[G.R. No. 132560.

January 30, 2002]

WESTMONT BANK (formerly ASSOCIATED BANKING

CORP.), petitioner, vs. EUGENE ONG, respondent.

DECISION
QUISUMBING, J.:

This is a petition for review of the decision dated January 13, 1998, of the
[1]

Court of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay

respondent P1,754,787.50 plus twelve percent (12%) interest per annum
computed from October 7, 1977, the date of the first extrajudicial demand, plus
damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account with petitioner,
formerly the Associated Banking Corporation, but now known as Westmont
Bank. Sometime in May 1976, he sold certain shares of stocks through Island
Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific
Banking Corporation managers checks, both dated May 4, 1976, issued in the
[2]

name of Eugene Ong as payee. Before Ong could get hold of the checks, his
friend Paciano Tanlimco got hold of them, forged Ongs signature and deposited
these with petitioner, where Tanlimco was also a depositor. Even though Ongs
specimen signature was on file, petitioner accepted and credited both checks
to the account of Tanlimco, without verifying the signature indorsements
appearing at the back thereof. Tanlimco then immediately withdrew the money
and absconded.
Instead of going straight to the bank to stop or question the payment, Ong
first sought the help of Tanlimcos family to recover the amount. Later, he
reported the incident to the Central Bank, which like the first effort, unfortunately
proved futile.
It was only on October 7, 1977, about five (5) months from discovery of the
fraud, did Ong cry foul and demanded in his complaint that petitioner pay the
value of the two checks from the bank on whose gross negligence he imputed
his loss. In his suit, he insisted that he did not deliver, negotiate, endorse or
transfer to any person or entity the subject checks issued to him and asserted
that the signatures on the back were spurious. [3]
 The bank did not present evidence to the contrary, but simply contended
that since plaintiff Ong claimed to have never received the originals of the two
(2) checks in question from Island Securities, much less to have authorized
Tanlimco to receive the same, he never acquired ownership of these
checks. Thus, he had no legal personality to sue as he is not a real party in
interest. The bank then filed a demurrer to evidence which was denied.
On February 8, 1989, after trial on the merits, the Regional Trial Court of
Manila, Branch 38, rendered a decision, thus:

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff
and against the defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in
question, exhibits A and B, respectively, with interest thereon at the legal rate of
twelve percent (12%) per annum computed from October 7, 1977 (the date of the first
extrajudicial demand) up to and until the same shall have been paid in full;
2. Moral damages in the amount of P250,000.00;
3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or
correction for the public good;
4. Attorneys fees of P50,000.00 and costs of suit.

Defendants counterclaims are dismissed for lack of merit.

SO ORDERED. [4]

Petitioner elevated the case to the Court of Appeals without success. In its
decision, the appellate court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in

toto.
[5]

Petitioner now comes before this Court on a petition for review, alleging that
the Court of Appeals erred:
I

... IN AFFIRMING THE TRIAL COURTS CONCLUSION THAT RESPONDENT

HAS A CAUSE OF ACTION AGAINST THE PETITIONER.

II
... IN AFFIRMING THE TRIAL COURTS DECISION FINDING PETITIONER
LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY
RECOVER DIRECTLY FROM THE FORMER; AND

III

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT

ABSOLVING PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong
has a cause of action against petitioner Westmont Bank; and (2) whether or not
Ong is barred to recover the money from Westmont Bank due to laches.
Respondent admitted that he was never in actual or physical possession of
the two (2) checks of the Island Securities nor did he authorize Tanlimco or any
of the latters representative to demand, accept and receive the same. For this
reason, petitioner argues, respondent cannot sue petitioner because under
Section 51 of the Negotiable Instruments Law it is only when a person
[6]

becomes a holder of a negotiable instrument can he sue in his own

name. Conversely, prior to his becoming a holder, he had no right or cause of
action under such negotiable instrument. Petitioner further argues that since
Section 191 of the Negotiable Instruments Law defines a holder as the payee
[7]

or indorsee of a bill or note, who is in possession of it, or the bearer thereof, in

order to be a holder, it is a requirement that he be in possession of the
instrument or the bearer thereof. Simply stated, since Ong never had
possession of the checks nor did he authorize anybody, he did not become a
holder thereof hence he cannot sue in his own name. [8]

Petitioner also cites Article 1249 of the Civil Code explaining that a check,
[9]

even if it is a managers check, is not legal tender. Hence, the creditor cannot
be compelled to accept payment thru this means. It is petitioners position that
[10]

for all intents and purposes, Island Securities has not yet tendered payment to
respondent Ong, thus, any action by Ong should be directed towards collecting
the amount from Island Securities. Petitioner claims that Ongs cause of action
against it has not ripened as of yet. It may be that petitioner would be liable to
the drawee bank - - but that is a matter between petitioner and drawee-bank,
Pacific Banking Corporation. [11]

For its part, respondent Ong leans on the ruling of the trial court and the
Court of Appeals which held that the suit of Ong against the petitioner bank is
a desirable shortcut to reach the party who ought in any event to be ultimately
liable. It likewise cites the ruling of the courts a quo which held that according
[12]

to the general rule, a bank who has obtained possession of a check upon an
unauthorized or forged indorsement of the payees signature and who collects
the amount of the check from the drawee is liable for the proceeds thereof to
the payee. The theory of said rule is that the collecting banks possession of
such check is wrongful. [13]

Respondent also cites Associated Bank vs. Court of Appeals which held [14]

that the collecting bank or last endorser generally suffers the loss because it
has the duty to ascertain the genuineness of all prior endorsements. The
collecting bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because
he is a client. Hence, it is in a better position to detect forgery, fraud or
irregularity in the indorsement. [15]

Anent Article 1249 of the Civil Code, Ong points out that bank checks are
specifically governed by the Negotiable Instruments Law which is a special law
and only in the absence of specific provisions or deficiency in the special law
may the Civil Code be invoked. [16]

Considering the contentions of the parties and the evidence on record, we

find no reversible error in the assailed decisions of the appellate and trial courts,
hence there is no justifiable reason to grant the petition.
Petitioners claim that respondent has no cause of action against the bank
is clearly misplaced. As defined, a cause of action is the act or omission by
which a party violates a right of another. The essential elements of a cause of
[17]

action are: (a) a legal right or rights of the plaintiff, (b) a correlative obligation of
the defendant, and (c) an act or omission of the defendant in violation of said
legal right.
[18]

The complaint filed before the trial court expressly alleged

respondents right as payee of the managers checks to receive the amount
involved, petitioners correlative duty as collecting bank to ensure that the
amount gets to the rightful payee or his order, and a breach of that duty
because of a blatant act of negligence on the part of petitioner which violated
respondents rights. [19]

Under Section 23 of the Negotiable Instruments Law:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
 Since the signature of the payee, in the case at bar, was forged to make it
appear that he had made an indorsement in favor of the forger, such signature
should be deemed as inoperative and ineffectual. Petitioner, as the collecting
bank, grossly erred in making payment by virtue of said forged signature. The
payee, herein respondent, should therefore be allowed to recover from the
collecting bank.
The collecting bank is liable to the payee and must bear the loss because it
is its legal duty to ascertain that the payees endorsement was genuine before
cashing the check. As a general rule, a bank or corporation who has obtained
[20]

possession of a check upon an unauthorized or forged indorsement of the

payees signature and who collects the amount of the check from the drawee,
is liable for the proceeds thereof to the payee or other owner, notwithstanding
that the amount has been paid to the person from whom the check was
obtained. [21]

The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful, and when the money had been collected
on the check, the bank or other person or corporation can be held as for moneys
had and received, and the proceeds are held for the rightful owners who may
recover them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected
the money without indorsement at all and the act of the bank amounts to
conversion of the check. [22]

Petitioners claim that since there was no delivery yet and respondent has
never acquired possession of the checks, respondents remedy is with the
drawer and not with petitioner bank.Petitioner relies on the view to the effect
that where there is no delivery to the payee and no title vests in him, he ought
not to be allowed to recover on the ground that he lost nothing because he
never became the owner of the check and still retained his claim of debt against
the drawer. However, another view in certain cases holds that even if the
[23]

absence of delivery is considered, such consideration is not material. The

rationale for this view is that in said cases the plaintiff uses one action to reach,
by a desirable short cut, the person who ought in any event to be ultimately
liable as among the innocent persons involved in the transaction. In other
words, the payee ought to be allowed to recover directly from the collecting
bank, regardless of whether the check was delivered to the payee or not. [24]

Considering the circumstances in this case, in our view, petitioner could not
escape liability for its negligent acts. Admittedly, respondent Eugene Ong at the
time the fraudulent transaction took place was a depositor of petitioner
bank. Banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact
business with them. They have the obligation to treat their clients account
[25]

meticulously and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks, therefore, is more
than that of a good father of a family. In the present case, petitioner was held
[26]

to be grossly negligent in performing its duties. As found by the trial court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano
Tanlimcos account by defendant bank, defendant bank, admittedly had in its files
specimen signatures of plaintiff who maintained a current account with them (Exhibits
L-1 and M-1; testimony of Emmanuel Torio). Given the substantial face value of the
two checks, totalling P1,754,787.50, and the fact that they were being deposited by a
person not the payee, the very least defendant bank should have done, as any
reasonable prudent man would have done, was to verify the genuineness of the
indorsements thereon. The Court cannot help but note that had defendant conducted
even the most cursory comparison with plaintiffs specimen signatures in its files
(Exhibit L-1 and M-1) it would have at once seen that the alleged indorsements were
falsified and were not those of the plaintiff-payee. However, defendant apparently
failed to make such a verification or, what is worse did so but, chose to disregard the
obvious dissimilarity of the signatures.The first omission makes it guilty of gross
negligence; the second of bad faith. In either case, defendant is liable to plaintiff for
the proceeds of the checks in question.[27]

These findings are binding and conclusive on the appellate and the
reviewing courts.
On the second issue, petitioner avers that respondent Ong is barred by
laches for failing to assert his right for recovery from the bank as soon as he
discovered the scam. The lapse of five months before he went to seek relief
from the bank, according to petitioner, constitutes laches.
In turn, respondent contends that petitioner presented no evidence to
support its claim of laches. On the contrary, the established facts of the case as
found by the trial court and affirmed by the Court of Appeals are that respondent
left no stone unturned to obtain relief from his predicament.
On the matter of delay in reporting the loss, respondent calls attention to the
fact that the checks were issued on May 4, 1976, and on the very next day, May
5, 1976, these were already credited to the account of Paciano Tanlimco and
presented for payment to Pacific Banking Corporation. So even if the theft of
the checks were discovered and reported earlier, respondent argues, it would
not have altered the situation as the encashment of the checks was
consummated within twenty four hours and facilitated by the gross negligence
of the petitioner bank.
[28]

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

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

whether or not by reason of long inaction or inexcusable neglect, a person

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

In the case at bar, it cannot be said that respondent sat on his rights. He
immediately acted after knowing of the forgery by proceeding to seek help from
the Tanlimco family and later the Central Bank, to remedy the situation and
recover his money from the forger, Paciano Tanlimco. Only after he had
exhausted possibilities of settling the matter amicably with the family of
Tanlimco and through the CB, about five months after the unlawful transaction
took place, did he resort to making the demand upon the petitioner and
eventually before the court for recovery of the money value of the two
checks. These acts cannot be construed as undue delay in or abandonment of
the assertion of his rights.
Moreover, the claim of petitioner that respondent should be barred by laches
is clearly a vain attempt to deflect responsibility for its negligent act. As
explained by the appellate court, it is petitioner which had the last clear chance
to stop the fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in clearing
checks. As we had earlier ruled, the one who had the last clear opportunity to
[31]

avoid the impending harm but failed to do so is chargeable with the

consequences thereof. [32]

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals, sustaining the judgment of the Regional Trial
Court of Manila, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.