Republic of the Philippines On February 10, 1978, HCCC filed a complaint 3 with the to HCCC.
with the to HCCC. According to Francisco, she agreed to grant
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 116320 November 29, 1999
ADALIA FRANCISCO, petitioner,
vs.
COURT OF APPEALS, HERBY COMMERCIAL &
CONSTRUCTION CORPORATION AND JAIME C.
ONG, respondents.
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the
decision 1 of the Court of Appeals affirming the
decision 2 rendered by Branch 168 of the Regional Trial
Court of Pasig in Civil Case No. 35231 in favor of private
respondents.
The controversy before this Court finds its origins in a
Land Development and Construction Contract which was
entered into on June 23, 1977 by A. Francisco Realty &
Development Corporation (AFRDC), of which petitioner
Adalia Francisco (Francisco) is the president, and private
respondent Herby Commercial & Construction
Corporation (HCCC), represented by its President and
General Manager private respondent Jaime C. Ong (Ong),
pursuant to a housing project of AFRDC at San Jose del
Monte, Bulacan, financed by the Government Service
Insurance System (GSIS). Under the contract, HCCC
agreed to undertake the construction of 35 housing units
and the development of 35 hectares of land. The payment
of HCCC for its services was on a turn-key basis, that is,
HCCC was to be paid on the basis of the completed houses
and developed lands delivered to and accepted by
AFRDC and the GSIS. To facilitate payment, AFRDC
executed a Deed of Assignment in favor of HCCC to
enable the latter to collect payments directly from the
GSIS. Furthermore, the GSIS and AFRDC put up an
Executive Committee Account with the Insular Bank of
Asia & America (IBAA) in the amount of P4,000,000.00
from which checks would be issued and co-signed by
petitioner Francisco and the GSIS Vice-President
Armando Diaz (Diaz).
Regional Trial Court of Quezon City against Francisco,
AFRDC and the GSIS for the collection of the unpaid
balance under the Land Development and Construction
Contract in the amount of P515,493.89 for completed
and delivered housing units and land development.
However, the parties eventually arrived at an amicable
settlement of their differences, which was embodied in a
Memorandum Agreement executed by HCCC and AFRDC
on July 21, 1978. Under the agreement, the parties
stipulated that HCCC had turned over 83 housing units
which have been accepted and paid for by the GSIS. The
GSIS acknowledged that it still owed HCCC P520,177.50
representing incomplete construction of housing units,
incomplete land development and 5% retention, which
amount will be discharged when the defects and
deficiencies are finally completed by HCCC. It was also
provided that HCCC was indebted to AFRDC in the
amount of P180,234.91 which the former agreed would
be paid out of the proceeds from the 40 housing units still
to be turned over by HCCC or from any amount due to
HCCC from the GSIS. Consequently, the trial court
dismissed the case upon the filing by the parties of a joint
motion to dismiss.
Sometime in 1979, after an examination of the records of
the GSIS, Ong discovered that Diaz and Francisco had
executed and signed seven checks 4 , of various dates and
amounts, drawn against the IBAA and payable to HCCC
for completed and delivered work under the contract.
Ong, however, claims that these checks were never
delivered to HCCC. Upon inquiry with Diaz, Ong learned
that the GSIS gave Francisco custody of the checks since
she promised that she would deliver the same to HCCC.
Instead, Francisco forged the signature of Ong, without
his knowledge or consent, at the dorsal portion of the
said checks to make it appear that HCCC had indorsed the
checks; Francisco then indorsed the checks for a second
time by signing her name at the back of the checks and
deposited the checks in her IBAA savings account. IBAA
credited Francisco's account with the amount of the
checks and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of
the city fiscal of Quezon City, charging Francisco with
estafa thru falsification of commercial documents.
Francisco denied having forged Ong's signature on the
checks, claiming that Ong himself indorsed the seven
checks in behalf of HCCC and delivered the same to
Francisco in payment of the loans extended by Francisco
HCCC the loans in the total amount of P585,000.00 and
covered by eighteen promissory notes in order to
obviate the risk of the non-completion of the project. As
a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCC's
receivables from the GSIS. Assistant City Fiscal Ramon M.
Gerona gave credence to Francisco's claims and
accordingly, dismissed the complaints, which dismissal
was affirmed by the Minister of Justice in a resolution
issued on June 5, 1981.
The present case was brought by private respondents on
November 19, 1979 against Francisco and IBAA for the
recovery of P370,475.00, representing the total value of
the seven checks, and for damages, attorney's fees,
expenses of litigation and costs. After trial on the merits,
the trial court rendered its decision in favor of private
respondents, the dispositive portion of which provides
—
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiffs and
against the defendants INSULAR BANK OF ASIA &
AMERICA and ATTY. ADALIA FRANCISCO, to jointly
and severally pay the plaintiffs the amount of
P370.475.00 plus interest thereon at the rate of
12% per annum from the date of the filing of the
complaint until the full amount is paid; moral
damages to plaintiff Jaime Ong in the sum of
P50,000.00; exemplary damages of P50,000.00;
litigation expenses of P5,000.00; and attorney's fees
of P50,000.00.
With respect to the cross-claim of the defendant
IBAA against its co-defendant Atty. Adalia Francisco,
the latter is ordered to reimburse the former for the
sums that the Bank shall pay to the plaintiff on the
forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the
National Bureau of Investigation (NBI), the trial court
held that Francisco had indeed forged the signature of
Ong to make it appear that he had indorsed the checks.
Also, the court ruled that there were no loans extended,
reasoning that it was unbelievable that HCCC was
experiencing financial difficulties so as to compel it to
1
obtain the loans from AFRDC in view of the fact that the
GSIS had issued checks in favor of HCCC at about the
same time that the alleged advances were made. The trial
court stated that it was plausible that Francisco
concealed the fact of issuance of the checks from private
respondents in order to make it appear as if she were
accommodating private respondents, when in truth she
was lending HCCC its own money.
With regards to the Memorandum Agreement entered
into between AFRDC and HCCC in Civil Case No. Q-24628,
the trial court held that the same did not make any
mention of the forged checks since private respondents
were as of yet unaware of their existence, that fact having
been effectively concealed by Francisco, until private
respondents acquired knowledge of Francisco's
misdeeds in 1979.
IBAA was held liable to private respondents for having
honored the checks despite such obvious irregularities
as the lack of initials to validate the alterations made on
the check, the absence of the signature of a co-signatory
in the corporate checks of HCCC and the deposit of the
checks on a second indorsement in the savings account
of Francisco. However, the trial court allowed IBAA
recourse against Francisco, who was ordered to
reimburse the IBAA for any sums it shall have to pay to
private respondents. 5
Both Francisco and IBAA appealed the trial court's
decision, but the Court of Appeals dismissed IBAA's
appeal for its failure to file its brief within the 45-day
extension granted by the appellate court. IBAA's motion
for reconsideration and petition for review
on certiorari filed with this Court were also similarly
denied. On November 21, 1989, IBAA and HCCC entered
into a Compromise Agreement which was approved by
the trial court, wherein HCCC acknowledged receipt of
the amount of P370,475.00 in full satisfaction of its
claims against IBAA, without prejudice to the right of the
latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial
court's ruling, hence this petition for review
on certiorari filed by petitioner, assigning the following
errors to the appealed decision —
1. The respondent Court of Appeals erred in
concluding that private respondents did not owe
Petitioner the sum covered by the Promissory Notes
Exh. 2-2-A-2-P (FRANCISCO). Such conclusion was
based mainly on conjectures, surmises and
speculation contrary to the unrebutted pleadings
and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding
that Petitioner falsified the signature of private
respondent ONG on the checks in question without
any authority therefor which is patently
contradictory to the unrebutted pleading and
evidence that petitioner was expressly authorized
by respondent HERBY thru ONG to collect all
receivables of HERBY from GSIS to pay the loans
extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in
holding that the seven checks in question were not
taken up in the liquidation and reconciliation of all
outstanding account between AFRDC and HERBY as
acknowledged by the parties in Memorandum
Agreement (Exh. 5) is a pure conjecture, surmise
and speculation contrary to the unrebutted
evidence presented by petitioners. It is an inference
made which is manifestly mistaken.
4. The respondent Court of Appeals erred in
affirming the decision of the lower court and
dismissing the appeal. 6
The pivotal issue in this case is whether or not Francisco
forged the signature of Ong on the seven checks. In this
connection, we uphold the lower courts' finding that the
subject matter of the present case, specifically the seven
checks, drawn by GSIS and AFRDC, dated between
October to November 1977, in the total amount of
P370,475.00 and payable to HCCC, was not included in
the Memorandum Agreement executed by HCCC and
AFRDC in Civil Case No. Q-24628. As observed by the trial
court, aside from there being absolutely no mention of
the checks in the said agreement, the amounts
represented by said checks could not have been included
in the Memorandum Agreement executed in 1978
because private respondents only discovered Francisco's
acts of forgery in 1979. The lower courts found that
Francisco was able to easily conceal from private
respondents even the fact of the issuance of the checks
since she was a co-signatory thereof. 7 We also note that
Francisco had custody of the checks, as proven by the
check vouchers bearing her uncontested signature, 8 by
which she, in effect, acknowledged having received the
checks intended for HCCC. This contradicts Francisco's
claims that the checks were issued to Ong who delivered
them to Francisco already indorsed. 9
As regards the forgery, we concur with the lower courts',
finding that Francisco forged the signature of Ong on the
checks to make it appear as if Ong had indorsed said
checks and that, after indorsing the checks for a second
time by signing her name at the back of the checks,
Francisco deposited said checks in her savings account
with IBAA. The forgery was satisfactorily established in
the trial court upon the strength of the findings of the NBI
handwriting expert. 10 Other than petitioner's self-
serving denials, there is nothing in the records to rebut
the NBI's findings. Well-entrenched is the rule that
findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals,
deserve to be respected and affirmed by the Supreme
Court, provided it is supported by substantial evidence
on record, 11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized
to sign Ong's name on the checks by virtue of the
Certification executed by Ong in her favor giving her the
authority to collect all the receivables of HCCC from the
GSIS, including the questioned checks. 12 Petitioner's
alternative defense must similarly fail. The Negotiable
Instruments Law provides that where any person is
under obligation to indorse in a representative capacity,
he may indorse in such terms as to negative personal
liability. 13 An agent, when so signing, should indicate
that he is merely signing in behalf of the principal and
must disclose the name of his principal; otherwise he
shall be held personally liable. 14 Even assuming that
Francisco was authorized by HCCC to sign Ong's name,
still, Francisco did not indorse the instrument in
accordance with law. Instead of signing Ong's name,
Francisco should have signed her own name and
expressly indicated that she was signing as an agent of
HCCC. Thus, the Certification cannot be used by
Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or
negligently causes damage to another, shall indemnify
the latter for the same. 15 Due to her forgery of Ong's
signature which enabled her to deposit the checks in her
own account, Francisco deprived HCCC of the money due
it from the GSIS pursuant to the Land Development and
2
Construction Contract. Thus, we affirm respondent
court's award of compensatory damages in the amount
of P370,475.00, but with a modification as to the interest
rate which shall be six percent (6%) per annum, to be
computed from the date of the filing of the complaint
since the amount of damages was alleged in the
complaint; 16 however, the rate of interest shall be
twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory until
its satisfaction and the basis for the computation of this
twelve percent (12%) rate of interest shall be the
amount of P370,475.00. This is in accordance with the
doctrine enunciated in Eastern Shipping
Lines, Inc. vs. Court of Appeals, et al., 17 which was
reiterated in Philippine National Bank vs. Court of
Appeals, 18 Philippine Airlines, Inc. vs. Court of
Appeals 19 and in Keng Hua Paper Products
Co., Inc. vs. Court of Appeals, 20 which provides that —
1. When an obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
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 six percent (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.
3. When the judgment of the court awarding a sum of SO ORDERED.
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or Melo, Vitug, Panganiban and Purisima, JJ., concur.
paragraph 2, above, shall be twelve percent (12%) per
annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent
to a forbearance of credit.
We also sustain the award of exemplary damages in the
amount of P50,000.00. Under Article 2229 of the Civil
Code, exemplary damages are imposed by way of
example or correction for the public good, in addition to
the moral, temperate, liquidated or compensatory
damages. Considering petitioner's fraudulent act, we
hold that an award of P50,000.00 would be adequate, fair
and reasonable. The grant of exemplary damages
justifies the award of attorney's fees in the amount of
P50,000.00, and the award of P5,000.00 for litigation
expenses. 21
The appellate court's award of P50,000.00 in moral
damages is warranted. Under Article 2217 of the Civil
Code, moral damages may be granted upon proof of
physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. 22 Ong
testitified that he suffered sleepless nights,
embarrassment, humiliation and anxiety upon
discovering that the checks due his company were forged
by petitioner and that petitioner had filed baseless
criminal complaints against him before the fiscal's office
of Quezon City which disrupted HCCC's business
operations. 23
WHEREFORE, we AFFIRM the respondent court's
decision promulgated on June 29, 1992, upholding the
February 16, 1988 decision of the trial court in favor of
private respondents, with the modification that the
interest upon the actual damages awarded shall be at six
percent (6%) per annum, which interest rate shall be
computed from the time of the filing of the complaint on
November 19, 1979. However, the interest rate shall be
twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory and
until such amount is fully paid. The basis for computation
of the six percent and twelve percent rates of interest
shall be the amount of P370,475.00. No pronouncement
as to costs.
3
 EN BANC
G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD., plaintiff-appellant,
vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA
BANKING CORPORATION, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking
Corporation.
HULL, J.:
Plaintiff corporation, organized under the laws of the
Territory of Hawaii, is authorized to engaged in business
in the Philippine Islands, and maintains its main office in
these Islands in the City of Manila.
The business in the Philippine Islands was in the hands
of Alfred D. Cooper, its agent under general power of
attorney with authority of substitution. The principal
employee in the Manila office was one Joseph L. Wilson,
to whom had been given a general power of attorney but
without power of substitution. In 1926 Cooper, desiring
to go on vacation, gave a general power of attorney to
Newland Baldwin and at the same time revoked the
power of Wilson relative to the dealings with the Bank of
the Philippine Islands, one of the banks in Manila in
which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with
one Alfredo Dolores, a messenger-clerk in plaintiff's
Manila office, sent a cable gram in code to the company
in Honolulu requesting a telegraphic transfer to the
China Banking Corporation of Manila of $100,00. The
money was transferred by cable, and upon its receipt the
China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract
to plaintiff corporation offering the sum of P201,000,
which was then the current rate of exchange. On this
contract was forged the name of Newland Baldwin and
typed on the body of the contract was a note:lawphil.net
Please send us certified check in our favor when
transfer is received.
A manager's check on the China Banking Corporation for
P201,000 payable to San Carlos Milling Company or
order was receipted for by Dolores. On the same date,
September 28, 1927, the manger's check was deposited
with the Bank of the Philippine Islands by the following
endorsement:
For deposit only with Bank of the Philippine Islands,
to credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN For Agent
The endorsement to which the name of Newland
Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited
the current account of plaintiff in the sum of P201,000
and passed the cashier's check in the ordinary course of
business through the clearing house, where it was paid
by the China Banking Corporation.
On the same day the cashier of the Bank of the Philippine
Islands received a letter, purporting to be signed by
Newland Baldwin, directing that P200,000 in bills of
various denominations, named in the letter, be packed
for shipment and delivery the next day. The next day,
Dolores witnessed the counting and packing of the
money, and shortly afterwards returned with the check
for the sum of P200,000, purporting to be signed by
Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for
shipment to its mill from the Bank of the Philippine
Islands but never in so large an amount, and according to
the record, never under the sole supervision of Dolores
as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for
P1 to cover the cost of packing the money, and he left the
bank and shortly afterwards returned with another
check for P1, purporting to be signed by Newland
Baldwin. Whereupon the money was turned over to
Dolores, who took it to plaintiff's office, where he turned
the money over to Wilson and received as his share,
P10,000.
Shortly thereafter the crime was discovered, and upon
the defendant bank refusing to credit plaintiff with the
amount withdrawn by the two forged checks of
P200,000 and P1, suit was brought against the Bank of
the Philippine Islands, and finally on the suggestion of
the defendant bank, an amended complaint was filed by
plaintiff against both the Bank of the Philippine Islands
and the China Banking Corporation.
At the trial the China Banking Corporation contended
that they had drawn a check to the credit of the plaintiff
company, that the check had been endorsed for deposit,
and that as the prior endorsement had in law been
guaranteed by the Bank of the Philippine Islands, when
they presented the cashier's check to it for payment, the
China Banking Corporation was absolved even if the
endorsement of Newland Baldwin on the check was a
forgery.
The Bank of the Philippine Islands presented many
special defenses, but in the main their contentions were
that they had been guilty of no negligence, that they had
dealt with the accredited representatives of the company
in the due course of business, and that the loss was due
to the dishonesty of plaintiff's employees and the
negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent,
Wilson, and Dolores, most of the time there was
employed a woman stenographer and cashier. The agent
did not keep in his personal possession either the code-
book or the blank checks of either the Bank of the
Philippine Islands or the China Banking Corporation.
Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of
the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial
court held that the deposit of P201,000 in the Bank of the
Philippine Islands being the result of a forged
endorsement, the relation of depositor and banker did
not exist, but the bank was only a gratuitous bailee; that
the Bank of the Philippine Islands acted in good faith in
the ordinary course of its business, was not guilty of
negligence, and therefore under article 1902 of the Civil
Code which should control the case, plaintiff could not
recover; and that as the cause of loss was the criminal
actions of Wilson and Dolores, employees of plaintiff, and
as Newland Baldwin, the agent, had not exercised
adequate supervision over plaintiff's Manila office,
4
therefore plaintiff was guilty of negligence, which ground
would likewise defeat recovery.
From the decision of the trial court absolving the
defendants, plaintiff brings this appeal and makes nine
assignments of error which we do not deem it necessary
to discuss in detail.
There is a mild assertion on the part of the defendant
bank that the disputed signatures of Newland Baldwin
were genuine and that he had been in the habit of signing
checks in blank and turning the checks so signed over to
Wilson.
The proof as to the falsity of the questioned signatures of
Baldwin places the matter beyond reasonable doubt, nor
is it believed that Baldwin signed checks in blank and
turned them over to Wilson.
As to the China Banking Corporation, it will be seen that
it drew its check payable to the order of plaintiff and
delivered it to plaintiff's agent who was authorized to
receive it. A bank that cashes a check must know to
whom it pays. In connection with the cashier's check, this
duty was therefore upon the Bank of the Philippine
Islands, and the China Banking Corporation was not
bound to inspect and verify all endorsements of the
check, even if some of them were also those of depositors
in that bank. It had a right to rely upon the endorsement
of the Bank of the Philippine Islands when it gave the
latter bank credit for its own cashier's check. Even if we
would treat the China Banking Corporation's cashier's
check the same as the check of a depositor and attempt
to apply the doctrines of the Great Eastern Life Insurance
Co. vs. Hongkong & Shanghai Banking Corporation and
National Bank (43 Phil., 678), and hold the China
Banking Corporation indebted to plaintiff, we would at
the same time have to hold that the Bank of the
Philippine Islands was indebted to the China Banking
Corporation in the same amount. As, however, the money
was in fact paid to plaintiff corporation, we must hold
that the China Banking Corporation is indebted neither
to plaintiff nor to the Bank of the Philippine Islands, and
the judgment of the lower court far as it absolves the
China Banking Corporation from responsibility is
affirmed.
Returning to the relation between plaintiff and the Bank
of the Philippine Islands, we will now consider the effect
of the deposit of P201,000. It must be noted that this was
not a presenting of the check for cash payment but for
deposit only. It is a matter of general knowledge that
most endorsements for deposit only, are informal. Most
are by means of a rubber stamp. The bank would have
been justified in accepting the check for deposit even
with only a typed endorsement. It accepted the check and
duly credited plaintiff's account with the amount on the
face of the check. Plaintiff was not harmed by the
transaction as the only result was the removal of that
sum of money from a bank from which Wilson could have
drawn it out in his own name to a bank where Wilson
would not have authority to draw checks and where
funds could only be drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of
the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us
the entire amount of said manager's check of two
hundred one thousand (P201,000) pesos, together
with interest thereon at the agreed rate of 3 ½ per
cent per annum on daily balances of our credit in
account current with your bank to this date. In the
event of your refusal to pay, we shall claim interest
at the legal rate of 6 per cent from and after the date
of this demand inasmuch as we desire to withdraw
and make use of the money." Such language might
well be treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee
is without merit. In the first place, it is absolutely
contrary to what the bank did. It did not take it up as a
separate account but it transferred the credit to
plaintiff's current account as a depositor of that bank.
Furthermore, banks are not gratuitous bailees of the
funds deposited with them by their customers. Banks are
run for gain, and they solicit deposits in order that they
can use the money for that very purpose. In this case the
action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of
plaintiff that the Bank of the Philippine Islands was an
intermeddling bank. In the many cases cited by plaintiff
where the bank that cashed the forged endorsement was
held as an intermeddler, in none was the claimant a
regular depositor of the bank, nor in any of the cases
cited, was the endorsement for deposit only. It is
therefore clear that the relation of plaintiff with the Bank
of the Philippine Islands in regard to this item of
P201,000 was that of depositor and banker, creditor and
debtor.
We now come to consider the legal effect of payment by
the bank to Dolores of the sum of P201,000, on two
checks on which the name of Baldwin was forged as
drawer. As above stated, the fact that these signatures
were forged is beyond question. It is an elementary
principle both of banking and of the Negotiable
Instruments Law that —
A bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as
making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of
the depositor whose name was forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the
Philippine Islands astray. If it was in fact lulled into a
false sense of security, it was by the effrontery of Dolores,
the messenger to whom it entrusted this large sum of
money.
The bank paid out its money because it relied upon the
genuineness of the purported signatures of Baldwin.
These, they never questioned at the time its employees
should have used care. In fact, even today the bank
represents that it has a relief that they are genuine
signatures.
The signatures to the check being forged, under section
23 of the Negotiable Instruments Law they are not a
charge against plaintiff nor are the checks of any value to
the defendant.
It must therefore be held that the proximate cause of loss
was due to the negligence of the Bank of the Philippine
Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine
Islands must therefore be reversed, and a judgment
entered in favor of plaintiff-appellant and against the
Bank of the Philippine Islands, defendant-appellee, for
the sum of P200,001, with legal interest thereon from
December 23,1928, until payment, together with costs in
both instances. So ordered.
5
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur. third party defendant Yabut who is defendant voluntarily admitted that he forged the
FIRST DIVISION likewise ORDERED to pay the other half to plaintiff signature of Ms. Lebron and encashed the checks.
corporation [Casa Montessori Internationale "The PNP Crime Laboratory conducted an
G.R. No. 149454 May 28, 2004 (CASA)]."4 examination of the nine (9) checks and concluded
that the handwritings thereon compared to the
The assailed Resolution denied all the parties’ Motions standard signature of Ms. Lebron were not written by
BANK OF THE PHILIPPINE ISLANDS, petitioner, the latter.
vs. for Reconsideration.
CASA MONTESSORI INTERNATIONALE LEONARDO T.
YABUT, respondents. The Facts "On March 4, 1991, plaintiff filed the herein
Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to
x ----------------------------- x The facts of the case are narrated by the CA as follows: reinstate the amount of ₱782,500.007 in the current
and savings accounts of the plaintiff with interest at
G.R. No. 149507 May 28, 2004 "On November 8, 1982, plaintiff CASA Montessori 6% per annum.
International5 opened Current Account No. 0291-
CASA MONTESSORI INTERNATIONALE, petitioner, 0081-01 with defendant BPI[,] with CASA’s President "On February 16, 1999, the RTC rendered the
vs. Ms. Ma. Carina C. Lebron as one of its authorized appealed decision in favor of the plaintiff."8
BANK OF THE PHILIPPINE ISLANDS, respondent. signatories.
Ruling of the Court of Appeals
DECISION "In 1991, after conducting an investigation, plaintiff
discovered that nine (9) of its checks had been
encashed by a certain Sonny D. Santos since 1990 in Modifying the Decision of the Regional Trial Court (RTC),
PANGANIBAN, J.: the total amount of ₱782,000.00, on the following the CA apportioned the loss between BPI and CASA. The
dates and amounts: appellate court took into account CASA’s contributory
By the nature of its functions, a bank is required to take negligence that resulted in the undetected forgery. It
meticulous care of the deposits of its clients, who have then ordered Leonardo T. Yabut to reimburse BPI half
the right to expect high standards of integrity and ‘Check No. Date Amount the total amount claimed; and CASA, the other half. It also
performance from it. disallowed attorney’s fees and moral and exemplary
1. 839700 April 24, 1990 ₱ 43,400.00 damages.
Among its obligations in furtherance thereof is knowing 2. 839459 Nov. 2, 1990 110,500.00
the signatures of its clients. Depositors are not estopped Hence, these Petitions.9
3. 839609 Oct. 17, 1990 47,723.00
from questioning wrongful withdrawals, even if they
have failed to question those errors in the statements 4. 839549 April 7, 1990 90,700.00 Issues
sent by the bank to them for verification.
5. 839569 Sept. 23, 1990 52,277.00 In GR No. 149454, Petitioner BPI submits the following
The Case 6. 729149 Mar. 22, 1990 148,000.00 issues for our consideration:

Before us are two Petitions for Review1 under Rule 45 of
the Rules of Court, assailing the March 23, 2001
Decision2 and the August 17, 2001 Resolution3 of the
Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as follows:
"WHEREFORE, upon the premises, the decision
appealed from is AFFIRMED with the modification
that defendant bank [Bank of the Philippine Islands
(BPI)] is held liable only for one-half of the value of
the forged checks in the amount of ₱547,115.00
after deductions subject to REIMBURSEMENT from
7. 729129 Mar. 16, 1990 51,015.00 "I. The Honorable Court of Appeals erred in deciding
8. 839684 Dec. 1, 1990 140,000.00 this case NOT in accord with the applicable
decisions of this Honorable Court to the effect that
9. 729034 Mar. 2, 1990 98,985.00 forgery cannot be presumed; that it must be proved
by clear, positive and convincing evidence; and that
the burden of proof lies on the party alleging the
Total -- ₱ 782,600.006 forgery.
"It turned out that ‘Sonny D. Santos’ with account at "II. The Honorable Court of Appeals erred in deciding
BPI’s Greenbelt Branch [was] a fictitious name used this case not in accord with applicable laws, in
by third party defendant Leonardo T. Yabut who particular the Negotiable Instruments Law (NIL)
worked as external auditor of CASA. Third party which precludes CASA, on account of its own

6
 negligence, from asserting its forgery claim against
BPI, specially taking into account the absence of any
negligence on the part of BPI."10
In GR No. 149507, Petitioner CASA submits the following
issues:
"1. The Honorable Court of Appeals erred when it
ruled that ‘there is no showing that [BPI], although
negligent, acted in bad faith x x x’ thus denying the
prayer for the award of attorney’s fees, moral
damages and exemplary damages to [CASA]. The
Honorable Court also erred when it did not order
[BPI] to pay interest on the amounts due to [CASA].
"2. The Honorable Court of Appeals erred when it
declared that [CASA] was likewise negligent in the
case at bar, thus warranting its conclusion that the
loss in the amount of ₱547,115.00 be ‘apportioned
between [CASA] and [BPI] x x x.’"11
These issues can be narrowed down to three. First, was
there forgery under the Negotiable Instruments Law
(NIL)? Second, were any of the parties negligent and
therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages,
attorney’s fees, and interest be awarded?
The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in
GR No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a
signature is forged or made without the authority of
the person whose signature it purports to be, it is
wholly inoperative, and no right x x x to enforce
payment thereof against any party thereto, can be
acquired through or under such signature, unless the
party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of
authority."12
Under this provision, a forged signature is a real13 or
absolute defense,14 and a person whose signature on a
negotiable instrument is forged is deemed to have never
become a party thereto and to have never consented to
the contract that allegedly gave rise to it.15
The counterfeiting of any writing, consisting in the
signing of another’s name with intent to defraud, is
forgery.16
In the present case, we hold that there was forgery of the
drawer’s signature on the check.
First, both the CA17 and the RTC18 found that Respondent
Yabut himself had voluntarily admitted, through an
Affidavit, that he had forged the drawer’s signature and
encashed the checks.19 He never refuted these
findings.20 That he had been coerced into admission was
not corroborated by any evidence on record.21
Second, the appellate and the trial courts also ruled that
the PNP Crime Laboratory, after its examination of the
said checks,22 had concluded that the handwritings
thereon -- compared to the standard signature of the
drawer -- were not hers.23 This conclusion was the same
as that in the Report24 that the PNP Crime Laboratory
had earlier issued to BPI -- the drawee bank -- upon the
latter’s request.
Indeed, we respect and affirm the RTC’s factual findings,
especially when affirmed by the CA, since these are
supported by substantial evidence on record.25
Voluntary Admission Not Violative of Constitutional
Rights
The voluntary admission of Yabut did not violate his
constitutional rights (1) on custodial investigation, and
(2) against self-incrimination.
In the first place, he was not under custodial
investigation.26 His Affidavit was executed in private and
before private individuals.27 The mantle of protection
under Section 12 of Article III of the 1987
Constitution28 covers only the period "from the time a
person is taken into custody for investigation of his
possible participation in the commission of a crime or
from the time he is singled out as a suspect in the
commission of a crime although not yet in custody."29
Therefore, to fall within the ambit of Section 12, quoted
above, there must be an arrest or a deprivation of
freedom, with "questions propounded on him by the
police authorities for the purpose of eliciting admissions,
confessions, or any information."30 The said
constitutional provision does "not apply to spontaneous
statements made in a voluntary manner"31 whereby an
individual orally admits to authorship of a
crime.32 "What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating
facts."33
Moreover, the right against self-incrimination34 under
Section 17 of Article III35 of the Constitution, which is
ordinarily available only in criminal prosecutions,
extends to all other government proceedings -- including
civil actions, legislative investigations,36 and
administrative proceedings that possess a criminal or
penal aspect37 -- but not to private investigations done
by private individuals. Even in such government
proceedings, this right may be waived,38 provided the
waiver is certain; unequivocal; and intelligently,
understandingly and willingly made.39
If in these government proceedings waiver is allowed, all
the more is it so in private investigations. It is of no
moment that no criminal case has yet been filed against
Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom
damage has been caused. As we shall also explain later, it
is not mandatory for CASA -- the plaintiff below -- to
implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of
Rights40 does not concern itself with the relation
between a private individual and another individual. It
governs the relationship between the individual and the
State."41 Moreover, the Bill of Rights "is a charter of
liberties for the individual and a limitation upon the
power of the [S]tate."42 These rights43 are guaranteed to
preclude the slightest coercion by the State that may lead
the accused "to admit something false, not prevent him
from freely and voluntarily telling the truth."44
7
Yabut is not an accused here. Besides, his mere
invocation of the aforesaid rights "does not automatically
entitle him to the constitutional protection."45 When he
freely and voluntarily executed46 his Affidavit, the State
was not even involved. Such Affidavit may therefore be
admitted without violating his constitutional rights
while under custodial investigation and against self-
incrimination.
Clear, Positive and Convincing Examination and
Evidence
The examination by the PNP, though inconclusive, was
nevertheless clear, positive and convincing.
Forgery "cannot be presumed."47 It must be established
by clear, positive and convincing evidence.48 Under the
best evidence rule as applied to documentary evidence
like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced,
as the original writing itself must be produced in
court.49 But when, without bad faith on the part of the
offeror, the original checks have already been destroyed
or cannot be produced in court, secondary evidence may
be produced.50 Without bad faith on its part, CASA
proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of that
fact51 -- Yabut. He clearly admitted to discarding the paid
checks to cover up his misdeed.52 In such a situation,
secondary evidence like microfilm copies may be
introduced in court.
The drawer’s signatures on the microfilm copies were
compared with the standard signature. PNP Document
Examiner II Josefina de la Cruz testified on cross-
examination that two different persons had written
them.53 Although no conclusive report could be issued in
the absence of the original checks,54 she affirmed that
her findings were 90 percent conclusive.55 According to
her, even if the microfilm copies were the only basis of
comparison, the differences were evident.56 Besides, the
RTC explained that although the Report was
inconclusive, no conclusive report could have been given
by the PNP, anyway, in the absence of the original
checks.57 This explanation is valid; otherwise, no such
report can ever be relied upon in court.
Even with respect to documentary evidence, the best
evidence rule applies only when the contents of a
document -- such as the drawer’s signature on a check --
is the subject of inquiry.58 As to whether the document
has been actually executed, this rule does not apply; and
testimonial as well as any other secondary evidence is
admissible.59 Carina Lebron herself, the drawer’s
authorized signatory, testified many times that she had
never signed those checks. Her testimonial evidence is
admissible; the checks have not been actually executed.
The genuineness of her handwriting is proved, not only
through the court’s comparison of the questioned
handwritings and admittedly genuine specimens
thereof,60 but above all by her.
The failure of CASA to produce the original checks
neither gives rise to the presumption of suppression of
evidence61 nor creates an unfavorable inference against
it.62 Such failure merely authorizes the introduction of
secondary evidence63 in the form of microfilm copies. Of
no consequence is the fact that CASA did not present the
signature card containing the signatures with which
those on the checks were compared.64 Specimens of
standard signatures are not limited to such a card.
Considering that it was not produced in evidence, other
documents that bear the drawer’s authentic signature
may be resorted to.65 Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document
containing the allegedly forged signature, one cannot
make a definitive comparison that would establish
forgery;66 and that a comparison based on a mere
reproduction of the document under controversy cannot
produce reliable results.67 We have also said, however,
that a judge cannot merely rely on a handwriting expert’s
testimony,68 but should also exercise independent
judgment in evaluating the authenticity of a signature
under scrutiny.69 In the present case, both the RTC and
the CA conducted independent examinations of the
evidence presented and arrived at reasonable and
similar conclusions. Not only did they admit secondary
evidence; they also appositely considered testimonial
and other documentary evidence in the form of the
Affidavit.
The best evidence rule admits of exceptions and, as we
have discussed earlier, the first of these has been
met.70 The result of examining a questioned handwriting,
even with the aid of experts and scientific instruments,
may be inconclusive;71 but it is a non sequitur to say that
such result is not clear, positive and convincing. The
preponderance of evidence required in this case has
been satisfied.72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature,
BPI -- the drawee -- erred in making payments by virtue
thereof. The forged signatures are wholly inoperative,
and CASA -- the drawer whose authorized signatures do
not appear on the negotiable instruments -- cannot be
held liable thereon. Neither is the latter precluded from
setting up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged
Signature
We have repeatedly emphasized that, since the banking
business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of
diligence73 is expected,74 and high standards of integrity
and performance are even required, of it.75 By the nature
of its functions, a bank is "under obligation to treat the
accounts of its depositors with meticulous care,76 always
having in mind the fiduciary nature of their
relationship."77
BPI contends that it has a signature verification
procedure, in which checks are honored only when the
signatures therein are verified to be the same with or
similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the
omission of that degree of diligence required78 of a bank.
It cannot now feign ignorance, for very early on we have
already ruled that a bank is "bound to know the
signatures of its customers; and if it pays a forged check,
it must be considered as making the payment out of its
own funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was
forged."79 In fact, BPI was the same bank involved when
we issued this ruling seventy years ago.
Neither Waiver nor Estoppel Results from Failure to
Report Error in Bank Statement
8
The monthly statements issued by BPI to its clients
contain a notice worded as follows: "If no error is
reported in ten (10) days, account will be
correct."80 Such notice cannot be considered a waiver,
even if CASA failed to report the error. Neither is it
estopped from questioning the mistake after the lapse of
the ten-day period.
This notice is a simple confirmation81 or "circularization"
-- in accounting parlance -- that requests client-
depositors to affirm the accuracy of items recorded by
the banks.82 Its purpose is to obtain from the depositors
a direct corroboration of the correctness of their account
balances with their respective banks.83 Internal or
external auditors of a bank use it as a basic audit
procedure84 -- the results of which its client-depositors
are neither interested in nor privy to -- to test the details
of transactions and balances in the bank’s
records.85 Evidential matter obtained from independent
sources outside a bank only serves to provide greater
assurance of reliability86 than that obtained solely within
it for purposes of an audit of its own financial statements,
not those of its client-depositors.
Furthermore, there is always the audit risk that errors
would not be detected87 for various
reasons. One, materiality is a consideration in audit
planning;88 and two, the information obtained from such
a substantive test is merely presumptive and cannot be
the basis of a valid waiver.89 BPI has no right to impose a
condition unilaterally and thereafter consider failure to
meet such condition a waiver. Neither may CASA
renounce a right90 it has never possessed.91
Every right has subjects -- active and passive. While the
active subject is entitled to demand its enforcement, the
passive one is duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active
subject, because it could not have demanded from CASA
a response to its notice. Besides, the notice was a measly
request worded as follows: "Please examine x x x and
report x x x."93 CASA, on the other hand, could not have
been a passive subject, either, because it had no
obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or
asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal
contemplation.94 Our rules on evidence even make a juris
et de jure presumption95 that whenever one has, by one’s
own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act
upon that belief, one cannot -- in any litigation arising
from such act or omission -- be permitted to falsify that
supposed truth.96
In the instant case, CASA never made any deed or
representation that misled BPI. The former’s omission, if
any, may only be deemed an innocent mistake oblivious
to the procedures and consequences of periodic audits.
Since its conduct was due to such ignorance founded
upon an innocent mistake, estoppel will not arise.97 A
person who has no knowledge of or consent to a
transaction may not be estopped by it.98 "Estoppel
cannot be sustained by mere argument or doubtful
inference x x x."99 CASA is not barred from questioning
BPI’s error even after the lapse of the period given in the
notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and
fictitious payee, BPI -- the drawee bank -- becomes liable
to its depositor-drawer. Since the encashing bank is one
of its branches,101 BPI can easily go after it and hold it
liable for reimbursement.102 It "may not debit the
drawer’s account103 and is not entitled to
indemnification from the drawer."104 In both law and
equity, when one of two innocent persons "must suffer
by the wrongful act of a third person, the loss must be
borne by the one whose negligence was the proximate
cause of the loss or who put it into the power of the third
person to perpetrate the wrong."105
Proximate cause is determined by the facts of the
case.106 "It is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would
not have occurred."107
Pursuant to its prime duty to ascertain well the
genuineness of the signatures of its client-depositors on
checks being encashed, BPI is "expected to use
reasonable business prudence."108 In the performance of
that obligation, it is bound by its internal banking rules
and regulations that form part of the contract it enters
into with its depositors.109
Unfortunately, it failed in that regard. First, Yabut was
able to open a bank account in one of its branches
without privity;110 that is, without the proper
verification of his corresponding identification
papers. Second, BPI was unable to discover early on not
only this irregularity, but also the marked differences in
the signatures on the checks and those on the signature
card. Third, despite the examination procedures it
conducted, the Central Verification Unit111 of the bank
even passed off these evidently different signatures as
genuine. Without exercising the required prudence on its
part, BPI accepted and encashed the eight checks
presented to it. As a result, it proximately contributed to
the fraud and should be held primarily liable112 for the
"negligence of its officers or agents when acting within
the course and scope of their employment."113 It must
bear the loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking
forgery is recognized as an exception114 to the general
rule that a forged signature is wholly
inoperative.115 Contrary to BPI’s claim, however, we do
not find CASA negligent in handling its financial affairs.
CASA, we stress, is not precluded from setting up forgery
as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to
investigate and determine objectively if the financial
statements submitted for audit by a corporation have
been prepared in accordance with the appropriate
financial reporting practices116 of private entities. The
relationship that arises therefrom is both legal and
moral.117 It begins with the execution of the engagement
letter118 that embodies the terms and conditions of the
audit and ends with the fulfilled expectation of the
auditor’s ethical119 and competent performance in all
aspects of the audit.120
The financial statements are representations of the
client; but it is the auditor who has the responsibility for
the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the
9
opinion121 expressed therein.122 The auditor does not
assume the role of employee or of management in the
client’s conduct of operations123 and is never under the
control or supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He
handled its monthly bank reconciliations and had access
to all relevant documents and checkbooks.126 In him was
reposed the client’s127 trust and confidence128 that he
would perform precisely those functions and apply the
appropriate procedures in accordance with generally
accepted auditing standards.129 Yet he did not meet these
expectations. Nothing could be more horrible to a client
than to discover later on that the person tasked to detect
fraud was the same one who perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives
the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda,
shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not
equipollent with discernment.
Besides, in the internal accounting control system
prudently installed by CASA,130 it was Yabut who should
examine those documents in order to prepare the bank
reconciliations.131 He owned his working papers,132 and
his output consisted of his opinion as well as the client’s
financial statements and accompanying notes thereto.
CASA had every right to rely solely upon his output --
based on the terms of the audit engagement -- and could
thus be unwittingly duped into believing that everything
was in order. Besides, "[g]ood faith is always presumed
and it is the burden of the party claiming otherwise to
adduce clear and convincing evidence to the
contrary."133
Moreover, there was a time gap between the period
covered by the bank statement and the date of its actual
receipt. Lebron personally received the December 1990
bank statement only in January 1991134 -- when she was
also informed of the forgery for the first time, after which
she immediately requested a "stop payment order." She
cannot be faulted for the late detection of the forged
December check. After all, the bank account with BPI was
not personal but corporate, and she could not be
expected to monitor closely all its finances. A preschool
teacher charged with molding the minds of the youth
cannot be burdened with the intricacies or complexities
of corporate existence.
There is also a cutoff period such that checks issued
during a given month, but not presented for payment
within that period, will not be reflected therein.135 An
experienced auditor with intent to defraud can easily
conceal any devious scheme from a client unwary of the
accounting processes involved by manipulating the cash
balances on record -- especially when bank transactions
are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the
selection and appointment of an auditor -- a fault that is
not tantamount to negligence.
Negligence is not presumed, but proven by whoever
alleges it.136 Its mere existence "is not sufficient without
proof that it, and no other cause,"137 has given rise to
damages.138 In addition, this fault is common to, if not
prevalent among, small and medium-sized business
entities, thus leading the Professional Regulation
Commission (PRC), through the Board of Accountancy
(BOA), to require today not only accreditation for the
practice of public accountancy,139 but also the
registration of firms in the practice thereof. In fact,
among the attachments now required upon registration
are the code of good governance140 and a sworn
statement on adequate and effective training.141
The missing checks were certainly reported by the
bookkeeper142 to the accountant143 -- her immediate
supervisor -- and by the latter to the auditor. However,
both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no
irregularities.
The bookkeeper144 who had exclusive custody of the
checkbooks145 did not have to go directly to CASA’s
president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a
resolution of it was arrived at, precisely because the
person at the top of the helm was the culprit. The
vouchers, invoices and check stubs in support of all check
disbursements could be concealed or fabricated -- even
in collusion -- and management would still have no way
to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful
act through no fault of CASA. If auditors may be held
liable for breach of contract and negligence,146 with all
the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA
had the discretion to pursue BPI alone under the NIL, by
reason of expediency or munificence or both. Money paid
under a mistake may rightfully be recovered,147 and
under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of
fraud or bad faith,149 moral damages cannot be
awarded.150 The adverse result of an action does not per
se make the action wrongful, or the party liable for it. One
may err, but error alone is not a ground for granting such
damages.151 While no proof of pecuniary loss is
necessary therefor -- with the amount to be awarded left
to the court’s discretion152 -- the claimant must
nonetheless satisfactorily prove the existence of its
factual basis153 and causal relation154 to the claimant’s
act or omission.155
Regrettably, in this case CASA was unable to identify the
particular instance -- enumerated in the Civil Code --
upon which its claim for moral damages is
predicated.156 Neither bad faith nor negligence so gross
that it amounts to malice157 can be imputed to BPI. Bad
faith, under the law, "does not simply connote bad
judgment or negligence;158 it imports a dishonest
purpose or some moral obliquity and conscious doing of
a wrong, a breach of a known duty through some motive
or interest or ill will that partakes of the nature of
fraud."159
As a general rule, a corporation -- being an artificial
person without feelings, emotions and senses, and
having existence only in legal contemplation -- is not
entitled to moral damages,160 because it cannot
experience physical suffering and mental
anguish.161 However, for breach of the fiduciary duty
10
required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by such
breach, and social humiliation results
therefrom.162 CASA was unable to prove that BPI had
debased the good reputation of,163 and consequently
caused incalculable embarrassment to, the former.
CASA’s mere allegation or supposition thereof, without
any sufficient evidence on record,164 is not enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public
good,166 exemplary damages cannot be recovered as a
matter of right.167 As we have said earlier, there is no bad
faith on the part of BPI for paying the checks of CASA
upon forged signatures. Therefore, the former cannot be
said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.168 The latter, having
no right to moral damages, cannot demand exemplary
damages.169
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the
right to litigate,170 we find that CASA is entitled to
reasonable attorney’s fees based on "factual, legal, and
equitable justification."171
When the act or omission of the defendant has compelled
the plaintiff to incur expenses to protect the latter’s
interest,172 or where the court deems it just and
equitable,173 attorney’s fees may be recovered. In the
present case, BPI persistently denied the claim of CASA
under the NIL to recredit the latter’s account for the
value of the forged checks. This denial constrained CASA
to incur expenses and exert effort for more than ten
years in order to protect its corporate interest in its bank
account. Besides, we have already cautioned BPI on a
similar act of negligence it had committed seventy years
ago, but it has remained unrelenting. Therefore, the
Court deems it just and equitable to grant ten percent
(10%)174 of the total value adjudged to CASA as
attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for the Board of Accountancy of the Professional Regulation
compelling the latter to resort to the courts to obtain Commission for such action as it may deem appropriate
payment, legal interest may be adjudicated at the against Respondent Yabut. No costs.
discretion of the Court, the same to run from the
filing175 of the Complaint.176 Since a court judgment is SO ORDERED.
not a loan or a forbearance of recovery, the legal interest
shall be at six percent (6%) per annum.177 "If the
obligation consists in the payment of a sum of money, Davide, Jr.*, Ynares-Santiago**, Carpio, and Azcuna,
and the debtor incurs in delay, the indemnity for JJ., concur.
damages, there being no stipulation to the contrary, shall
be the payment of x x x legal interest, which is six
percent per annum."178 The actual base for its
computation shall be "on the amount finally
adjudged,"179 compounded180 annually to make up for
the cost of money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not
prevent us from granting it upon damages awarded for
breach of contract.182 Because BPI evidently breached its
contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section
196 of the NIL, any case not provided for shall be
"governed by the provisions of existing legislation or, in
default thereof, by the rules of the law
merchant."183 Damages are not provided for in the NIL.
Thus, we resort to the Code of Commerce and the Civil
Code. Under Article 2 of the Code of Commerce, acts of
commerce shall be governed by its provisions and, "in
their absence, by the usages of commerce generally
observed in each place; and in the absence of both rules,
by those of the civil law."184 This law being silent, we look
at Article 18 of the Civil Code, which states: "In matters
which are governed by the Code of Commerce and
special laws, their deficiency shall be supplied" by its
provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our
civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is
hereby DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of Appeals
is AFFIRMED with modification: BPI is held liable for
₱547,115, the total value of the forged checks less the
amount already recovered by CASA from Leonardo T.
Yabut, plus interest at the legal rate of six percent
(6%) per annum -- compounded annually, from the filing
of the complaint until paid in full; and attorney’s fees of
ten percent (10%) thereof, subject to reimbursement
from Respondent Yabut for the entire amount, excepting
attorney’s fees. Let a copy of this Decision be furnished
11
 SECOND DIVISION
July 7, 2016
G.R. No. 205839
LAND BANK OF THE PHILIPPINES, Petitioner
vs.
NARCISO L. KHO, Respondent
x-----------------------x
G.R. No. 205840
MA.LORENA FLORES and ALEXANDER
CRUZ, Petitioners,
vs.
NARCISO L. KHO, Respondent.
DECISION
BRION, J.:
These are consolidated petitions for review
on certiorari assailing the Court of Appeals' (CA) August
30, 2012 decision and February 14, 2013 Resolution
in CA-G.R. CV No. 93881.1The CA set aside the Regional
Trial Court’s (RTC) dismissal of Civil Case No. Q-06-
571542and remanded the case for further proceedings.
Antecedents
The respondent Narciso Kho is the sole proprietor of
United Oil Petroleum, a business engaged in trading
diesel fuel. Sometime in December 2006, he entered into
a verbal agreement to purchase lubricants from Red
Orange International Trading (Red Orange), represented
by one Rudy Medel. Red Orange insisted that it would
only accept a Land Bank manager’s check as payment.
On December 28, 2005, Kho, accompanied by Rudy
Medel, opened Savings Account No. 0681-0681-80 at
the Araneta Branch of petitioner Land Bank of the
Philippines (Land Bank).3His initial ₱25,993,537.37
deposit4 consisted of the following manager’s checks:
1 UCPB Del Monte Branch PHP 15,000,000
Check No. 19107
2 E-PCI Banawe Branch PHP 2,900,000
Check No. 26200720
3 I.E. Bank Retiro Branch PHP 8,093,537.37
Check No. 1466
These checks were scheduled for clearance on January 2,
2006.
Kho also purchased Land Bank Manager’s Check No.
07410 leveraged by his newly opened savings account.
Recem Macarandan, the Acting Operations Supervisor of
the Araneta branch, and Leida Benitez, the Document
Examiner, prepared and signed the check.5
The check was postdated to January 2, 2006, and
scheduled for actual delivery on the same date after the
three checks were expected to have been cleared. It was
valued at ₱25,000,000.00 and made payable to Red
Orange.6
Kho requested a photocopy of the manager’s check to
provide Red Orange with proof that he had available
funds for the transaction.1âwphi1 The branch manager,
petitioner Ma. Lorena Flores, accommodated his request.
Kho gave the photocopy of the check to Rudy Medel.7
On January 2, 2006, Kho returned to the bank and picked
up check No. 07410. Accordingly, ₱25,000,000.00 was
debited from his savings account.
Unfortunately, his deal with Red Orange did not push
through.
On January 3, 2006, an employee of the Bank of the
Philippine Islands (BPI) called Land Bank, Araneta
Branch, to inform them that Red Orange had deposited
check No. 07410 for payment. Flores confirmed with BPI
that Land Bank had issued the check to Kho.8
On January 4, 2006, the Central Clearing
Department (CCD) of the Land Bank Head Office faxed a
copy of the deposited check to the Araneta branch for
payment. The officers of the Araneta branch examined
the fax copy and thought that the details matched the
check purchased by Kho. Thus, Land Bank confirmed
the deposited check.9
On January 5, 2006, Flores informed Kho by phone that
Check No. 07410 was cleared and paid by the BPI,
Kamuning branch.10
Shocked, Kho informed Flores that he never negotiated
the check because the deal did not materialize. More
importantly, the actual check was still in his possession.11
Kho immediately went to Land Bank with the check No.
07410. They discovered that what was deposited and
encashed with BPI was a spurious manager’s
check.12 Kho demanded the cancellation of his manager’s
check and the release of the remaining money in his
account (then ₱995,207.27).13 However, Flores refused
his request because she had no authority to do so at the
time.
Kho returned to the Land Bank, Araneta branch on
January 12, 2006, with the same demands. He was
received by petitioner Alexander Cruz who was on his
second day as the Officer in Charge (OIC) of the Araneta
branch.14 Cruz informed him that there was a standing
freeze order on his account because of the (then)
ongoing investigation on the fraudulent withdrawal of
the manager’s check.15
On January 16, 2006, Kho sent Land Bank a final demand
letter for the return of his ₱25,000,000.00 and the
release of the ₱995,207.27 from his account but the bank
did not comply.
Hence, on January 23, 2006, Kho filed a Complaint for
Specific Performance and Damages against Land Bank,
represented by its Araneta Avenue Branch Manager
Flores and its OIC Cruz. He also impleaded Flores and
Cruz in their personal capacities. The complaint was
docketed as Civil Case No. Q-06-57154.
Kho asserted that the manager’s check No. 07410 was
still in his possession and that he had no obligation to
inform Land Bank whether or not he had already
negotiated the check.16
12
On the other hand, Land Bank argued that Kho was
negligent because he handed Medel a photocopy of the
manager’s check and that this was the proximate cause
of his loss.17
On April 30, 2009, the RTC dismissed the complaint.18
Citing Associated Bank v. Court of Appeals, the RTC
reasoned that the failure of the purchaser/drawer to
exercise ordinary care that substantially contributed to
the making of the forged check precludes him from
asserting the forgery.19 It held that (1) Kho’s act of giving
Medel a photocopy of the check and (2) his failure to
inform the bank that the transaction with Red Orange did
not push through were the proximate causes of his loss.20
The RTC also found that Flores and Cruz acted in good
faith in performing their duties as officers of Land Bank
when they refused to cancel the manager’s check and
disallowed Kho from withdrawing from his account.21
Kho appealed to the CA where the case was docketed
as CA-G.R. CV No. 93881.
On August 30, 2012, the CA set aside the RTC’s decision
and remanded the case for further proceedings.
The CA pointed out that Land Bank was conducting an
investigation to determine whether there was a
fraudulent negotiation of the manager’s check No.
07410. It held that the outcome of the investigation –
which was not yet available during the trial – is crucial to
the resolution of the case. It noted that the RTC’s ruling
on Kho’s negligence in dealing with Medel preempted the
outcome of Land Bank’s investigation.22 Thus, it
remanded the case to the RTC with the directive to
consider the outcome of the investigation.
Dissatisfied, Land Bank, Flores, and Cruz, filed separately
petitions for review on certiorari before this Court.
The Arguments
Land Bank asserts that neither party denied the spurious
nature of the manager’s check that was deposited with
BPI. Therefore, the conclusion of its investigation as to
the fraudulent negotiation of check No. 07410 is
immaterial to the resolution of the case.23
Land Bank adopts the RTC’s conclusion that Kho is
precluded from asserting the forgery of check No.
07410 because his negligence substantially contributed
to his loss.24
The bank highlights the following instances of Kho’s
negligence:
(1) Kho transacted with Rudy Medel, a person he barely
knew, without verifying Medel’s actual relationship with
Red Orange. In fact, Kho even mistook him as "Rudy
Rodel" in his complaint;
(2) Kho accorded Medel an unusual degree of trust. He
brought Medel with him to the bank and carelessly gave
the latter a photocopy of the manager’s check; and
(3) When he picked up check No. 07410 on January 2,
2006, Kho did not even bother to inform Land Bank that
his transaction with Red Orange did not push through.
He could have prevented or detected the duplication of
the check if he had simply notified the bank.25
Flores and Cruz maintain that they did not incur any
personal liability to Kho because they were only
performing their official duties in good faith. They insist
that their alleged wrongdoing, if there was any, were
corporate acts performed within the scope of their
official authority; therefore, only Land Bank should be
made liable for the consequences.26
For his part, Kho adopts the CA’s arguments and
reasoning in CA-G. R. CV No. 93881.27
Our Ruling
At the outset, we agree with Land Bank’s contention that
the result of its investigation is not indispensable to
resolving this case. After all, it was not conducted by an
independent party but by a party-litigant. We cannot
expect the report to yield a completely impartial result.
At best, the investigation report will be of doubtful
probative value.
More importantly, all the facts necessary to decide the
case are already available. Although they have reached
different legal conclusions, both the RTC and the CA
agree that:
On December 28, 2005, Kho opened an account with
Land Bank in order to leverage a business deal with Red
Orange;
He purchased Land Bank Manager’s check No. 07410
worth ₱25,000,000.00 payable to Red Orange and dated
January 2, 2006;
He also gave Rudy Medel a photocopy of the check that
the bank had given him;
After his visit to the Bank, the deal with Medel and Red
Orange did not push through;
He picked up check No. 07410 from the bank on
January 2, 2006, without informing the bank that the deal
did not materialize;
Afterwards, Red Orange presented a spurious copy of
check No. 07410 to BPI, Kamuning for payment;
Land Bank cleared the check;
However, Kho never negotiated the actual check. It was
in his possession the whole time.
This case can already be resolved based on these
undisputed facts. Therefore, the CA erred when it
remanded the case for further proceedings.
That said, we cannot agree that the proximate causes of
the loss were Kho’s act of giving Medel a photocopy of
check No. 07410 and his failure to inform Land Bank that
his deal with Red Orange did not push through.
Proximate cause – which is determined by a mixed
consideration of logic, common sense, policy, and
precedent – is "that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without which
the result would not have occurred."28
13
We cannot understand how both the RTC and the CA
overlooked the fact that Land Bank’s officers cleared the
counterfeit check. We stress that the signatories of the
genuine check No. 07410 were Land Bank’s officers
themselves.
The business of banking is imbued with public interest;
it is an industry where the general public’s trust and
confidence in the system is of paramount
importance.29 Consequently, banks are expected to exert
the highest degree of, if not the utmost, diligence. They
are obligated to treat their depositors’ accounts with
meticulous care, always keeping in mind the fiduciary
nature of their relationship.30
Banks hold themselves out to the public as experts in
determining the genuineness of checks and
corresponding signatures thereon.31 Stemming from
their primordial duty of diligence, one of a bank’s prime
duties is to ascertain the genuineness of the drawer’s
signature on check being encashed.32 This holds
especially true for manager’s checks.
A manager’s check is a bill of exchange drawn by a bank
upon itself, and is accepted by its issuance. It is an order
of the bank to pay, drawn upon itself, committing in
effect its total resources, integrity, and honor behind its
issuance. The check is signed by the manager (or some
other authorized officer) for the bank. In this case, the
signatories were Macarandan and Benitez.
The genuine check No. 07410 remained in Kho’s
possession the entire time and Land Bank admits that the
check it cleared was a fake. When Land Bank’s CCD
forwarded the deposited check to its Araneta branch for
inspection, its officers had every opportunity to
recognize the forgery of their signatures or the falsity of
the check. Whether by error or neglect, the bank failed to
do so, which led to the withdrawal and eventual loss of
the ₱25,000,000.00.
This is the proximate cause of the loss. Land Bank
breached its duty of diligence and assumed the risk of
incurring a loss on account of a forged or counterfeit
check. Hence, it should suffer the resulting damage.
We cannot agree with the Land Bank and the RTC’s
positions that Kho is precluded from invoking the
forgery. A drawer or a depositor of the bank is precluded
from asserting the forgery if the drawee bank can prove
his failure to exercise ordinary care and if this negligence
substantially contributed to the forgery or the
perpetration of the fraud.
In Gempesaw v. Court of Appeals,33 Natividad Gempesaw,
a businesswoman, completely placed her trust in her
bookkeeper. Gempesaw allowed her bookkeeper to
prepare the checks payable to her suppliers. She signed
the checks without verifying their amounts and their
corresponding invoices. Despite receiving her banks
statements, Gempesaw never verified the correctness of
the returned checks nor confirmed if the payees actually
received payment. This went on for over two years,
allowing her bookkeeper to forge the indorsements of
over 82 checks.
Gempesaw failed to examine her records with
reasonable diligence before signing the checks and after
receiving her bank statements. Her gross negligence
allowed her bookkeeper to benefit from the subsequent
forgeries for over two years.
Gempesaw’s negligence precluded her from asserting
the forgery. Nevertheless, we adjudged the drawee Bank
liable to share evenly in her loss for its failure to exercise
utmost diligence, which amounted to a breach of its
contractual obligations to the depositor.34
In Associated Bank v. Court of Appeals,35 the province of
Tarlac (the depositor) released 30 checks payable to the
order of a government hospital to
a retired administrative officer/cashier of the hospital.
The retired officer forged the hospital’s indorsement and
deposited the checks into his personal account. This took
place for over three years resulting in the accumulated
loss of ₱203,300.00. We found the province of Tarlac
grossly negligent, to the point of substantially
contributing to its loss.36
Nevertheless, we apportioned the loss evenly between
the province of Tarlac and the drawee bank because of
the bank’s failure to pay according to the terms of the
check. It violated its duty to charge the customer’s
account only for properly payable items.37
Kho’s negligence does not even come close to
approximating those of Gempesaw or of the province of
Tarlac. While his act of giving Medel a photocopy of the
check may have allowed the latter to create a duplicate,
this cannot possibly excuse Land Bank’s failure to
recognize that the check itself –not just the signatures – is
a fake instrument. More importantly, Land Bank itself
furnished Kho the photocopy without objecting to the
latter’s intention of giving it to Medel.
Kho' s failure to inform Land Bank that the deal did not
push through as of January 2, 2006, does not justify Land
Bank's confirmation and clearing of a fake check bearing
the forged signatures of its own officers. Whether or not
the deal pushed through, the check remained in Kho's
possession. He was entitled to a reasonable expectation
that the bank would not release any funds corresponding
to the check.
Lastly, we agree with the RTC's finding that neither
Flores nor Cruz is liable to Kho in their private capacities.
Their refusal to honor Kho' s demands was made in good
faith pursuant to the directives of the Land Bank's
management.
As a pillar of economic development, the banking
industry is impressed with public interest. The general
public relies on banks' sworn duty to serve with utmost
diligence. Public trust and confidence in banks is critical
to a healthy, stable, and well-functioning economy. Let
this serve as a reminder for banks to always act with the
highest degree of diligence and the most meticulous
attention to detail.
WHEREFORE, we PARTLY GRANT the petitions. The
Court of Appeals' August 30, 2012 decision and February
14, 2013 resolution in CA-G.R. CV No. 93881 are SET
ASIDE. The Regional Trial Court's April 30, 2009
decision in Civil Case No. Q-06-57154 is REVERSED.
Petitioner Land Bank of the Philippines is ORDERED:
(1) to PAY Narciso Kho the sum of TWENTY FIVE
MILLION PESOS (₱25,000,000.00), plus interest at the
legal rate reckoned from the filing of the complaint; and
(2) to ALLOW Narciso Kho to withdraw his remaining
funds from Savings Account No. 0681-0681-80.
SO ORDERED.
14
 SECOND DIVISION
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,
INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT
OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook
question – if a bank pays out on a forged check, is it liable
to reimburse the drawer from whose account the funds
were paid out? The Court of Appeals, in reversing a trial
court decision adverse to the bank, invoked tenuous
reasoning to acquit the bank of liability. We reverse,
applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines,
Inc. ("Samsung Construction"), while based in Biñan,
Laguna, maintained a current account with defendant
Far East Bank and Trust Company1 ("FEBTC") at the
latter’s Bel-Air, Makati branch.2 The sole signatory to
Samsung Construction’s account was Jong Kyu Lee
("Jong"), its Project Manager,3 while the checks remained
in the custody of the company’s accountant, Kyu Yong
Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented
for payment FEBTC Check No. 432100 to the bank’s
branch in Bel-Air, Makati. The check, payable to cash and
drawn against Samsung Construction’s current account,
was in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00). The bank
teller, Cleofe Justiani, first checked the balance of
Samsung Construction’s account. After ascertaining
there were enough funds to cover the check,5 she
compared the signature appearing on the check with the
specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of
the signature appearing on the check. She then asked
Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the
branch Senior Assistant Cashier Gemma Velez, as it was
bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked
the signature on the check as against that on the
signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check
and signature card to Shirley Syfu, another bank officer,
for approval. Syfu then noticed that Jose Sempio III
("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-
known to Syfu and the other bank officers, he being the
assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who vouched for the
genuineness of Jong’s signature. Confirming the identity
of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction.
Satisfied with the genuineness of the signature of Jong,
Syfu authorized the bank’s encashment of the check to
Gonzaga.
The following day, the accountant of Samsung
Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Aware that he
had not prepared such a check for Jong’s signature, Kyu
perused the checkbook and found that the last blank
check was missing.7 He reported the matter to Jong, who
then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature
had been forged. The Bank Manager reputedly told Jong
that he would be reimbursed for the amount of the
check.8 Jong proceeded to the police station and
consulted with his lawyers.9 Subsequently, a criminal
case for qualified theft was filed against Sempio before
the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction,
through counsel, demanded that FEBTC credit to it the
amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00), with interest.11 In
response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung
Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments
Law, and prayed for the payment of the amount debited
as a result of the questioned check plus interest, and
attorney’s fees.12 The case was docketed as Civil Case No.
92-61506 before the Regional Trial Court ("RTC") of
Manila, Branch 9.13
During the trial, both sides presented their respective
expert witnesses to testify on the claim that Jong’s
signature was forged. Samsung Corporation, which had
referred the check for investigation to the NBI, presented
Senior NBI Document Examiner Roda B. Flores. She
testified that based on her examination, she concluded
that Jong’s signature had been forged on the check. On
the other hand, FEBTC, which had sought the assistance
of the Philippine National Police (PNP),14 presented
Rosario C. Perez, a document examiner from the PNP
Crime Laboratory. She testified that her findings showed
that Jong’s signature on the check was genuine.15
Confronted with conflicting expert testimony, the RTC
chose to believe the findings of the NBI expert. In
a Decision dated 25 April 1994, the RTC held that Jong’s
signature on the check was forged and accordingly
directed the bank to pay or credit back to Samsung
Construction’s account the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the
time the complaint was filed, and attorney’s fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28
November 1996, the Special Fourteenth Division of the
Court of Appeals rendered a Decision,16 reversing the
RTC Decision and absolving FEBTC from any liability.
The Court of Appeals held that the contradictory findings
of the NBI and the PNP created doubt as to whether there
was forgery.17 Moreover, the appellate court also held
that assuming there was forgery, it occurred due to the
negligence of Samsung Construction, imputing blame on
the accountant Kyu for lack of care and prudence in
keeping the checks, which if observed would have
prevented Sempio from gaining access thereto.18 The
Court of Appeals invoked the ruling in PNB v. National
City Bank of New York19 that, if a loss, which must be
borne by one or two innocent persons, can be traced to
the neglect or fault of either, such loss would be borne by
the negligent party, even if innocent of intentional
fraud.20
15
Samsung Construction now argues that the Court of
Appeals had seriously misapprehended the facts when it
overturned the RTC’s finding of forgery. It also contends
that the appellate court erred in finding that it had been
negligent in safekeeping the check, and in applying the
equity principle enunciated in PNB v. National City Bank
of New York.
Since the trial court and the Court of Appeals arrived at
contrary findings on questions of fact, the Court is
obliged to examine the record to draw out the correct
conclusions. Upon examination of the record, and based
on the applicable laws and jurisprudence, we reverse the
Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the
authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party
thereto, can be acquired through or under such
signature, unless the party against whom it is sought
to enforce such right is precluded from setting up the
forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is
"wholly inoperative," and payment made "through or
under such signature" is ineffectual or does not
discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawer’s account. The
traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he
has the maker’s signature and is expected to know and
compare it.22 The rule has a healthy cautionary effect on
banks by encouraging care in the comparison of the
signatures against those on the signature cards they have
on file. Moreover, the very opportunity of the drawee to
insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to
spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered
Checks, elucidates:
When a person deposits money in a general account
in a bank, against which he has the privilege of
drawing checks in the ordinary course of business,
the relationship between the bank and the depositor
is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the
situation is the same as though the bank had
borrowed money from the depositor, agreeing to
repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The
bank owes the depositor money in the same sense
that any debtor owes money to his creditor. Added to
this, in the case of bank and depositor, there is, of
course, the bank’s obligation to pay checks drawn by
the depositor in proper form and presented in due
course. When the bank receives the deposit, it
impliedly agrees to pay only upon the depositor’s
order. When the bank pays a check, on which the
depositor’s signature is a forgery, it has failed to
comply with its contract in this respect. Therefore,
the bank is held liable.
The fact that the forgery is a clever one is immaterial.
The forged signature may so closely resemble the
genuine as to defy detection by the depositor himself.
And yet, if a bank pays the check, it is paying out its
own money and not the depositor’s.
The forgery may be committed by a trusted employee
or confidential agent. The bank still must bear the
loss. Even in a case where the forged check was
drawn by the depositor’s partner, the loss was placed
upon the bank. The case referred to is Robinson v.
Security Bank, Ark., 216 S. W. Rep. 717. In this case,
the plaintiff brought suit against the defendant bank
for money which had been deposited to the plaintiff’s
credit and which the bank had paid out on checks
bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further
held that the fact that the plaintiff waited eight or
nine months after discovering the forgery, before
notifying the bank, did not, as a matter of law,
constitute a ratification of the payment, so as to
preclude the plaintiff from holding the bank liable.
xxx
This rule of liability can be stated briefly in these
words: "A bank is bound to know its depositors’
signature." The rule is variously expressed in the
many decisions in which the question has been
considered. But they all sum up to the proposition
that a bank must know the signatures of those whose
general deposits it carries.24
By no means is the principle rendered obsolete with the
advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and
Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its
customer determines who can draw against the
customer’s account by specifying whose signature is
necessary on checks that are chargeable against the
customer’s account. Therefore, a check drawn against
the account of an individual customer that is signed
by someone other than the customer, and without
authority from her, is not properly payable and is not
chargeable to the customer’s account, inasmuch as
any "unauthorized signature on an instrument is
ineffective" as the signature of the person whose
name is signed.25
Under Section 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party whose
signature is forged.26 On the premise that Jong’s
signature was indeed forged, FEBTC is liable for the loss
since it authorized the discharge of the forged check.
Such liability attaches even if the bank exerts due
diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious
experts; and when a bank has been so deceived, it is a
harsh rule which compels it to suffer although no one has
suffered by its being deceived.27 The forgery may be so
near like the genuine as to defy detection by the
depositor himself, and yet the bank is liable to the
depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check
was indeed forged. A document formally presented is
presumed to be genuine until it is proved to be
fraudulent. In a forgery trial, this presumption must be
overcome but this can only be done by convincing
testimony and effective illustrations.29
In ruling that forgery was not duly proven, the Court of
Appeals held:
16
 [There] is ground to doubt the findings of the trial
court sustaining the alleged forgery in view of the
conflicting conclusions made by handwriting experts
from the NBI and the PNP, both agencies of the
government. xxx
These contradictory findings create doubt on
whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550,
the Supreme Court held that forgery cannot be
presumed; it must be proved by clear, positive and
convincing evidence.
This reasoning is pure sophistry. Any litigator worth his
or her salt would never allow an opponent’s expert
witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of
fact will have to decide which version to believe, and
explain why or why not such version is more credible
than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two
experts, both clothed with the presumption of official
duty, in order to draw a conclusion, especially one which
is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies
the penultimate tier in the judicial hierarchy. This Court
has long deferred to the appellate court as to its findings
of fact in the understanding that it has the appropriate
skill and competence to plough through
the minutiae that scatters the factual field. In failing to
thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court
of Appeals was sadly remiss. Of course, courts, like
humans, are fallible, and not every error deserves a stern
rebuke. Yet, the appellate court’s error in this case
warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted
as a governing standard by every court in the land, barely
any actionable claim would prosper, defeated as it would
be by the mere invocation of the existence of a contrary
"expert" opinion.
On the other hand, the RTC did adjudge the testimony of
the NBI expert as more credible than that of the PNP, and
explained its reason behind the conclusion:
After subjecting the evidence of both parties to a
crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI document
examiner is more credible because the testimony of
the PNP Crime Laboratory Services document
examiner reveals that there are a lot of differences in
the questioned signature as compared to the
standard specimen signature. Furthermore, as
testified to by Ms. Rhoda Flores, NBI expert, the
manner of execution of the standard signatures used
reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of
the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the
person who executed the questioned signature was
hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the
RTC bluntly noted that "apparently, there [are]
differences on that questioned signature and the
standard signatures."31 This Court, in examining the
signatures, makes a similar finding. The PNP expert
excused the noted "differences" by asserting that they
were mere "variations," which are normal deviations
found in writing.32 Yet the RTC, which had the
opportunity to examine the relevant documents and to
personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the
testimony of the PNP expert as unconvincing. During the
trial, she was confronted several times with apparent
differences between strokes in the questioned signature
and the genuine samples. Each time, she would just
blandly assert that these differences were just
"variations,"33 as if the mere conjuration of the word
would sufficiently disquiet whatever doubts about the
deviations. Such conclusion, standing alone, would be of
little or no value unless supported by sufficiently cogent
reasons which might amount almost to a
demonstration.34
The most telling difference between the questioned and
genuine signatures examined by the PNP is in the final
upward stroke in the signature, or "the point to the short
stroke of the terminal in the capital letter ‘L,’" as referred
to by the PNP examiner who had marked it in her
comparison chart as "point no. 6." To the plain eye, such
upward final stroke consists of a vertical line which
forms a ninety degree (90º) angle with the previous
stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an
upward stroke.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these
signatures are looped, while the upward stroke of the
seventh36 forms a severe forty-five degree (45º) with the
previous stroke. The difference is glaring, and indeed, the
PNP examiner was confronted with the inconsistency in
point no. 6.
Q: Now, in this questioned document point no. 6, the
"s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature
(sic) were (sic) point 6 is repeated or the last stroke
"s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of
the final stroke in the questioned signature as a mere
variation,38 the same excuse she proffered for the other
marked differences noted by the Court and the counsel
for petitioner.39
There is no reason to doubt why the RTC gave credence
to the testimony of the NBI examiner, and not the PNP
expert’s. The NBI expert, Rhoda Flores, clearly qualifies
as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior
Document Examiner with the NBI, and had held that rank
for twelve years prior to her testimony. She had placed
among the top five examinees in the Competitive
Seminar in Question Document Examination, conducted
by the NBI Academy, which qualified her as a document
examiner.40 She had trained with the Royal Hongkong
Police Laboratory and is a member of the International
Association for Identification.41 As of the time she
testified, she had examined more than fifty to fifty-five
thousand questioned documents, on an average of fifteen
to twenty documents a day.42 In comparison, PNP
document examiner Perez admitted to having examined
only around five hundred documents as of her
testimony.43
In analyzing the signatures, NBI Examiner Flores utilized
the scientific comparative examination method
consisting of analysis, recognition, comparison and
17
evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also
prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She
compared the questioned signature as against ten (10)
other sample signatures of Jong. Five of these signatures
were executed on checks previously issued by Jong,
while the other five contained in business letters Jong
had signed.45 The NBI found that there were significant
differences in the handwriting characteristics existing
between the questioned and the sample signatures, as to
manner of execution, link/connecting strokes,
proportion characteristics, and other identifying
details.46
The RTC was sufficiently convinced by the NBI
examiner’s testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than
those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card
signed by Jong, which was relied upon by the employees
of FEBTC in authenticating Jong’s signature. The
distinction is irrelevant in establishing forgery. Forgery
can be established comparing the contested signatures
as against those of any sample signature duly established
as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP
examiner did compare the questioned signature against
the bank signature cards. The crucial fact in question
is whether or not the check was forged, not whether
the bank could have detected the forgery. The latter
issue becomes relevant only if there is need to weigh
the comparative negligence between the bank and
the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the
effect of Jong’s testimony that the signature on the check
was not his.47 The assertion may seem self-serving at
first blush, yet it cannot be ignored that Jong was in the
best position to know whether or not the signature on
the check was his. While his claim should not be taken at
face value, any averments he would have on the matter,
if adjudged as truthful, deserve primacy in consideration.
Jong’s testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances
that support the conclusion that the assailed check was
indeed forged. Judicial notice can be taken that is highly
unusual in practice for a business establishment to draw
a check for close to a million pesos and make it payable
to cash or bearer, and not to order. Jong immediately
reported the forgery upon its discovery. He filed the
appropriate criminal charges against Sempio, the
putative forger.48
Now for determination is whether Samsung
Construction was precluded from setting up the defense
of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the
doctrines that "where a loss must be borne by one of two
innocent person, can be traced to the neglect or fault of
either, it is reasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose
means it has succeeded49 or who put into the power of
the third person to perpetuate the wrong."50 Applying
these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed the
encashment of the forged check.
In the case at bar, the forgery appears to have been
made possible through the acts of one Jose Sempio III,
an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who
supposedly stole the blank check and who
presumably is responsible for its encashment
through a forged signature of Jong Kyu Lee. Sempio
was assistant to the Korean accountant who was in
possession of the blank checks and who through
negligence, enabled Sempio to have access to the
same. Had the Korean accountant been more careful
and prudent in keeping the blank checks Sempio
would not have had the chance to steal a page thereof
and to effect the forgery. Besides, Sempio was an
employee who appears to have had dealings with the
defendant Bank in behalf of the plaintiff corporation
and on the date the check was encashed, he was there
to certify that it was a genuine check issued to
purchase equipment for the company.51
We recognize that Section 23 of the Negotiable
Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we
are unable to conclude that Samsung Construction was
guilty of negligence in this case. The appellate court
failed to explain precisely how the Korean accountant
was negligent or how more care and prudence on his
part would have prevented the forgery. We cannot
sustain this "tar and feathering" resorted to without any
basis.
The bare fact that the forgery was committed by an
employee of the party whose signature was forged
cannot necessarily imply that such party’s negligence
was the cause for the forgery. Employers do not possess
the preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees. The
Court’s pronouncement in PCI Bank v. Court of
Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a
drawer-payor’s confidential employee or agent, who
by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what
measures Samsung Construction employed to safeguard
its blank checks. Jong did testify that his accountant, Kyu,
kept the checks inside a "safety box,"55 and no contrary
version was presented by FEBTC. However, such
testimony cannot prove that the checks were indeed kept
in a safety box, as Jong’s testimony on that point is
hearsay, since Kyu, and not Jong, would have the
personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can
conclude that there was no negligence on Samsung
Construction’s part. The presumption remains that every
person takes ordinary care of his concerns,56 and that the
ordinary course of business has been
followed.57 Negligence is not presumed, but must be
proven by him who alleges it.58 While the complaint was
lodged at the instance of Samsung Construction, the
matter it had to prove was the claim it had alleged -
whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal
presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove
the negative fact that Samsung Construction was
negligent. While the payee, as in this case, may not have
the personal knowledge as to the standard procedures
18
observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a
negative fact may be "a difficult office,"59 but necessarily
so, as it seeks to overcome a presumption in law. FEBTC
was unable to dispute the presumption of ordinary care
exercised by Samsung Construction, hence we cannot
agree with the Court of Appeals’ finding of negligence.
The assailed Decision replicated the extensive efforts
which FEBTC devoted to establish that there was no
negligence on the part of the bank in its acceptance and
payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the
drawer is not precluded from setting up the defense of
forgery under Section 23 by his own negligence. The rule
of equity enunciated in PNB v. National City Bank of New
York, 60 as relied upon by the Court of Appeals, deserves
careful examination.
The point in issue has sometimes been said to be that
of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because
he has been negligent in failing to recognize that
the handwriting is not that of his customer. But it
follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence
prior to that 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.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee
who has paid upon the forged signature bears the loss.
The exception to this rule arises only when negligence
can be traced on the part of the drawer whose signature
was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to
determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction
was negligent in the safekeeping of its checks. For one,
the settled rule is that the mere fact that the depositor
leaves his check book lying around does not constitute
such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check
blanks, forges the depositor’s signature and collect on
the checks from the bank.62 And for another, in point of
fact Samsung Construction was not negligent at all since
it reported the forgery almost immediately upon
discovery.63
It is also worth noting that the forged signatures in PNB
v. National City Bank of New York were not of the drawer,
but of indorsers. The same circumstance attends PNB v.
Court of Appeals,64 which was also cited by the Court of
Appeals. It is accepted that a forged signature of the
drawer differs in treatment than a forged signature of the
indorser.
The justification for the distinction between forgery
of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to
verify the drawer’s signature by comparison with one
in his hands, but has ordinarily no opportunity to
verify an indorsement.65
Thus, a drawee bank is generally liable to its
depositor in paying a check which bears either a
forgery of the drawer’s signature or a forged
indorsement. But the bank may, as a general rule,
recover back the money which it has paid on a check
bearing a forged indorsement, whereas it has not this
right to the same extent with reference to a check
bearing a forgery of the drawer’s signature.66
The general rule imputing liability on the drawee who
paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it
exercised before paying out on the forged check, we
might as well comment on the bank’s performance of its
duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable
check. Yet, there are several troubling circumstances that
lead us to believe that the bank itself was remiss in its
duty.
The fact that the check was made out in the amount of
nearly one million pesos is unusual enough to require a
higher degree of caution on the part of the bank. Indeed,
FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should
the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required.67
In this case, not only did the amount in the check nearly
total one million pesos, it was also payable to cash. That
latter circumstance should have aroused the suspicion of
the bank, as it is not ordinary business practice for a
check for such large amount to be made payable to cash
or to bearer, instead of to the order of a specified
person.68 Moreover, the check was presented for
payment by one Roberto Gonzaga, who was not
designated as the payee of the check, and who did not
carry with him any written proof that he was authorized
by Samsung Construction to encash the check. Gonzaga,
a stranger to FEBTC, was not even an employee of
Samsung Construction.69 These circumstances are
already suspicious if taken independently, much more so
if they are evaluated in concurrence. Given the shadiness
attending Gonzaga’s presentment of the check, it was not
sufficient for FEBTC to have merely complied with its
internal procedures, but mandatory that all earnest
efforts be undertaken to ensure the validity of the check,
and of the authority of Gonzaga to collect payment
therefor.
According to FEBTC Senior Assistant Cashier Gemma
Velez, the bank tried, but failed, to contact Jong over the
phone to verify the check.70 She added that calling the
issuer or drawer of the check to verify the same was not
part of the standard procedure of the bank, but an "extra
effort."71 Even assuming that such personal verification
is tantamount to extraordinary diligence, it cannot be
denied that FEBTC still paid out the check despite the
absence of any proof of verification from the drawer.
Instead, the bank seems to have relied heavily on the say-
so of Sempio, who was present at the bank at the time the
check was presented.
FEBTC alleges that Sempio was well-known to the bank
officers, as he had regularly transacted with the bank in
behalf of Samsung Construction. It was even claimed that
everytime FEBTC would contact Jong about problems
with his account, Jong would hand the phone over to
Sempio.72 However, the only proof of such allegations is
the testimony of Gemma Velez, who also testified that
she did not know Sempio personally,73 and had met
Sempio for the first time only on the day the check was
encashed.74 In fact, Velez had to inquire with the other
officers of the bank as to whether Sempio was actually
known to the employees of the bank.75 Obviously, Velez
19
had no personal knowledge as to the past relationship of Manila, Branch 9, dated 25 April 1994 is REINSTATED.
between FEBTC and Sempio, and any averments of her to Costs against respondent.
that effect should be deemed hearsay evidence.
Interestingly, FEBTC did not present as a witness any SO ORDERED.
other employee of their Bel-Air branch, including those
who supposedly had transacted with Sempio before.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and
Chico-Nazario, JJ., concur.
Even assuming that FEBTC had a standing habit of
dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending the
presentment of the forged check should have put the
bank on the highest degree of alert. The Court recently
emphasized that the highest degree of care and diligence
is required of banks.

Banks are engaged in a business impressed with

public interest, and it is their duty to protect in return
their many clients and depositors who transact
business with them. They have the obligation to treat
their client’s account meticulously and with the
highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of
a family.76

Given the circumstances, extraordinary diligence

dictates that FEBTC should have ascertained from Jong
personally that the signature in the questionable check
was his.

Still, even if the bank performed with utmost diligence,

the drawer whose signature was forged may still recover
from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no
right to enforce the payment of a check can arise out of a
forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting
up the forgery, the general rule should apply.
Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge
the amount so paid to the account of the depositor.77 A
bank is liable, irrespective of its good faith, in paying a
forged check.78

WHEREFORE, the Petition is GRANTED. The Decision of

the Court of Appeals dated 28 November 1996 is
REVERSED, and the Decision of the Regional Trial Court

20
 Republic of the Philippines
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
21
 (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
22
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
23
 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
24
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
25
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;
26
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
27
 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.
We are of opinion that the facts of the present case do not
make it one between two equally innocent persons, the
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.)
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
28
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;
29
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;
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.

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

30
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE
COMMERCIAL AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for
petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to
as the PNB — seeks the review by certiorari of a decision
of the Court of Appeals, which affirmed that of the Court
of First Instance of Manila, dismissing plaintiff's
complaint against the Philippine Commercial and
Industrial Bank — hereinafter referred to as the PCIB —
for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties
and the decision of the Court of Appeals show that, on
about January 15, 1962, one Augusto Lim deposited in
his current account with the PCIB branch at Padre Faura,
Manila, GSIS Check No. 645915- B, in the sum of
P57,415.00, drawn against the PNB; that, following an
established banking practice in the Philippines, the check
was, on the same date, forwarded, for clearing, through
the Central Bank, to the PNB, which did not return said
check the next day, or at any other time, but retained it
and paid its amount to the PCIB, as well as debited it
against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand
from the GSIS, said sum of P57,415.00 was re-credited to
the latter's account, for the reason that the signatures of
its officers on the check were forged; and that,
thereupon, or on February 2, 1962, the PNB demanded
from the PCIB the refund of said sum, which the PCIB
refused to do. Hence, the present action against the PCIB,
which was dismissed by the Court of First Instance of
Manila, whose decision was, in turn, affirmed by the
Court of Appeals.
It is not disputed that the signatures of the General
Manager and the Auditor of the GSIS on the check, as
drawer thereof, are forged; that the person named in the
check as its payee was one Mariano D. Pulido, who
purportedly indorsed it to one Manuel Go; that the check
purports to have been indorsed by Manuel Go to Augusto
Lim, who, in turn, deposited it with the PCIB, on January
15, 1962; that, thereupon, the PCIB stamped the
following on the back of the check: "All prior
indorsements and/or Lack of Endorsement Guaranteed,
Philippine Commercial and Industrial Bank," Padre
Faura Branch, Manila; that, on the same date, the PCIB
sent the check to the PNB, for clearance, through the
Central Bank; and that, over two (2) months before, or on
November 13, 1961, the GSIS had notified the PNB, which
acknowledged receipt of the notice, that said check had
been lost, and, accordingly, requested that its payment
be stopped.
In its brief, the PNB maintains that the lower court erred:
(1) in not finding the PCIB guilty of negligence; (2) in not
finding that the indorsements at the back of the check are
forged; (3) in not finding the PCIB liable to the PNB by
virtue of the former's warranty on the back of the check;
(4) in not holding that "clearing" is not "acceptance", in
contemplation of the Negotiable Instruments law; (5) in
not finding that, since the check had not been accepted
by the PNB, the latter is entitled to reimbursement
therefor; and (6) in denying the PNB's right to recover
from the PCIB.
The first assignment of error will be discussed later,
together with the last,with which it is interrelated.
As regards the second assignment of error, the PNB
argues that, since the signatures of the drawer are
forged, so must the signatures of the supposed indorsers
be; but this conclusion does not necessarily follow from
said premise. Besides, there is absolutely no evidence,
and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the
PNB refunded the amount of the check to the GSIS, on
account of the forgery in the signatures, not of the
indorsers or supposed indorsers, but of the officers of the
GSIS as drawer of the instrument. In other words, the
question whether or not the indorsements have been
falsified is immaterial to the PNB's liability as a drawee,
or to its right to recover from the PCIB,1 for, as against
the drawee, the indorsement of an intermediate bank
does not guarantee the signature of the drawer,2 since
the forgery of the indorsement is not the cause of the
loss.3
With respect to the warranty on the back of the check, to
which the third assignment of error refers, 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.4 Said warranty is irrelevant, therefore, to
the PNB's alleged right to recover from the PCIB. It could
have been availed of by a subsequent indorsee5 or a
holder in due course6 subsequent to the PCIB, but, the
PNB is neither.7 Indeed, upon payment by the PNB, as
drawee, the check ceased to be a negotiable instrument,
and became a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we
must bear in mind that, in general, "acceptance", in the
sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the
same are payable on demand.10 Indeed, "acceptance" and
"payment" are, within the purview of said Law,
essentially different things, for the former is
"a promise to perform an act," whereas the latter is the
"actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer," which,
in the case of checks, is the payment, on demand, of a
given sum of money. Upon the other hand, actual
payment of the amount of a check implies not only an
assent to said order of the drawer and a recognition of
the drawer's obligation to pay the aforementioned sum,
but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of
error. The PNB maintains that the lower court erred in
not finding that the PCIB had been guilty of negligence in
not discovering that the check was forged. Assuming that
there had been such negligence on the part of the PCIB, it
is undeniable, however, that the PNB has, also, been
negligent, with the particularity that the PNB had been
guilty of a greater degree of negligence, because it had a
previous and formal notice from the GSIS that the check
had been lost, with the request that payment thereof be
stopped. Just as important, if not more important and
31
decisive, is the fact that the PNB's negligence was the capacity and authority to draw the
main or proximate cause for the corresponding loss. instrument; and

In this connection, it will be recalled that the PCIB (b) The existence of the payee and his
did not cash the check upon its presentation by Augusto then capacity to indorse.
Lim; that the latter had merely deposited it in his current
account with the PCIB; that, on the same day, the PCIB The prevailing view is that the same rule applies in the
sent it, through the Central Bank, to the PNB, for clearing; case of a drawee who pays a bill without having
that the PNB did not return the check to the PCIB the next previously accepted it.16
day or at any other time; that said failure to return the
check to the PCIB implied, under the current banking
practice, that the PNB considered the check good and WHEREFORE, the decision appealed from is hereby
would honor it; that, in fact, the PNB honored the check affirmed, with costs against the Philippine National Bank.
and paid its amount to the PCIB; and that only then did It is so ordered.
the PCIB allow Augusto Lim to draw said amount from
his aforementioned current account. Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles,
Fernando and Capistrano, JJ., concur.
Thus, by not returning the check to the PCIB, by thereby Zaldivar, J., took no part.
indicating that the PNB had found nothing wrong with
the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter,
not only to believe that the check was genuine and good
in every respect, but, also, to pay its amount to Augusto
Lim. In other words, the PNB was the primary or
proximate cause of the loss, and, hence, may not recover
from the PCIB.13

It is a well-settled maxim of law and equity that when one

of two (2) innocent persons must suffer by the wrongful
act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or
who put it into the power of the third person to
perpetrate the wrong.14

Then, again, it has, likewise, been held that, where the

collecting (PCIB) and the drawee (PNB) banks are
equally at fault, the court will leave the parties where it
finds them.15

Lastly, Section 62 of Act No. 2031 provides:

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

32
 SECOND DIVISION
G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
(formerly INSULAR BANK OF ASIA AND
AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC.
and CITIBANK, N.A., respondents.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
COURT OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF
APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several
fraudulently negotiated checks.
The original actions a quo were instituted by Ford
Philippines to recover from the drawee bank, CITIBANK,
N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly
Insular Bank of Asia and America], the value of several
checks payable to the Commissioner of Internal Revenue,
which were embezzled allegedly by an organized
syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for
review of the March 27, 1995 Decision1 of the Court of
Appeals in CA-G.R. CV No. 25017, entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of
Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of
Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails
the October 15, 1996 Decision3 of the Court of Appeals
and its March 5, 1997 Resolution4 in CA-G.R. No. 28430
entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank," affirming in
toto the judgment of the trial court holding the defendant
drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the
misapplied proceeds of the plaintiff's Citibanl Check
Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted
by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and
issued its Citibank Check No. SN-04867 in the amount
of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiff;s percentage
or manufacturer's sales taxes for the third quarter of
1977.
The aforesaid check was deposited with the
degendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting
or depository bank.
The proceeds of the same Citibank check of the
plaintiff was never paid to or received by the payee
thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau
and/or Commissioner of Internal Revenue, the
plaintiff was compelled to make a second payment to
the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of
plaintiff in the amount of P4,746,114.41 was duly
received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that
during the time of the transactions in question,
plaintiff had been maintaining a checking account
with defendant Citibank; that Citibank Check No. SN-
04867 which was drawn and issued by the plaintiff in
favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel
lines and written in between said lines was the
phrase "Payee's Account Only"; and that defendant
Citibank paid the full face value of the check in the
amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of
plaintiff's percentage tax for the last quarter of 1977,
the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977,
designating therein in Muntinlupa, Metro Manila, as
the authorized agent bank of Metrobanl, Alabang
branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No.
SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA,
through its Ermita Branch. The latter accepted the
check and sent it to the Central Clearing House for
clearing on the samd day, with the indorsement at the
back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant
IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the
latter paid the face value of the check in the amount
of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with
the defendant Citibank and the check was returned to
the plaintiff.
Upon verification, plaintiff discovered that its
Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of
Internal Revenue. Hence, in separate letters dated
October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-
assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold
the defendants liable for reimbursement of the face
33
 value of the same. Both defendants denied liability
and refused to pay.
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the
plaintiff - supposed to be Exhibit "D", the latter was
officially informed, among others, that its check in the
amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead
encashed by unauthorized persons, hence, plaintiff
has to pay the said amount within fifteen days from
receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiff's
percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse
plaintiff of the payment it had made for the second
time to the BIR of its percentage taxes, plaintiff filed
on January 20, 1983 its original complaint before this
Court.
On December 24, 1985, defendant IBAA was merged
with the Philippine Commercial International Bank
(PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it
made of plaintiff's Citibank Check No. SN-04867 in
the amount of P4,746,114.41 "was in due course"; it
merely relied on the clearing stamp of the
depository/collecting bank, the defendant IBAA that
"all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's
injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the
proceeds of plaintiff's Citibank Check No. SN-048867
was paid to defendant IBAA as collecting bank,
plaintiff was maintaining a checking account with
defendant Citibank."5
Although it was not among the stipulated facts, an
investigation by the National Bureau of Investigation
(NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back
the check because there was an error in the computation
of the tax due to the Bureau of Internal Revenue (BIR).
With Rivera's instruction, PCIBank replaced the check
with two of its own Manager's Checks (MCs). Alleged
members of a syndicate later deposited the two MCs with
the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint
before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from
justice".
On June 15, 1989, the trial court rendered its decision, as
follows:
"Premises considered, judgment is hereby rendered
as follows:
"1. Ordering the defendants Citibank and IBAA (now
PCI Bank), jointly and severally, to pay the plaintiff
the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed
until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the
cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter
has paid or may pay to the plaintiff in accordance
with next preceding paragraph;
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants,
Citibank and PCIBank, elevated their respective petitions
for review on certiorari to the Courts of Appeals. On
March 27, 1995, the appellate court issued its judgment
as follows:
"WHEREFORE, in view of the foregoing, the court
AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay
the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when
the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted
decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were
denied for lack of merit.
Separately, PCIBank and Ford filed before this Court,
petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the
decision and resolution of the Twelfth Division of the
Court of Appeals contending that it merely acted on the
instruction of Ford and such casue of action had already
prescribed.
PCIBank sets forth the following issues for
consideration:
I. Did the respondent court err when, after finding
that the petitioner acted on the check drawn by
34
 respondent Ford on the said respondent's
instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the
said check.
II. Did the respondent court err when it did not find
prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R.
No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court
which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following
propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford
considering that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute
and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the
Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as
banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first
time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no
evidence of gross negligence on the part of petitioner
Ford.9
II. PCI Bank is liable to petitioner Ford considering
that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a person
other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the
subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting
bank.11
3. PCIBank is barred from raising issues of fact in the
instant proceedings.12
4. Petitioner Ford's cause of action had not
prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds
of checks intended, this time, to settle Ford's percentage
taxes appertaining to the second quarter of 1978 and the
first quarter of 1979.
The facts as narrated by the Court of Appeals are as
follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978
in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR
Revenue Tax Receipt No. 28645385 was issued for the
said purpose.
On April 20, 1979, Ford drew another Citibank Check No.
SN-16508 in the amount of P6,311,591.73, representing
the payment of percentage tax for the first quarter of
1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-
1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two
diagonal lines on its upper corner between, which were
written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter
dated February 28, 1980, the BIR, Region 4-B, demanded
for the said tax payments the corresponding periods
above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue
Tax Receipts were considered "fake and spurious". This
anomaly was confirmed by the NBI upon the initiative of
the BIR. The findings forced Ford to pay the BIR a new,
while an action was filed against Citibank and PCIBank
for the recovery of the amount of Citibank Check
Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which
tried the case, made its findings on the modus operandi of
the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the
plaintiff FORD as its General Ledger Accountant. As
such, he prepared the plaintiff's check marked Ex. 'A'
[Citibank Check No. Sn-10597] for payment to the
BIR. Instead, however, fo delivering the same of the
payee, he passed on the check to a co-conspirator
named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with
one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious
person denominated as 'Reynaldo reyes' in the
Meralco Branch of PCIBank where Dulay works as
Assistant Manager.
After an initial deposit of P100.00 to validate the
account, Castro deposited a worthless Bank of
America Check in exactly the same amount as the first
FORD check (Exh. "A", P5,851,706.37) while this
worthless check was coursed through PCIB's main
office enroute to the Central Bank for clearing,
replaced this worthless check with FORD's Exhibit 'A'
and accordingly tampered the accompanying
documents to cover the replacement. As a result,
Exhibit 'A' was cleared by defendant CITIBANK, and
the fictitious deposit account of 'Reynaldo Reyes' was
credited at the PCIB Meralco Branch with the total
amount of the FORD check Exhibit 'A'. The same
method was again utilized by the syndicate in
profiting from Exh. 'B' [Citibank Check No. SN-16508]
which was subsequently pilfered by Alexis Marindo,
Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew
various checks distributing the sahres of the other
35
 participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the
method for the embezzlement; (2) RODOLFO R. DE
LEON a customs broker who negotiated the initial
contact between Bernabe, FORD's Godofredo Rivera
and PCIB's Remberto Castro; (3) JUAN VASTILLO
who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who
passed on the first check (Exhibit "A") to Castro; (5)
REMERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo
Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIB's Assistant Manager at its
Meralco Branch, who assisted Castro in switching the
checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank
account; (7) ALEXIS MARINDO, Rivera's Assistant at
FORD, who gave the second check (Exh. "B") to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection
Agent who provided the fake and spurious revenue
tax receipts to make it appear that the BIR had
received FORD's tax payments.
Several other persons and entities were utilized by
the syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the
aforementioned participants in the conspiracy, have
not been impleaded in the present case. The manner
by which the said funds were distributed among
them are traceable from the record of checks drawn
against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally
benefited therefrom and readily indicate in what
amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati,
Branch 57, held drawee-bank, Citibank, liable for the
value of the two checks while adsolving PCIBank from
any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered
sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of P12,163,298.10
prayed for in its complaint, with 6% interest thereon
from date of first written demand until full payment,
plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00
as attorney's fees and costs of litigation, and pay the
costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals
which affirmed, in toto, the decision of the trial court.
Hence, this petition.
Petitioner Ford prays that judgment be rendered setting
aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank
Check Numbers SN-10597 and 16508 for P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing
the complaint against defendant PCIBank considering
that:
I. Defendant PCIBank was clearly negligent when it
failed to exercise the diligence required to be
exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the
diligence required in the selection and supervision of
its officers and employees.
III. Defendant PCIBank was, due to its negligence,
clearly liable for the loss or damage resulting to the
plaintiff Ford as a consequence of the substitution of
the check consistent with Section 5 of Central Bank
Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not
accept, endorse or negotiate in due course the subject
checks, it is liable, under Article 2154 of the Civil
Code, to return the money which it admits having
received, and which was credited to it its Central
bank account.16
The main issue presented for our consideration by these
petitions could be simplified as follows: Has petitioner
Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of
the checks intended as payment to the Commissioner of
Internal Revenue? Or has Ford's cause of action already
prescribed?
Note that in these cases, the checks were drawn against
the drawee bank, but the title of the person negotiating
the same was allegedly defective because the instrument
was obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the payee. It
was established that instead of paying the checks to the
CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the
mmbers of the syndicate. As to the unlawful negotiation
of the check the applicable law is Section 55 of the
Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who
negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument,
or any signature thereto, by fraud, duress, or fore and
fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of
faith or under such circumstances as amount to a
fraud."
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetator in breach of faith
amounting to fraud. The person negotiating the checks
must have gone beyond the authority given by his
principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set
up the personal defense to escape liability and recover
from other parties who. Though their own negligence,
alowed the commission of the crime.
In this case, we note that the direct perpetrators of the
offense, namely the embezzlers belonging to a syndicate,
are now fugitives from justice. They have, even if
temporarily, escaped liability for the embezzlement of
millions of pesos. We are thus left only with the task of
determining who of the present parties before us must
bear the burden of loss of these millions. It all boils down
to thequestion of liability based on the degree of
negligence among the parties concerned.
Foremost, we must resolve whether the injured party,
Ford, is guilty of the "imputed contributory negligence"
that would defeat its claim for reimbursement, bearing
36
ing mind that its employees, Godofredo Rivera and Alexis
Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own
employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the
designated authorized collecting bank (Metrobank-
Alabang) of the payee, CIR. Citibank bewails the fact that
Ford was remiss in the supervision and control of its own
employees, inasmuch as it only discovered the
syndicate's activities through the information given by
the payee of the checks after an unreasonable period of
time.
PCIBank also blames Ford of negligence when it allegedly
authorized Godofredo Rivera to divert the proceeds of
Citibank Check No. SN-04867, instead of using it to pay
the BIR. As to the subsequent run-around of unds of
Citibank Check Nos. SN-10597 and 16508, PCIBank
claims that the proximate cause of the damge to Ford lies
in its own officers and employees who carried out the
fradulent schemes and the transactions. These
circumstances were not checked by other officers of the
company including its comptroller or internal auditor.
PCIBank contends that the inaction of Ford despite the
enormity of the amount involved was a sheer negligence
and stated that, as between two innocent persons, one of
whom must suffer the consequences of a breach of trust,
the one who made it possible, by his act of negligence,
must bear the loss.
For its part, Ford denies any negligence in the
performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of
diligence on the part of Ford. And, citing the case
of Gempesaw vs. Court of Appeals,17 Ford argues that even
if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends the Godofredo rivera was
not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds
that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should
not be considered by this Court.
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his
servant's wrongful act, the law imputes to the master the
act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or
wrongful conduct of the master, for which he is
liable.18 The general rule is that if the master is injured
by the negligence of a third person and by the concuring
contributory negligence of his own servant or agent, the
latter's negligence is imputed to his superior and will
defeat the superior's action against the third person,
asuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is
made.19
Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Ford's General Ledger
Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. AS defined,
proximate cause is that which, in the natural and
continuous sequence, unbroken by any efficient,
intervening cause produces the injury and without the
result would not have occurred.20
It appears that although the employees of Ford initiated
the transactions attributable to an organized syndicate,
in our view, their actions were not the proximate cause
of encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as
the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm
the request of Godofredo Rivera to recall Citibank Check
No. SN-04867. Rivera's instruction to replace the said
check with PCIBank's Manager's Check was not in
theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597
and 16508, it was established that these checks were
made payable to the CIR. Both were crossed checks.
These checks were apparently turned around by Ford's
emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the forgery
was committed by a drawer-payor's confidential
employee or agent, who by virtue of his position had
unusual facilities for perpertrating the fraud and
imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor,
in the absence of some circumstance raising estoppel
against the drawer.21 This rule likewise applies to the
checks fraudulently negotiated or diverted by the
confidential employees who hold them in their
possession.
With respect to the negligence of PCIBank in the payment
of the three checks involved, separately, the trial courts
found variations between the negotiation of Citibank
Check No. SN-04867 and the misapplication of total
proceeds of Checks SN-10597 and 16508. Therefore, we
have to scrutinize, separately, PCIBank's share of
negligence when the syndicate achieved its ultimate
agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank
through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing
with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed," and was
presented to Citibank for payment. Thereafter PCIBank,
instead of remitting the proceeds to the CIR, prepared
two of its Manager's checks and enabled the syndicate to
encash the same.
On record, PCIBank failed to verify the authority of Mr.
Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was
duly authorized, showed lack of care and prudence
required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized
to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIBank is duty bound to consult its
principal regarding the unwarranted instructions given
by the payor or its agent. As aptly stated by the trial
court, to wit:
"xxx. Since the questioned crossed check was
deposited with IBAA [now PCIBank], which claimed
to be a depository/collecting bank of BIR, it has the
37
 responsibility to make sure that the check in question
is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check),
defendant IBAA should receive instructions only
from its principal BIR and not from any other person
especially so when that person is not known to the
defendant. It is very imprudent on the part of the
defendant IBAA to just rely on the alleged telephone
call of the one Godofredo Rivera and in his signature
considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an
argreement to the contrary, that of principal and
agent.22 A bank which receives such paper for collection
is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by
proof of authority from the drawer, or that the drawer
has clothed his agent with apparent authority to receive
the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp
appearing at the back of the questioned checks stating
that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GURANTEED should render PCIBank
liable because it made it pass through the clearing house
and therefore Citibank had no other option but to pay it.
Thus, Citibank had no other option but to pay it. Thus,
Citibank assets that the proximate cause of Ford's injury
is the gross negligence of PCIBank. Since the questione
dcrossed check was deposited with PCIBank, which
claimed to be a depository/collecting bank of the BIR, it
had the responsibility to make sure that the check in
questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase
"Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR. Thus,
it is the duty of the collecting bank PCIBank to ascertain
that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is
bound to scruninize the check and to know its depositors
before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this
court is in full accord with the ruling of the PCHC's
Board of Directors that:
'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 back of the checks are the defedant's
clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid
on the checks.'
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant
is liable for any damage arising out of the falsity of its
representation."25
Lastly, banking business requires that the one who first
cashes and negotiates the check must take some
percautions to learn whether or not it is genuine. And if
the one cashing the check through indifference or othe
circumstance assists the forger in committing the fraud,
he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did
not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the
check. For this reason, a bank which cashes a check
drawn upon another bank, without requiring proof as to
the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against
the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of
the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may
recover from the holder the money paid on the check.26
Having established that the collecting bank's negligence
is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the
proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that
PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597
and 16508, because PCIBank did not actually receive nor
hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in
the process of the embezzlement. This Court is
convinced that the switching operation (involving the
checks while in transit for "clearing") were the
clandestine or hidden actuations performed by the
members of the syndicate in their own personl,
covert and private capacity and done without the
knowledge of the defendant PCIBank…"27
In this case, there was no evidence presented confirming
the conscious particiapation of PCIBank in the
embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts
and declarations of its officers or agents within the
course and scope of their employment.28 A bank will be
held liable for the negligence of its officers or agents
when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its
officers even as regards that species of tort of which
malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the
victim of the scheme hatched by a syndicate in which its
own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank,
Remberto Castro, received Citibank Check Numbers SN-
10597 and 16508. He passed the checks to a co-
conspirator, an Assistant Manager of PCIBank's Meralco
Branch, who helped Castro open a Checking account of a
fictitious person named "Reynaldo Reyes." Castro
38
deposited a worthless Bank of America Check in exactly
the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of
Citibank Check Nos. SN 10597 and 16508. The PCIBank
Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using
facilities in their official capacity or authority but for
their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds
these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will t be
permitted to shirk its responsibility for such frauds, even
though no benefit may accrue to the bank therefrom. For
the general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting
within the course and apparent scope of his employment
or authority.29 And if an officer or employee of a bank, in
his official capacity, receives money to satisfy an
evidence of indebetedness lodged with his bank for
collection, the bank is liable for his misappropriation of
such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of
Central Bank Circular No. 580, Series of 1977 provides
that any theft affecting items in transit for clearing, shall
be for the account of sending bank, which in this case is
PCIBank.
But in this case, responsibility for negligence does not lie
on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee
bank was likewise negligent in the performance of its
duties. Citibank failed to establish that its payment of
Ford's checjs were made in due course and legally in
order. In its defense, Citibank claims the genuineness and
due execution of said checks, considering that Citibank
(1) has no knowledge of any informity in the issuance of
the checks in question (2) coupled by the fact that said
checks were sufficiently funded and (3) the endorsement
of the Payee or lack thereof was guaranteed by PCI Bank
(formerly IBAA), thus, it has the obligation to honor and
pay the same.
For its part, Ford contends that Citibank as the drawee
bank owes to Ford an absolute and contractual duty to
pay the proceeds of the subject check only to the payee
thereof, the CIR. Citing Section 6232 of the Negotiable
Instruments Law, Ford argues that by accepting the
instrument, the acceptro which is Citibank engages that
it will pay according to the tenor of its acceptance, and
that it will pay only to the payee, (the CIR), considering
the fact that here the check was crossed with annotation
"Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise
answer for the damages incurred by Ford on Citibank
Checks Numbers SN 10597 and 16508, because of the
contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual
obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this
score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check
Numbers SN 10597 and 16508 before paying the amount
of the proceeds thereof to the collecting bank of the BIR.
One thing is clear from the record: the clearing stamps at
the back of Citibank Check Nos. SN 10597 and 16508 do
not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to
Citibank Check Nos. 10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed
failed to perform what was incumbent upon it, which is
to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee
bank did not discover the irregularity seasonably, in our
view, consitutes negligence in carrying out the bank's
duty to its depositors. The point is that as a business
affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship.33
Thus, invoking the doctrine of comparative negligence,
we are of the view that both PCIBank and Citibank failed
in their respective obligations and both were negligent in
the selection and supervision of their employees
resulting in the encashment of Citibank Check Nos. SN
10597 AND 16508. Thus, we are constrained to hold
them equally liable for the loss of the proceeds of said
checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business
is so impressed with public interest where the trust and
confidence of the public in general is of paramount
umportance such that the appropriate standard of
diligence must be very high, if not the highest, degree of
diligence.34 A bank's liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its
employees is of no moment.35
Banks handle daily transactions involving millions of
pesos.36 By the very nature of their work the degree of
responsibility, care and trustworthiness expected of
their employees and officials is far greater than those of
ordinary clerks and employees.37 Banks are expected to
exercise the highest degree of diligence in the selection
and supervision of their employees.38
On the issue of prescription, PCIBank claims that the
action of Ford had prescribed because of its inability to
seek judicial relief seasonably, considering that the
alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven
years thereafter.
The statute of limitations begins to run when the bank
gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged
drawer as a voucher with a statement of his
account,39 and an action upon a check is ordinarily
governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a
written contract must be brought within ten year from
the time the right of action accrues.41 hence, the
reckoning time for the prescriptive period begins when
the instrument was issued and the corresponding check
was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check
No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of
the check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed on
January 20, 1984, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the
39
amount of Citibank Check No. SN 04867 was seasonably
filed within the period provided by law.

Finally, we also find thet Ford is not completely

blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements
of account, and cancelled checks and to give notice within
a reasonable time (or as required by statute) of any
discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks'
liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As
provided in Article 1172 of the Civil Code of the
Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be regulated by the
courts, according to the circumstances. In quasi-delicts,
the contributory negligence of the plaintiff shall reduce
the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of

the Court of Appeals in CA-G.R. CV No. 25017
are AFFIRMED. PCIBank, know formerly as Insular Bank
of Asia and America, id declared solely responsible for
the loss of the proceeds of Citibank Check No SN 04867
in the amount P4,746,114.41, which shall be paid
together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of

Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must
share the loss, (concerning the proceeds of Citibank
Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank
is ORDERED to pay Ford Philippines Inc. P6,081,649.05,
with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said
amount.1âwphi1.nêt

Costs against Philippine Commercial International Bank

and Citibank N.A.

SO ORDERED.

Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

40
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-
appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION
and PHILIPPINE NATIONAL BANK, defendants-
appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and
Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the
defendants are banking corporations, and each is duly
licensed to do its respective business in the Philippines
Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on
the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of Lazaro
Melicor. E. M. Maasim fraudulently obtained possession
of the check, forged Melicor's signature, as an endorser,
and then personally endorsed and presented it to the
Philippine National Bank where the amount of the check
was placed to his credit. After having paid the check, and
on the next day, the Philippine national Bank endorsed
the check to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the
check to the account of the plaintiff. In the ordinary
course of business, the Hongkong Shanghai Banking
Corporation rendered a bank statement to the plaintiff
showing that the amount of the check was charged to its
account, and no objection was then made to the
statement. About four months after the check was
charged to the account of the plaintiff, it developed that
Lazaro Melicor, to whom the check was made payable,
had never received it, and that his signature, as an
endorser, was forged by Maasim, who presented and
deposited it to his private account in the Philippine
National Bank. With this knowledge , the plaintiff
promptly made a demand upon the Hongkong and
Shanghai Banking Corporation that it should be given
credit for the amount of the forged check, which the bank
refused to do, and the plaintiff commenced this action to
recover the P2,000 which was paid on the forged check.
On the petition of the Shanghai Bank, the Philippine
National Bank was made defendant. The Shanghai Bank
denies any liability, but prays that, if a judgment should
be rendered against it, in turn, it should have like
judgment against the Philippine National Bank which
denies all liability to either party.
Upon the issues being joined, a trial was had and
judgment was rendered against the plaintiff and in favor
of the defendants, from which the plaintiff appeals,
claiming that the court erred in dismissing the case,
notwithstanding its finding of fact, and in not rendering
a judgment in its favor, as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact made
by the trial court, and the plaintiff relies upon them for a
reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order,
when its value was collected by a third person by
means of forgery of the signature of the payee? Is it
the drawee or the last indorser, who ignored the
forgery at the time of making the payment, or the
forger?
To lower court found that Melicor's name was forged to
the check. "So that the person to whose order the check
was issued did not receive the money, which was
collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held
responsible for the payment of made to Maasim in
good faith of the amount of the check, because the
indorsement of Maasim is unquestionable and his
signature perfectly genuine, and the bank was not
obliged to identify the signature of the former
indorser. Neither could the Hongkong and Shanghai
Banking Corporation be held responsible in making
payment in good faith to the National Bank, because
the latter is a holder in due course of the check in
question. In other words, the two defendant banks
can not be held civilly responsible for the
consequences of the falsification or forgery of the
signature of Lazaro Melicor, the National Bank having
had no notice of said forgery in making payment to
Maasim, nor the Hongkong bank in making payment
to National Bank. Neither bank incurred in any
responsibility arising from that crime, nor was either
of the said banks by subsequent acts, guilty of
negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to
the order of Melicor. In other words, the plaintiff
authorized and directed the Shanghai Bank to pay
Melicor, or his order, P2,000. It did not authorize or
direct the bank to pay the check to any other person than
Melicor, or his order, and the testimony is undisputed
that Melicor never did part with his title or endorse the
check, and never received any of its proceeds. Neither is
the plaintiff estopped or bound by the banks statement,
which was made to it by the Shanghai Bank. This is not a
case where the plaintiff's own signature was forged to
one of it checks. In such a case, the plaintiff would have
known of the forgery, and it would have been its duty to
have promptly notified the bank of any forged signature,
and any failure on its part would have released bank
from any liability. That is not this case. Here, the forgery
was that of Melicor, who was the payee of the check, and
the legal presumption is that the bank would not honor
the check without the genuine endorsement of Melicor.
In other words, when the plaintiff received it banks
statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the
bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable
Instruments Law, says:
When a signature is forged or made without the
authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
41
 such right is precluded from setting up the forgery or
want of authority.

That section is square in point.

The money was on deposit in the Shanghai Bank, and it

had no legal right to pay it out to anyone except the
plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never paid
to Melicor, and he never paid to Melicor, and he never
personally endorsed the check, or authorized any one to
endorse it for him, and the alleged endorsement was a
forgery. Hence, upon the undisputed facts, it must follow
that the Shanghai Bank has no defense to this action.

It is admitted that the Philippine National Bank cashed

the check upon a forged signature, and placed the money
to the credit of Maasim, who was a forger. That the
Philippine National Bank then endorsed the check and
forwarded it to the Shanghai Bank by whom it was paid.
The Philippine National Bank had no license or authority
to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's
endorsment was genuine before cashing the check. Its
remedy is against Maasim to whom it paid the money.

The judgment of the lower court is reversed, and one will

be entered here in favor of the plaintiff and against the
Hongkong and Shanghai Banking Corporation for the
P2,000, with interest thereon from November 8, 1920 at
the rate of 6 per cent per annum, and the costs of this
action, and a corresponding judgment will be entered in
favor of the Hongkong Shanghai Banking Corporation
against the Philippine National Bank for the same
amount, together with the amount of its costs in this
action. So ordered.

Araullo, C.J., Johnson, Street, Malcolm, Avanceña, Villamor,

Ostrand and Romualdez, JJ., concur.

42
 SECOND DIVISION
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private
respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-
G.R. CV No. 16447), petitioner, Natividad Gempesaw,
appealed to this Court in a Petition for Review, on the
issue of the right of the drawer to recover from the
drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the
drawer's account.
The records show that on January 23, 1985, petitioner
filed a Complaint against the private respondent
Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82)
checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees'
indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case,
rendered a decision on November 17, 1987 dismissing
the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a
decision rendered on February 22, 1990, affirmed the
decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing
the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must
nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990,
the petitioner filed this petition under Rule 45 of the
Rules of Court setting forth the following as the alleged
errors of the respondent Court:1
I more than eight (8) years. After the bookkeeper
THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER IS
THE PROXIMATE CAUSE OF THE RESULTING INJURY
TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED
IN NOT FINDING AND RULING THAT IT IS THE GROSS
AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT
ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF
THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS,
IS THE DIRECT AND PROXIMATE CAUSE OF THE
DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED
IN NOT ORDERING THE RESPONDENT BANK TO
RESTORE OR RE-CREDIT THE CHECKING ACCOUNT
OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82)
CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89
WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) 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. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of
the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against
her checking account with the respondent bank as
drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were
prepared and filled up as to all material particulars by
her trusted bookkeeper, Alicia Galang, an employee for
prepared the checks, the completed checks were
submitted to the petitioner for her signature, together
with the corresponding invoice receipts which indicate
the correct obligations due and payable to her suppliers.
Petitioner signed each and every check without
bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees named
therein were left to the bookkeeper. Petitioner admitted
that she did not make any verification as to whether or
not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did
not verify he correctness of the returned checks, much
less check if the payees actually received the checks in
payment for the supplies she received. In the course of
her business operations covering a period of two years,
petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of
several suppliers. These checks were all presented by the
indorsees as holders thereof to, and honored by, the
respondent drawee Bank. Respondent drawee Bank
correspondingly debited the amounts thereof against
petitioner's checking account numbered 30-00038-1.
Most of the aforementioned checks were for amounts in
excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a
few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the
amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-
60), appellant's actual obligation to said payee was
only P895.33 (Exh. A-83); (2) in Check No. 652282
issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated
April 7, 1984 for the amount of P11,672.47 in favor of
Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10
(Exh. A-31) her actual obligation was only P677.10
(Exhs. C and C-1); (5) in Check No. 651862 dated
August 9, 1984 in favor of Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her obligation was only
P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated
August 11, 1984 in favor of Grocer's International
Food Corp. in the amount of P11,335.60 (Exh. A-66),
43
 her obligation was only P1,335.60 (Exh. E and E-1);
(7) in Check No. 589019 dated March 17, 1984 in
favor of Sophy Products in the amount of P11,648.00
(Exh. A-78), her obligation was only P648.00 (Exh. G);
(8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 23, 1984 in the amount of P11,504.00 in favor of
Monde Denmark Biscuit (Exh. A-34), her obligation
was only P504.00 (Exhs. I-1 and I-2).2
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.
All the eighty-two (82) checks with forged signatures of
the payees were brought to Ernest L. Boon, Chief
Accountant of respondent drawee Bank at the Buendia
branch, who, without authority therefor, accepted them
all for deposit at the Buendia branch to the credit and/or
in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y.
Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5
of Alfredo Y. Romero at the respondent drawee Bank's
Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the
checks were deposited in Account No. 0443-4, under the
name of Benito Lam at the Elcaño branch of the
respondent drawee Bank.
About thirty (30) of the payees whose names were
specifically written on the checks testified that they did
not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were
not theirs.
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. The
Branch Managers of the Ongpin and Elcaño branches
accepted the deposits made in the Buendia branch and
credited the accounts of Alfredo Y. Romero and Benito
Lam in their respective branches.
On November 7, 1984, 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. On January 23, 1985,
petitioner filed the complaint with the Regional Trial
Court.
This is not a suit by the party whose signature was forged
on a check drawn against the drawee bank. The payees
are not parties to the case. Rather, it is the drawer, whose
signature is genuine, who instituted this action to
recover from the drawee bank the money value of eighty-
two (82) checks paid out by the drawee bank to holders
of those checks where the indorsements of the payees
were forged. How and by whom the forgeries were
committed are not established on the record, but the
respective payees admitted that they did not receive
those checks and therefore never indorsed the same. The
applicable law is the Negotiable Instruments
Law4 (heretofore referred to as the NIL). Section 23 of
the NIL provides:
When a signature is forged or made without the
authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or
want of authority.
Under the aforecited provision, forgery is a real or
absolute defense by the party whose signature is
forged. A party whose signature to an instrument was
forged was never a party and never gave his consent to
the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot
be held liable thereon by anyone, not even by a holder
in due course. Thus, if a person's signature is forged as
a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a
person's signature as a drawer of a check is forged, the
drawee bank cannot charge the amount thereof against
the drawer's account because he never gave the bank
the order to pay. And said section does not refer only to
the forged signature of the maker of a promissory note
and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision
a forged signature is "wholly inoperative", no one can
gain title to the instrument through such forged
indorsement. Such an indorsement prevents any
subsequent party from acquiring any right as against
any party whose name appears prior to the forgery.
Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery.
Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the
forgery. However, the law makes an exception to these
rules where a party is precluded from setting up forgery
as a defense.
As a matter of practical significance, problems arising
from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the
drawer — for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the
drawer's negligence with respect to forged
indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his
cancelled checks in contrast to a duty imposed upon him
to look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a
business procedure as are reasonably calculated to
prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has
been paid under a forged indorsement, the drawer is
under duty promptly to report such fact to the drawee
bank.5 For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee,
the drawer loses his right against the drawee who has
44
debited his account under a forged indorsement.6 In
other words, he is precluded from using forgery as a
basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks
were filled up and completed by her trusted employee,
Alicia Galang, and were given to her for her signature.
Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid
contract yet.
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument to the
payee for the purpose of giving effect thereto.7 The first
delivery of the instrument, complete in form, to the
payee who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the
instrument from the drawer of the check to the payee,
there can be no valid and binding contract and no
liability on the instrument.
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
Elcaño 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 No. 13-00038-1,
Caloocan branch.
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.
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, the petitioner
relied implicitly upon the honesty and loyalty of her
bookkeeper, 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 the
bookkeeper commenced her fraudulent scheme that
petitioner discovered that eighty-two (82) checks were
wrongfully charged to her account, at which she notified
the respondent drawee bank.
It is highly improbable that in a period of two years, not
one of Petitioner's suppliers complained of non-
payment. Assuming that even one single complaint had
been made, petitioner would have been duty-bound, as
far as the respondent drawee Bank was concerned, to
make an adequate investigation on the matter. Had this
been done, the discrepancies would have been
discovered, sooner or later. Petitioner's failure to make
such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks
with forged indorsements. On the other hand, since the
record mentions nothing about such a complaint, the
possibility exists that the checks in question covered
inexistent sales. But even in such a case, considering the
length of a period of two (2) years, it is hard to believe
that petitioner did not know or realize that she was
paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be
disappearing or that there may be a leak in her business,
and refrain from taking the steps that a careful and
prudent businessman would take in such circumstances
and if taken, would result in stopping the continuance of
the fraudulent scheme. If she fails to take steps, the facts
may establish her negligence, and in that event, she
would be estopped from recovering from the bank.9
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
45
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.
The doctrine in the case of Great Eastern Life Insurance
Co. vs. Hongkong & Shanghai Bank 11 is not applicable to
the case at bar because in said case, the check was
fraudulently taken and the signature of the payee was
forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the
drawer; neither was the forging of the payee's
indorsement due to the drawer's negligence. Since the
drawer was not negligent, the drawee was duty-bound to
restore to the drawer's account the amount theretofore
paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should
not have honored the checks because they were crossed
checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's
bank which in turn must present it for payment against
the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot
be presented for payment but it can only be deposited
and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit
the drawee bank from having checks with more than one
indorsement. 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; or
xxx xxx xxx
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. 12
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.
Thus, it is clear that under the NIL, petitioner is
precluded from raising the defense of forgery by reason
of her gross negligence. But under Section 196 of the NIL,
any case not provided for in the Act shall be governed by
the provisions of existing legislation. Under the laws
of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and
supervision of its employees as being the cause of the
loss because negligence is the proximate cause thereof
and under Article 2179 of the Civil Code, she may not be
awarded damages. However, under Article 1170 of the
same Code the respondent drawee Bank may be held
liable for damages. The article provides —
Those who in the performance of their obligations
are guilty of fraud, negligence or delay, and those who
in any manner contravene the tenor thereof, are
liable for damages.
There is no question that there is a contractual relation
between petitioner as depositor (obligee) and the
respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound
by its internal banking rules and regulations which form
part of any contract it enters into with any of its
depositors. When it violated its internal rules that second
endorsements are not to be accepted without the
approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank
did not discover the irregularity with respect to the
acceptance of checks with second indorsement for
deposit even without the approval of the branch
manager despite periodic inspection conducted by a
team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —
The fault or negligence of the obligor consists in the
omission of that diligence which is required by the
nature of the obligation and corresponds with the
circumstance of the persons, of the time and of the
place. . . .
We hold that banking business is so impressed with
public interest where the trust and confidence of the
public in general is of paramount importance such that
the appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such
a degree of diligence that is required of it. There is no way
We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious
but primary wherein the defense of exercise of due
diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is
adjudged liable to share the loss with the petitioner on a
46
fifty-fifty ratio in accordance with Article 172 which
provides:

Responsibility arising from negligence in the

performance of every kind of obligation is also
demandable, but such liability may be regulated by
the courts according to the circumstances.

With the foregoing provisions of the Civil Code being

relied upon, it is being made clear that the decision to
hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although
the case was brought before the court not on breach of
contractual obligations, the courts are not precluded
from applying to the circumstances of the case the laws
pertinent thereto. Thus, the fact that petitioner's
negligence was found to be the proximate cause of her
loss does not preclude her from recovering damages. The
reason why the decision dealt on a discussion on
proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent
court. And in breaches of contract under Article 1173,
due diligence on the part of the defendant is not a
defense.

PREMISES CONSIDERED, the case is hereby ordered

REMANDED to the trial court for the reception of
evidence to determine the exact amount of loss suffered
by the petitioner, considering that she partly benefited
from the issuance of the questioned checks since the
obligation for which she issued them were apparently
extinguished, such that only the excess amount over and
above the total of these actual obligations must be
considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.

SO ORDERED.

Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

47
 time, the Inter-Island Gas advised the petitioner, the
FIRST DIVISION 2. Drawn by the Enrique Cortiz & Co. upon the Pacific respondent, the drawers and the drawee-banks of the
Banking Corporation and payable to the Inter-Island Gas said checks about the forgeries, and filed a criminal
[G.R. No. L-29432. August 6, 1975.] Service, Inc. or bearer:chanrob1es virtual 1aw library complaint against Ramirez with the Office of the City
Fiscal of Manila. 1
JAI-ALAI CORPORATION OF THE 4/13/59 B-335063 P 2108.70 21
PHILIPPINES, Petitioner, v. BANK OF THE The respondent’s cashier, Ramon Sarthou, upon receipt
PHILIPPINE ISLAND, Respondent. 4/27/59 B-335072 P2210.94 22 of the latter of Inter-Island Gas dated August 31, 1959,
called up the petitioner’s cashier, Manuel Garcia, and
Bausa, Ampil & Suarez for Petitioner. 3. Drawn by the Luzon Tinsmith & Company upon the advised the latter that in view of the circumstances he
China Banking Corporation and payable to the Inter- would debit the value of the checks against the
Aviado & Aranda for Respondent. Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw petitioner’s account as soon as they were returned by the
library respective drawee-banks.
DECISION
5/18/59 VN430188 P940.8025cralaw:red Meanwhile, the drawers of the checks, having been
CASTRO, J.: notified of the forgeries, demanded reimbursement to
4. Drawn by the Roxas Manufacturing, Inc. upon the their respective accounts from the drawee-banks, which
Philippine National Bank and payable to the Inter-Island in turn demanded from the respondent, as collecting
This is a petition by the Jai-Alai Corporation of the Gas Service, Inc. order:chanrob1es virtual 1aw library bank, the return of the amounts they had paid on account
Philippines (hereinafter referred to as the petitioner) for thereof. When the drawee-banks returned the checks to
review of the decision of the Court of Appeals in C.A.-G.R. 5/14/59 1860160 P 500.00 26 the respondent, the latter paid their value which the
34042-R dated June 25, 1968 in favor of the Bank of the former in turn paid to the Inter-Island Gas. The
Philippine Islands (hereinafter referred to as the 5/18/59 1860660 P 500.00 27 respondent, for its part, debited the petitioner’s current
respondent). account and forwarded to the latter the checks
All the foregoing checks, which were acquired by the containing the forged indorsements, which the
From April 2, 1959 to May 18, 1959, ten checks with a petitioner from one Antonio J. Ramirez, a sales agent of petitioner, however, refused to accept.
total face value of P8,030.58 were deposited by the the Inter-Island Gas and a regular bettor at jai-alai games,
petitioner in its current account with the respondent were, upon deposit, temporarily credited to the On October 8, 1959 the petitioner drew against its
bank. The particulars of these checks are as petitioner’s account in accordance with the clause current account with the respondent a check for
follows:chanrob1es virtual 1aw library printed on the deposit slips issued by the respondent and P135,000 payable to the order of the Mariano Olondriz y
which reads: Cia. in payment of certain shares of stock. The check was,
however, dishonored by the respondent as its records
1. Drawn by the Delta Engineering Service upon the "Any credit allowed the depositor on the books of the showed that as of October 8, 1959 the current account of
Pacific Banking Corporation and payable to the Inter- Bank for checks or drafts hereby received for deposit, is the petitioner, after netting out the value of the checks
Island Gas Service Inc. or order: provisional only, until such time as the proceeds thereof, P8,030.58) with the forged indorsements, had a balance
in current funds or solvent credits, shall have been of only P128,257.65.
1aw library actually received by the Bank and the latter reserves to
itself the right to charge back the item to the account of The petitioner then filed a complaint against the
Date Check Exhibit its depositor, at any time before that event, regardless of respondent with the Court of First Instance of Manila,
Deposited Number Amount Number whether or not the item itself can be returned."cralaw which was however dismissed by the trial court after due
virtua1aw library trial, and as well by the Court of Appeals, on appeal.
4/2/59 B-352680 P500.00 18
About the latter part of July 1959, after Ramirez had Hence, the present recourse.
4/20/59 A-156907 372.32 19 resigned from the Inter-Island Gas and after the checks
had been submitted to inter-bank clearing, the Inter- The issues posed by the petitioner in the instant petition
4/24/59 A-156924 397.82 20 Island Gas discovered that all the indorsements made on may be briefly stated as follows:chanrob1es virtual 1aw
the checks purportedly by its cashiers, Santiago Amplayo library
5/4/59 B-364764 250.00 23 and Vicenta Mucor (who were merely authorized to
deposit checks issued payable to the said company) as (a) Whether the respondent had the right to debit the
5/6/59 B-364775 250.00 24 well as the rubber stamp impression thereon reading petitioner’s current account in the amount
"Inter-Island Gas Service, Inc.," were forgeries. In due corresponding to the total value of the checks in question

48
after more than three months had elapsed from the date
their value was credited to the petitioner’s account:(b)
Whether the respondent is estopped from claiming that
the amount of P8,030.58, representing the total value of
the checks with the forged indorsements, had not been
properly credited to the petitioner’s account, since the
same had already been paid by the drawee-banks and
received in due course by the respondent; and(c) On the
assumption that the respondent had improperly debited
the petitioner’s current account, whether the latter is
entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds
when it debited the petitioner’s account. When the
petitioner deposited the checks with the respondent, the
nature of the relationship created at that stage was one
of agency, that is, the bank was to collect from the
drawees of the checks the corresponding proceeds. It is
true that the respondent had already collected the
proceeds of the checks when it debited the petitioner’s
account, so that following the rule in Gullas v. Philippine
National Bank 2 it might be argued that the relationship
between the parties had become that of creditor and
debtor as to preclude the respondent from using the
petitioner’s funds to make payments not authorized by
the latter. It is our view nonetheless that no creditor-
debtor relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031)
states that 3 — "When a signature is forged or made
without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of
authority."
Since under the foregoing provision, a forged signature
in a negotiable instrument is wholly inoperative and no
right to discharge it or enforce its payment can be
acquired through or under the forged signature except
against a party who cannot invoke the forgery, it stands
to reason, upon the facts of record, that the respondent,
as a collecting bank which indorsed the checks to the
drawee-banks for clearing, should be liable to the latter
for reimbursement, for, as found by the court a quo and
by the appellate court, the indorsements on the checks
had been forged prior to their delivery to the petitioner.
In legal contemplation, therefore, the payments made by
the drawee-banks to the respondent on account of the
said checks were ineffective; and, such being the case, the
relationship of creditor and debtor between the
petitioner and the respondent had not been validly
effected, the checks not having been properly and
legitimately converted into cash. 4
In Great Eastern Life Ins. Co. v. Hongkong & Shanghai
Bank, 5 the Court ruled that it is the obligation of the
collecting bank to reimburse the drawee-bank the value
of the checks subsequently found to contain the forged
indorsement of the payee. The reason is that the bank
with which the check was deposited has no right to pay
the sum stated therein to the forger "or anyone else upon
a forged signature." "It was its duty to know," said the
Court, "that [the payee’s] endorsement was genuine
before cashing the check." The petitioner must in turn
shoulder the loss of the amounts which the respondent;
as its collecting agent, had to reimburse to the drawee-
banks.
We do not consider material for the purposes of the case
at bar that more than three months had elapsed since the
proceeds of the checks in question were collected by
the Respondent. The record shows that the respondent
had acted promptly after being informed that the
indorsements on the checks were forged. Moreover,
having received the checks merely for collection and
deposit, the respondent cannot he expected to know or
ascertain the genuineness of all prior indorsements on
the said checks. Indeed, having itself indorsed them to
the respondent in accordance with the rules and
practices of commercial banks, of which the Court takes
due cognizance, the petitioner is deemed to have given
the warranty prescribed in Section 66 of the Negotiable
Instruments Law that every single one of those checks "is
genuine and in all respects what it purports to be.."
The petitioner was, moreover, grossly recreant in
accepting the checks in question from Ramirez. It could
not have escaped the attention of the petitioner that the
payee of all the checks was a corporation — the Inter-
Island Gas Service, Inc. Yet, the petitioner cashed these
checks to a mere individual who was admittedly a
habitue at its jai-alai games without making any inquiry
as to his authority to exchange checks belonging to the
payee-corporation. In Insular Drug Co. v. National 6 the
Court made the pronouncement that.
". . . The right of an agent to indorse commercial paper is
a very responsible power and will not be lightly inferred.
A salesman with authority to collect money belonging to
his principal does not have the implied authority to
indorse checks received in payment. 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." (underscoring supplied)
It must be noted further that three of the checks in
question are crossed checks, namely, exhs. 21, 25 and 27,
which may only be deposited, but not encashed; yet, the
petitioner negligently accepted them for cash. That two
of the crossed checks, namely, exhs. 21 and 25, are bearer
instruments would not, in our view, exculpate the
petitioner from liability with respect to them. The fact
that they are bearer checks and at the same time crossed
checks should have aroused the petitioner’s suspicion as
to the title of Ramirez over them and his authority to cash
them (apparently to purchase jai-alai tickets from the
petitioner), it appearing on their face that a corporate
entity — the Inter Island Gas Service, Inc. — was the
payee thereof and Ramirez delivered the said checks to
the petitioner ostensibly on the strength of the payee’s
cashiers’ indorsements.
At all events, under Section 67 of the Negotiable
Instruments Law, "Where a person places his
indorsement on an instrument negotiable by delivery he
incurs all the liability of an indorser," and under Section
66 of the same statute a general indorser warrants that
the instrument "is genuine and in all respects what it
purports to be." Considering that the petitioner indorsed
the said checks when it deposited them with the
respondent, the petitioner as an indorser guaranteed the
genuineness of all prior indorsements thereon. The
respondent which relied upon the petitioner’s warranty
should not be held liable for the resulting loss. This
conclusion applied similarly to exh. 22 which is an
uncrossed bearer instrument, for under Section 65 of the
Negotiable Instrument Law. "Every person negotiating
an instrument by delivery . . . warrants (a) That the
instrument is genuine and in all respects what it
purports to be." Under that same section this warranty
"extends in favor of no holder other than the immediate
transferee," which, in the case at bar, would be
the Respondent.
The provision in the deposit slip issued by the
respondent which stipulates that it "reserves to itself the
49
right to charge back the item to the account of its
depositor," at any time before "current funds or solvent
credits shall have been actually received by the Bank,"
would not materially affect the conclusion we have
reached. That stipulation prescribes that there must be
an actual receipt by the bank of current funds or solvent
credits; but as we have earlier indicated the transfer by
the drawee-banks of funds to the respondent on account
of the checks in question was ineffectual because made
under the mistaken and valid assumption that the
indorsements of the payee thereon were genuine. Under
article 2154 of the New Civil Code "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." There was, therefore, in contemplation
of law, no valid payment of money made by the drawee-
banks to the respondent on account of the questioned
checks.

ACCORDINGLY, the judgment of the Court of Appeals is

affirmed, at petitioner’s cost.

Makasiar, Esguerra, Muñoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave.

Endnotes:
1. The City Fiscal dropped the charges on the ground
that the Inter-Island Gas which was later reimbursed by
the drawee-banks, was no longer qualified to be
regarded as an offended party which could properly file
a complaint against Ramirez because it had not suffered
any damage at all.

2. 62 Phil. 519 (1935).

3. A bank check is a negotiable instrument and is

governed by the Negotiable Instruments Law (Ang
Tiong v. Ting, 22 SCRA 713).

4. The collecting hank may certainly set up as defense

the so-called "24-hour clearing house rule" of the
Central Bank. This rule is not, however, invoked here.
See Hongkong & Shanghai Banking Corp. v. People’s
Bank & Trust Co., 35 SCRA 141.

5. 43 Phil. 678 (1922).

6. 58 Phil. 685 (1933).

50
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES,
doing business under the name and style "Melissa's
RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law
Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the
private respondent has a cause of action against the
petitioners for their encashment and payment to another
person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of
ready-to-wear garments under the firm name "Melissa's
RTW." She deals with, among other customers,
Robinson's Department Store, Payless Department Store,
Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective
accounts crossed checks payable to Melissa's RTW in the
amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she
thought were still unpaid accounts, she was informed of
the issuance of the above-listed crossed checks. Further
inquiry revealed that the said checks had been deposited
with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its
"trusted depositors," in the words of its branch manager
and co-petitioner, Conrado Cruz, Sayson had not been
authorized by the private respondent to deposit and
encash the said checks.
The private respondent sued the petitioners in the
Regional Trial Court of Quezon City for recovery of the
total value of the checks plus damages. After trial,
judgment was rendered requiring them to pay the
private respondent the total value of the subject checks
in the amount of P15,805.00 plus 12% interest,
P50,000.00 actual damages, P25,000.00 exemplary
damages, P5,000.00 attorney's fees, and the costs of the
suit. 1
The petitioners appealed to the respondent court,
reiterating their argument that the private respondent
had no cause of action against them and should have
proceeded instead against the companies that issued the
checks. In disposing of this contention, the Court of
Appeals 2 said:
The cause of action of the appellee in the case at bar
arose from the illegal, anomalous and irregular acts
of the appellants in violating common banking
practices to the damage and prejudice of the
appellees, in allowing to be deposited and encashed
as well as paying to improper parties without the
knowledge, consent, authority or endorsement of the
appellee which totalled P15,805.00, the six (6) checks
in dispute which were "crossed checks" or "for
payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are
present in the case at bar, namely: (1) a right in favor
of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation
on the part of the named defendant to respect or not
to violate such right; and (3) an act or omission on the
part of such defendant violative of the right of the
plaintiff or constituting a breach thereof. (Republic
Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
And such cause of action has been proved by
evidence of great weight. The contents of the said
checks issued by the customers of the appellee had
not been questioned. There is no dispute that the
same are crossed checks or for payee's account only,
which is Melissa's RTW. The appellee had clearly
shown that she had never authorized anyone to
deposit the said checks nor to encash the same; that
the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in
violation of the instructions in the said crossed
checks that the same were for payee's account only;
and that the appellee maintained a savings account
with the Prudential Bank, Cubao Branch, Quezon City
which never cleared the said checks and the appellee
had been damaged by such encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is
done by writing two parallel lines diagonally on the left
top portion of the checks. The crossing is special where
the name of a bank or a business institution is written
between the two parallel lines, which means that the
drawee should pay only with the intervention of that
company. 3 The crossing is general where the words
written between the two parallel lines are "and Co." or
"for payee's account only," as in the case at bar. This
means that the drawee bank should not encash the check
but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared
that "the effects of crossing a check are: (1) that the check
may not be encashed but only deposited in the bank; (2)
that the check may be negotiated only once –– to one who
has an account with a bank; and (3) that the act of
crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that
he must inquire if he has received the check pursuant to
that purpose."
The effects therefore of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72 of
the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or
by some person authorized to receive payment on his
behalf. Who the holder or authorized person is depends
on the instruction stated on the face of the check.
51
The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only signify
that the drawers had intended the same for deposit only
by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for
violation of the common instruction found on the face of
the checks exclusively belongs to the issuers thereof and
not to the payee. Moreover, having acted in good faith as
they merely facilitated the encashment of the checks,
they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the
Bank for the account of Rafael Sayson although they were
crossed checks and the payee was not Sayson but
Melissa's RTW. The Bank stamped thereon its guarantee
that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate
and positive act, the Bank had for all legal intents and
purposes treated the said checks as negotiable
instruments and, accordingly, assumed the warranty of
the endorser.
The weight of authority is to the effect that "the
possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is
collected on the check, the bank can be held 'for moneys
had and received." 6 The proceeds are held for the
rightful owner of the payment and may be recovered by
him. The position of the bank taking the check on the
forged or unauthorized indorsement is the same as if it
had taken the check and collected without indorsement
at all. The act of the bank amounts to conversion of the
check. 7
It is not disputed that the proceeds of the subject checks
belonged to the private respondent. As she had not at any
time authorized Rafael Sayson to endorse or encash
them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed
notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the
payee for the value of the checks. This liability attached
whether or not the Bank was aware of the unauthorized
endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should
have first verified his right to endorse the crossed checks, collecting bank. In a similar situation, it was held that, to
of which he was not the payee, and to deposit the simplify proceedings, the payee of the illegally encashed
proceeds of the checks to his own account. The Bank was checks should be allowed to recover directly from the
by reason of the nature of the checks put upon notice that bank responsible for such encashment regardless of
they were issued for deposit only to the private whether or not the checks were actually delivered to the
respondent's account. Its failure to inquire into Sayson's payee. 11 We approve such direct action in the case at
authority was a breach of a duty it owed to the private bar.
respondent.
It is worth repeating that before presenting the checks
As the Court stressed in Banco de Oro Savings and for clearing and for payment, the Bank had stamped on
Mortgage Bank vs. Equitable Banking Corp., 9 "the law the back thereof the words: "All prior endorsements
imposes a duty of diligence on the collecting bank to and/or lack of endorsements guaranteed," and thus
scrutinize checks deposited with it, for the purpose of made the assurance that it had ascertained the
determining their genuineness and regularity. The genuineness of all prior endorsements.
collecting bank, being primarily engaged in banking,
holds itself out to the public as the expert on this field, We find that the respondent court committed no
and the law thus holds it to a high standard of conduct." reversible error in holding that the private respondent
had a valid cause of action against the petitioners and
The petitioners insist that the private respondent has no that the latter are indeed liable to her for their
cause of action against them because they have no privity unauthorized encashment of the subject checks. We also
of contract with her. They also argue that it was Eddie agree with the reduction of the award of the exemplary
Reyes, the private respondent's own husband, who damages for lack of sufficient evidence to support them.
endorsed the checks.
WHEREFORE, the petition is DENIED, with costs against
Assuming that Eddie Reyes did endorse the crossed the petitioner. It is so ordered.
checks, we hold that the Bank would still be liable to the
private respondent because he was not authorized to Narvasa, C.J., Griño-Aquino, Medialdea and Bellosillo, JJ.,
make the endorsements. And even if the endorsements concur.
were forged, as alleged, the Bank would still be liable to
the private respondent for not verifying the endorser's
authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement by
a person not authorized to make the signature and the
affixing of a name to a check as an endorsement by a
person not authorized to endorse it. 10
The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to the
authority of Rafael Sayson to deposit crossed checks
payable to Melissa's RTW upon a prior endorsement by
Eddie Reyes. The failure of the Bank to make this inquiry
was a breach of duty that made it liable to the private
respondent for the amount of the checks.
There being no evidence that the crossed checks were
actually received by the private respondent, she would
have a right of action against the drawer companies,
which in turn could go against their respective drawee
banks, which in turn could sue the herein petitioner as
52
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court
of First Instance of Manila, Branch XXIII in Civil Case No.
69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T.
Ebrada, encashed Back Pay Check No. 508060 dated
January 15, 1963 for P1,246.08 at the main office of the
plaintiff Republic Bank at Escolta, Manila. The check was
issued by the Bureau of Treasury.1 Plaintiff Bank was
later advised by the said bureau that the alleged
indorsement on the reverse side of the aforesaid check
by the payee, "Martin Lorenzo" was a forgery2 since the
latter had allegedly died as of July 14, 1952.3 Plaintiff
Bank was then requested by the Bureau of Treasury to
refund the amount of P1,246.08.4 To recover what it had
refunded to the Bureau of Treasury, plaintiff Bank made
verbal and formal demands upon defendant Ebrada to
account for the sum of P1,246.08, but said defendant
refused to do so. So plaintiff Bank sued defendant Ebrada
before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer
denying the material allegations of the complaint and as
affirmative defenses alleged that she was a holder in due
course of the check in question, or at the very least, has
acquired her rights from a holder in due course and
therefore entitled to the proceeds thereof. She also
alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to
be entitled to recover anything from her.5
About the same day, July 11, 1966 defendant Ebrada filed
a Third-Party complaint against Adelaida Dominguez
who, in turn, filed on September 14, 1966 a Fourth-Party
complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered
judgment for the plaintiff Bank against defendant
Ebrada; for Third-Party plaintiff against Third-Party
defendant, Adelaida Dominguez, and for Fourth-Party
plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada
took an appeal to the Court of First Instance of Manila
where the parties submitted a partial stipulation of facts
as follows:
COME NOW the undersigned counsel for the plaintiff,
defendant, Third-Party defendant and Fourth-Party
plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue
and be sued;
2. That on January 15, 1963 the Treasury of the
Philippines issued its Check No. BP-508060, payable
to the order of one MARTIN LORENZO, in the sum of
P1,246.08, and drawn on the Republic Bank, plaintiff
herein, which check will be marked as Exhibit "A" for
the plaintiff;
3. That the back side of aforementioned check bears
the following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the
defendant MAURICIA T. EBRADA by the Third-Party
defendant and Fourth-Party plaintiff ADELAIDA
DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T.
EBRADA was affixed on said check on February 27,
1963 when she encashed it with the plaintiff Bank;
6. That immediately after defendant MAURICIA T.
EBRADA received the cash proceeds of said check in
the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the
third-party defendant and fourth-party plaintiff
ADELAIDA DOMINGUEZ, who in turn handed the said
amount to the fourth-party defendant JUSTINA TINIO
on the same date, as evidenced by the receipt signed
by her which will be marked as Exhibit "1-
Dominguez"; and
7. That the parties hereto reserve the right to present
evidence on any other fact not covered by the
foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the
documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which
reads as follows:
WHEREFORE, the Court renders judgment ordering
the defendant Mauricia T. Ebrada to pay the plaintiff
the amount of ONE THOUSAND TWO FORTY-SIX
08/100 (P1,246.08), with interest at the legal rate
from the filing of the complaint on June 16, 1966,
until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim
she may have against Adelaida Dominguez in
connection with this case is hereby reserved. The
right of the estate of Dominguez to file the fourth-
party complaint against Justina Tinio is also reserved.
53
 SO ORDERED.
In her appeal, defendant-appellant presses that the
lower court erred:
IN ORDERING THE APPELLANT TO PAY THE
APPELLEE THE FACE VALUE OF THE SUBJECT CHECK
AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED
FOR 11-½ YEARS AND THAT THE APPELLANT DID
NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check
in question was delivered to defendant-appellant by
Adelaida Dominguez for the purpose of encashment and
that her signature was affixed on said check when she
cashed it with the plaintiff Bank. Likewise it is admitted
that defendant-appellant was the last indorser of the said
check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under
Section 65 of the Negotiable Instruments Law:6
Every person negotiating an instrument by delivery
or by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects
what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
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 sections;
(b) That the instrument is at the time of his
indorsement valid and subsisting.
It turned out, however, that the signature of the original
payee of the check, Martin Lorenzo was a forgery
because he was already dead 7 almost 11 years before
the check in question was issued by the Bureau of
Treasury. Under action 23 of the Negotiable Instruments
Law (Act 2031):
When a signature is forged or made without the
authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain
the instruments, or to give a discharge 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 is clear from the provision that where the signature on
a negotiable instrument if forged, the negotiation of the
check is without force or effect. But does this mean that
the existence of one forged signature therein will render
void all the other negotiations of the check with respect
to the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W.
590, where a check has several indorsements on it, it was
held that it is only the negotiation based on the forged or
unauthorized signature which is inoperative. Applying
this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on
the forged indorsement that should be declared
inoperative. This means that the negotiation of the check
in question from Martin Lorenzo, the original payee, to
Ramon R. Lorenzo, the second indorser, should be
declared of no affect, but the negotiation of the aforesaid
check from Ramon R. Lorenzo to Adelaida Dominguez,
the third indorser, and from Adelaida Dominguez to the
defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any
claim of forgery.
What happens then, if, after the drawee bank has paid the
amount of the check to the holder thereof, it was
discovered that the signature of the payee was forged?
Can the drawee bank recover from the one who encashed
the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196,
197, it was held that the drawee of a check can recover
from the holder the money paid to him on a forged
instrument. It is not supposed to be its duty to ascertain
whether the signatures of the payee or indorsers are
genuine or not. This is because the indorser is supposed
to warrant to the drawee that the signatures of the payee
and previous indorsers are genuine, warranty not
extending only to holders in due course. 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 and the drawee who has paid the
forged check, without actual negligence on his part, may
recover the money paid from such negligent purchasers.
In such cases the recovery is permitted because although
the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed
his duty, the forgery would in all probability, have been
detected and the fraud defeated. The reason for allowing
the drawee bank to recover from the encasher is:
Every one with even the least experience in business
knows that no business man would accept a check in
exchange for money or goods unless he is satisfied
that the check is genuine. He accepts it only because
he has proof that it is genuine, or because he has
sufficient confidence in the honesty and financial
responsibility of the person who vouches for it. If he
is deceived he has suffered a loss of his cash or goods
through his own mistake. His own credulity or
recklessness, or misplaced confidence was the sole
cause of the loss. Why should he be permitted to shift
the loss due to his own fault in assuming the risk,
upon the drawee, simply because of the accidental
circumstance that the drawee afterwards failed to
detect the forgery when the check was presented?8
Similarly, in the case before Us, the defendant-appellant,
upon receiving the check in question from Adelaida
Dominguez, was duty-bound to ascertain whether the
check in question was genuine before presenting it to
plaintiff Bank for payment. Her failure to do so makes her
liable for the loss and the plaintiff Bank may recover from
her the money she received for the check. As reasoned
out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the
forgery would have been detected and the fraud
defeated.
In our jurisdiction We have a case of similar
import. 9 The Great Eastern Life Insurance Company
drew its check for P2000.00 on the Hongkong and
Shanghai Banking Corporation payable to the order of
Lazaro Melicor. A certain E. M. Maasin fraudulently
obtained the check and forged the signature of Melicor,
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as an indorser, and then personally indorsed and time of taking the instrument knew him to be only an
presented the check to the Philippine National Bank accommodation party.
where the amount of the check was placed to his
(Maasin's) credit. On the next day, the Philippine IN VIEW OF THE FOREGOING, the judgment appealed
National Bank indorsed the cheek to the Hongkong and from is hereby affirmed in toto with costs against
Shanghai Banking Corporation which paid it and charged defendant-appellant.
the amount of the check to the insurance company. The
Court held that the Hongkong and Shanghai Banking
Corporation was liable to the insurance company for the SO ORDERED.
amount of the check and that the Philippine National
Bank was in turn liable to the Hongkong and Shanghai Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.
Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one

person and is presented to a bank by another and
purports upon its face to have been duly indorsed by
the payee of the check, it is the duty of the bank to
know that the check was duly indorsed by the
original payee, and where the bank pays the amount
of the check to a third person, who has forged the
signature of the payee, the loss falls upon the bank
who cashed the check, and its only remedy is against
the person to whom it paid the money.

With the foregoing doctrine We are to concede that the

plaintiff Bank should suffer the loss when it paid the
amount of the check in question to defendant-appellant,
but it has the remedy to recover from the latter the
amount it paid to her. Although the defendant-appellant
to whom the plaintiff Bank paid the check was not
proven to be the author of the supposed forgery, yet as
last indorser of the check, she has warranted that she has
good title to it 10 even if in fact she did not have it because
the payee of the check was already dead 11 years before
the check was issued. The fact that immediately after
receiving title cash proceeds of the check in question in
the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said
amount to Adelaida Dominguez (Third-Party defendant
and the Fourth-Party plaintiff) who in turn handed the
amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted
as an accommodation party in the check for which she is
also liable under Section 29 of the Negotiable
Instruments Law (Act 2031), thus: .An accommodation
party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder at the

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