent
drawee Bank to honor the forged checks or prevented it from recovering the amount it
had already paid on the checks, petitioner cannot now complain should the bank
refuse to recredit her account with the amount of such checks. 10 Under Section 23 of
the NIL, she is now precluded from using the forgery to prevent the bank's debiting of
her account.
Liability of Indorsers

CASE 38. Allied Banking Corporation vs. Lim Sio Wan, Metrobank et al.
(Exception; existence of negligence)

(Allied Check Metrobank Producers Bank Metrobank Allied Bank)

Facts

Lim Sio Wan deposited with the Allied Bank a 2 money market placement of
PhP 1,152,597.35 for a term of 31 days.

A person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied,
and instructed the latter to pre-terminate Lim Sio Wans 1st money market placement,
to issue a managers check representing the proceeds of the placement, and to give the
check to one Deborah Dee Santos who would pick up the check.

The bank issued to Santos the said managers check. The check was cross-
checked "For Payees Account Only" and given to Santos. Thereafter, the managers
check was deposited in the account of Filipinas Cement Corporation (FCC) at
respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of
Lim Sio Wan as indorser.

FCC had deposited a money market placement for PhP 2 million with
respondent Producers Bank. Santos was the money market trader assigned to handle
FCCs account. When the placement matured, FCC demanded the payment of the
proceeds of the placement. The Allied check was deposited with Metrobank in the
account of FCC as Producers Banks payment of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine
Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a
guaranty on the check, which reads: "All prior endorsements and/or lack of
endorsement guaranteed." The check was sent to Allied through the PCHC. Upon the
presentment of the check, Allied funded the check even without checking the
authenticity of Lim Sio Wans purported indorsement. Thus, the amount on the face of
the check was credited to the account of FCC.

Lim, upon the maturity date of the first money market placement, Lim Sio Wan
went to Allied to withdraw it. She was then informed that the placement had been pre-
terminated upon her instructions. She denied giving any instructions and receiving
the proceeds thereof. So she filed a complaint.

Allied bank filed a 3rd party complaint against Metrobank and Santos. And a
fourth party complaint against FCC with a fifth party complaint against Producers
bank.

The RTC ruled against Allied Bank and denied its cross claim against
Metrobank. On appeal to the CA, the appellate court modified the ruling, 60% will be
bear by the Allied and 40% for Metrobank.
 Allied Bank appealed, claiming that Metrobank as guarantor of all endorsement
on the check is the ultimate liable for the check.

Issue: WON Metrobank (collecting bank) is the sole liable in the case at bar for
being the last indorser of a forged instrument.

Ruling

NO. Section 66 in relation to Sec. 65 of the Negotiable Instruments Law

provides:

Section 66. Liability of general indorser.Every indorser who indorses without

qualification, warrants to all subsequent holders in due course;

a) 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.

Section 65. Warranty where negotiation by delivery, 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 of it;

c) That all prior parties had capacity to contract;

d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no
holder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating
public or corporation securities, other than bills and notes.

The warranty "that the instrument is genuine and in all respects what it
purports to be" covers all the defects in the instrument affecting the validity thereof,
including a forged indorsement. Thus, the last indorser will be liable for the amount
indicated in the negotiable instrument even if a previous indorsement was forged. We
held in a line of cases that "a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held liable therefor."

However, this general rule is subject to exceptions. One such exception is when
the issuance of the check itself was attended with negligence. Thus, in the cases cited
above where the collecting bank is generally held liable, in two of the cases where the
checks were negligently issued, this Court held the institution issuing the check just
as liable as or more liable than the collecting bank.

In the instant case, the trial court correctly found Allied negligent in issuing the
managers check and in transmitting it to Santos without even a written
authorization. In fact, Allied did not even ask for the certificate evidencing the money
market placement or call up Lim Sio Wan at her residence or office to confirm her
instructions. Both actions could have prevented the whole fraudulent transaction from
unfolding. Allieds negligence must be considered as the proximate cause of the
resulting loss.

The liability of Allied, however, is concurrent with that of Metrobank as the last
indorser of the check. When Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations without verifying the authenticity of Lim Sio Wans
indorsement and when it accepted the check despite the fact that it was cross-checked
payable to payees account only,56 its negligent and cavalier indorsement contributed
to the easier release of Lim Sio Wans money and perpetuation of the fraud. Given the
relative participation of Allied and Metrobank to the instant case, both banks cannot
be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.

Case 39: Metrobank vs. BA Finance Corp. and Malayan Ins. Co. Inc.

-Carpio Morales

Facts

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation

(BA Finance) a 329,280 loan to secure it; he mortgaged his car to respondent BA
Finance. The car was insured in Malayan.

The car was stolen. On Bitangas claim, Malayan Insurance issued a check
payable to the order of "B.A. Finance Corporation and Lamberto Bitanga" for
224,500, drawn against China Banking Corporation (China Bank). The check was
crossed with the notation "For Deposit Payees Account Only." Without the
indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to
his account with the Metrobank. Bitanga subsequently withdrew the entire proceeds
of the check.

In the meantime, Bitangas loan became past due, but despite demands, he
failed to settle it.
 BA Finance eventually learned of the loss of the car and of Malayan Insurances
issuance of a crossed check payable to it and Bitanga, and of Bitangas depositing it in
his account at Asianbank and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from
Asianbank but to no avail, prompting it to file a complaint for sum of money against
Asian bank and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to
deposit the check to his account and to withdraw the proceeds thereof, without his co-
payee BA Finance having either indorsed it or authorized him to indorse it in its
behalf, found Asianbank and Bitanga jointly and severally liable to BA
Finance following Section 41 of the Negotiable Instruments Law.

Issue: WON an instrument payable to the order of two payees requires the
concurrent indorsements of the payees?

WON Asianbank as last indorser is liable for the full amount of the check
in favor of the petitioner.

Ruling

Yes. Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or

indorsees who are not partners, all must indorse unless the one indorsing has
authority to indorse for the others.

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit
and release of the proceeds thereof, despite the absence of authority of Bitangas co-
payee BA Finance to endorse it on its behalf.

The payment of an instrument over a missing indorsement is the equivalent of

payment on a forged indorsement or an unauthorized indorsement in itself in the case
of joint payees.

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of
the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the
fact that the check did not, it bears repeating, carry the indorsement of BA Finance.

As has been repeatedly emphasized, the banking business is imbued with

public interest such that the highest degree of diligence and highest standards of
integrity and performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector. Undoubtedly, BA Finance
has a cause of action against petitioner.

Yes. To be sure, a collecting bank, Asianbank in this case, where a check is

deposited and which indorses the check upon presentment with the drawee bank, is
an indorser. This is because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase "all prior endorsements and/or
lack of endorsement guaranteed" and, for all intents and purposes, treats the check as
a negotiable instrument, hence, assumes the warranty of an indorser. Without
Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid
the value of the subject check.

Petitioner, as the collecting bank or last indorser, 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 prior indorsements.

Accordingly, one who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for the entire
amount of the check.

Moreover, granting petitioners appeal for partial liability would run counter to
the existing principles on the liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments Law which instructs that joint
payees who indorse are deemed to indorse jointly and severally. Recall that when the
maker dishonors the instrument, the holder thereof can turn to those secondarily
liable the indorser for recovery. And since the law explicitly mandates a solidary
liability on the part of the joint payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to either Bitanga or BA Finance
for full recompense.

Case 40: BPI vs. CA, CBC, and Philippine Clearing House Corp. (PUTCHA
NAPAKAHABANG KASO NITO)

(Both the drawee and collecting bank acted negligently)

Facts

A phone call to BPI's Money Market Department by a woman who identified

herself as Eligia G. Fernando who had a money market placement as evidenced by a
promissory note. The caller wanted to preterminate the placement, but Reginaldo
Eustaquio, Dealer Trainee in BPI's Money Market Department, who received the call
and who happened to be alone in the trading room at the time, told her "trading time"
was over for the day, which was a Friday, and suggested that she call again the
following week.

In the morning, the caller of the previous Friday followed up with Eustaquio,
merely by phone again, on the pretermination of the placement. Although not familiar
with the voice of the real Eligia G. Fernando, Eustaquio "made certain" that the caller
was the real Eligia G. Fernando by "verifying" that the details the caller gave about the
placement tallied with the details in "the ledger/folder" of the account.
 Eustaquio knew the real Eligia G. Fernando to be the Treasurer of Philippine
American Life Insurance Company (Philamlife) since he was handling Philamlife's
corporate money market account. But neither Eustaquio nor Bulan who originally
handled Fernando's account, nor anybody else at BPI, bothered to call up Fernando at
her Philamlife office to verify the request for pretermination.

The checks were issued as requested by the alleged caller. It was instructed by
the caller that the checks be delivered to her niece, Rosemarie. Eustaquio agreed
provided that Rosemarie has an authorization letter.

It was, in fact Rosemarie Fernando who got the two checks from the dispatcher,
as shown by the delivery receipt. Actually, as it turned out, the same impersonated
both Eligia G. Fernando and Rosemarie Fernando. Later, it was found out that the
signature was forged in the letter.

A woman who represented herself to be Eligia G. Fernando applied at CBC's

Head Office for the opening of a current account. The new current account was
approved and indicated on the application form by the initials of Regina G. Dy,
Cashier, who did not interview the new client but affixed her initials on the application
form after reviewing it. The following day, the woman holding herself out as Eligia G.
Fernando deposited the two checks in controversy. Her endorsement on the two
checks was found to conform with the depositor's specimen signature. CBC's guaranty
of prior endorsements and/or lack of endorsement were then stamped on the two
checks, which CBC forthwith sent to clearing and which BPI cleared on the same day.

The woman made several encashment. All these withdrawals were allowed on
the basis of the verification of the drawer's signature with the specimen signature on
file and the sufficiency of the funds in the account..

The true Eligia upon maturity of her money market placement in BPI,
demanded for its roll-over. However, the bank refused for she already pre-terminated
her placement. She executed an affidavit stating that while she was the payee of the
two checks in controversy, she never received nor endorsed them and that her
purported signature on the back of the checks was not hers but forged.

BPI returned the two checks in controversy to CBC for the reason "Payee's
endorsement forged". A ping-pong started when CBC, in turn, returned the checks for
reason "Beyond Clearing Time", and the stoppage of this ping-pong, as we mentioned
at the outset, prompted the filing of this case.

BPI contends that respondent CBC's clear warranty that "all prior
endorsements and/or lack of endorsements guaranteed" stamped at the back of the
checks was an unrestrictive clearing guaranty that all prior endorsements in the
checks are genuine. Under this premise petitioner BPI asserts that the presenting or
collecting bank, respondent CBC, had an unquestioned liability when it turned out
that the payee's signature on the checks were forged.

Issue: What is the extent of the liability of the collecting bank CBC and the
drawee bank (BPI), in case of a forged payees signature?
Ruling

As a general rule, in presenting the checks for clearing and for payment, CBC
made an express guarantee on the validity of "all prior endorsements." Thus, stamped
at the back of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such
warranty, BPI would not have paid on the checks.

Apropos the matter of forgery in endorsements, this Court has presently

succintly emphasized 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. This is laid down in the case of PNB v. National City
Bank. (63 Phil. 1711) In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged after it has paid the amount of the
check to the holder thereof, it can recover the amount paid from the collecting bank.

Section 23 of the Negotiable Instruments Law states:

When signature is forged or made without the authority of the person

whose signature it purports to be, it is wholly inoperative and no right to
retain the instrument, or to give discharge therefore, or to enforce payment
thereof, against any party thereto, can be acquired through or under such
forged signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.

There are two (2) parts of the provision. The first part states the general rule
while the second part states the exception to the general rule. The general rule is to
the effect that a forged signature is "wholly inoperative", and payment made "through
or under such signature" is ineffectual or does not discharge the instrument. The
exception to this rule is when the party relying in the forgery is "precluded from setting
up the forgery or want of authority. In this jurisdiction we recognize negligence of the
party invoking forgery as an exception to the general rule.

HOWEVER, the records show that petitioner BPI as drawee bank and
respondent CBC as representing or collecting bank were both negligent resulting in
the encashment of the forged checks.

Both banks were negligent in the selection and supervision of their employees
resulting in the encashment of the forged checks by an impostor. Both banks were not
able to overcome the presumption of negligence in the selection and supervision of
their employees. It was the gross negligence of the employees of both banks which
resulted in the fraud and the subsequent loss. While it is true that petitioner BPI's
negligence may have been the proximate cause of the loss, respondent CBC's
negligence contributed equally to the success of the impostor in encashing the
proceeds of the forged checks. Under these circumstances, we apply Article 2179 of
the Civil Code to the effect that while respondent CBC may recover its losses, such
losses are subject to mitigation by the courts.
 Considering the comparative negligence of the two (2) banks, we rule that the
demands of substantial justice are satisfied by allocating the loss of P2,413,215.16
and the costs of the arbitration proceeding in the amount of P7,250.00 and the cost of
litigation on a 60-40 ratio.

Case 41: BDO Savings and Mortgage Bank vs. Equitable Banking Corporation,
PCHC and RTC of QC

Facts

In March, April, May and August 1983, BDO through its Visa Card Department,
drew six crossed Manager's check payable to certain member establishments of Visa
Card. Subsequently, the Checks were deposited with the Equitable Banking Corp. to
the credit of its depositor, a certain Aida Trencio.

After stamping at the back of the Checks the usual endorsements. All prior
and/or lack of endorsement guaranteed the Equitable sent the checks for clearing
through the Philippine Clearing House Corporation (PCHC). Accordingly, BBDO paid
the Checks; its clearing account was debited for the value of the Checks and
defendant's clearing account was credited for the same amount.

Subsequently, it was discovered that the payees signatures on checks were

forged. So BDO seeks reimbursement against Equitable but the latter refused,
prompting the BDO to file the present action.

Equitable denied its liability on the basis that the check is non-negotiable as its
limits the negotiability of the instrument. The check has no wordings of payable to
bearer or order as required by Section 1.

Issue: Was the Equitable Bank negligent and thus responsible for any undue
payment?

Ruling

Yes. The petitioner having stamped its guarantee of "all prior endorsements
and/or lack of endorsements" is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by
the petitioner stamping thereon its guarantee, in order that it can clear the said
checks with the respondent bank. By such deliberate and positive attitude of the
petitioner it has for all legal intents and purposes treated the said cheeks as
negotiable instruments and accordingly assumed the warranty of the endorser when it
stamped its guarantee of prior endorsements at the back of the checks. It led the said
respondent to believe that it was acting as endorser of the checks and on the strength
of this guarantee said respondent cleared the checks in question and credited the
account of the petitioner. Petitioner is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
 The petitioner by its own acts and representation cannot now deny liability
because it assumed the liabilities of an endorser by stamping its guarantee at the back
of the checks.

Apropos the matter of forgery in endorsements, this Court has succinctly

emphasized 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. This is laid down in the case of PNB vs. National City Bank. In another
case, this court held that if the drawee-bank discovers that the signature of the payee
was forged after it has paid the amount of the check to the holder thereof, it can
recover the amount paid from the collecting bank.

We hold that while the drawer generally owes no duty of diligence to the
collecting bank, 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. And
although the subject checks are non-negotiable the responsibility of petitioner as
indorser thereof remains.

To countenance a repudiation by the petitioner of its obligation would be

contrary to equity and would deal a negative blow to the whole banking system of this
country.

In presenting the Checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at the
bank of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff
would not have paid on the checks.