Republic of the Philippines

SUPREME COURT stipulated in the contract of real estate mortgage. Demand and
Manila Dishonor Waived. Holder may accept partial payment reserving his
right of recourse again each and all indorsers.
EN BANC
(Purpose — mining industry)
G.R. No. L-16968 July 31, 1962 CONCEPCION MINING COMPANY, INC.,
By:
PHILIPPINE NATIONAL BANK, plaintiff-appellee, (Sgd.) VICENTE LEGARDA
vs. President
CONCEPCION MINING COMPANY, INC., ET AL., defendants- (Sgd.) VICENTE LEGARDA
appellants. (Sgd.) JOSE S SARTE

Ramon B. de los Reyes for plaintiff-appellee. "Please issue check to —

Demetrio Miraflor for defendants-appellants. Mr. Jose S. Sarte"

LABRADOR, J.: Upon the filing of the complaint the defendants presented their answer
in which they allege that the co-maker the promissory note Don
Appeal from a judgment or decision of the Court of First Instance of Vicente L. Legarda died on February 24, 1946 and his estate is in the
Manila, Hon. Gustavo Victoriano, presiding, sentencing defendants process of judicial determination in Special Proceedings No. 29060 of
Concepcion Mining Company and Jose Sarte to pay jointly and the Court of First Instance of Manila. On the basis of this allegation it
severally to the plaintiff the amount of P7,197.26 with interest up to is prayed, as a special defense, that the estate of said deceased
September 29, 1959, plus a daily interest of P1.3698 thereafter up to Vicente L. Legarda be included as party-defendant. The court in its
the time the amount is fully paid, plus 10% of the amount as attorney's decision ruled that the inclusion of said defendant is unnecessary and
fees, and costs of this suit. immaterial, in accordance with the provisions of Article 1216 of the
Deny Civil Code and section 17 (g) of the Negotiable Instruments
The present action was instituted by the plaintiff to recover from the Law.
defendants the face of a promissory note the pertinent part of which
reads as follows: A motion to reconsider this decision was denied and thereupon
defendants presented a petition for relief, asking that the effects of the
Manila, March 12, 1954 judgment be suspended for the reason that the deceased Vicente L.
Legarda should have been included as a party-defendant and his
liability should be determined in pursuance of the provisions of the
NINETY DAYS after date, for value received, I promise to pay to the
promissory note. This motion for relief was also denied, hence
order of the Philippine National Bank . . . .
defendant appealed to this Court.
In case it is necessary to collect this note by or through an attorney-at-
Section 17 (g) of the Negotiable Instruments Law provides as follows:
law, the makers and indorsers shall pay ten percent (10%) of the
amount due on the note as attorney's fees, which in no case shall be
less than P100.00 exclusive of all costs and fees allowed by law as
 SEC. 17. Construction where instrument is ambiguous. — Our attention has been attracted to the discrepancies in the printed
Where the language of the instrument is ambiguous or there record on appeal. We note, first, that the names of the defendants,
are omissions therein, the following rules of construction apply: who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte,
do not appear in the printed record on appeal. The title of the
xxx xxx xxx complaint set forth in the record on appeal does not contain the name
of Jose Sarte, when it should, as two defendants are named in the
(g) Where an instrument containing the word "I promise to pay" complaint and the only defense of the defendants is the non-inclusion
is signed by two or more persons, they are deemed to be of the deceased Vicente L. Legarda as a defendant in the action. We
jointly and severally liable thereon. also note that the copy of the promissory note which is set forth in the
record on appeal does not contain the name of the third maker Jose
And Article 1216 of the Civil Code of the Philippines also provides as S. Sarte. Fortunately, the brief of appellee on page 4 sets forth said
follows: name of Jose S. Sarte as one of the co-maker of the promissory note.
Evidently, there is an attempt to mislead the court into believing that
ART. 1216. The creditor may proceed against any one of the Jose S. Sarte is no one of the co-makers. The attorney for the
solidary debtors or some of them simultaneously. The demand defendants Atty. Jose S. Sarte himself and he should be held
made against one of them shall not be an obstacle to those primarily responsible for the correctness of the record on appeal. We,
which may subsequently be directed against the others so therefore, order the said Atty. Jose S. Sarte to explain why in his
long as the debt has not been fully collected. record on appeal his own name as one of the defendants does not
appear and neither does his name appear as one of the co-signers of
the promissory note in question. So ordered.
In view of the above quoted provisions, and as the promissory note
was executed jointly and severally by the same parties, namely,
Concepcion Mining Company, Inc. and Vicente L. Legarda and Jose Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera,
S. Sarte, the payee of the promissory note had the right to hold any Paredes, Dizon, Regala and Makalintal, JJ., concur.
one or any two of the signers of the promissory note responsible for Reyes, J.B.L., J., took no part.
the payment of the amount of the note. This judgment of the lower
court should be affirmed.
 Republic of the Philippines On July 11, 1966, defendant Ebrada filed her answer denying the
SUPREME COURT material allegations of the complaint and as affirmative defenses
Manila 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
FIRST DIVISION 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
G.R. No. L-40796 July 31, 1975
About the same day, July 11, 1966 defendant Ebrada filed a Third-
REPUBLIC BANK, plaintiff-appellee, Party complaint against Adelaida Dominguez who, in turn, filed on
vs. September 14, 1966 a Fourth-Party complaint against Justina Tinio.
MAURICIA T. EBRADA, defendant-appellant.
On March 21, 1967, the City Court of Manila rendered judgment for
Sabino de Leon, Jr. for plaintiff-appellee. the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff
against Third-Party defendant, Adelaida Dominguez, and for Fourth-
Julio Baldonado for defendant-appellant. 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:
MARTIN, J.:
COME NOW the undersigned counsel for the plaintiff,
Appeal on a question of law of the decision of the Court of First
defendant, Third-Party defendant and Fourth-Party
Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled
plaintiff and unto this Honorable Court most respectfully
"Republic Bank vs. Mauricia T. Ebrada."
submit the following:
On or about February 27, 1963 defendant Mauricia T. Ebrada,
PARTIAL STIPULATION OF FACTS
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 1. That they admit their respective capacities to sue
Bank was later advised by the said bureau that the alleged and be sued;
indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery2 since the latter had allegedly died as 2. That on January 15, 1963 the Treasury of the
of July 14, 1952.3 Plaintiff Bank was then requested by the Bureau of Philippines issued its Check No. BP-508060, payable
Treasury to refund the amount of P1,246.08.4 To recover what it had to the order of one MARTIN LORENZO, in the sum of
refunded to the Bureau of Treasury, plaintiff Bank made verbal and P1,246.08, and drawn on the Republic Bank, plaintiff
formal demands upon defendant Ebrada to account for the sum of herein, which check will be marked as Exhibit "A" for
P1,246.08, but said defendant refused to do so. So plaintiff Bank sued the plaintiff;
defendant Ebrada before the City Court of Manila.
3. That the back side of aforementioned check bears
the following signatures, in this order:
 1) MARTIN LORENZO; the filing of the complaint on June 16, 1966, until fully
paid, plus the costs in both instances against Mauricia
2) RAMON R. LORENZO; T. Ebrada.

3) DELIA DOMINGUEZ; and The right of Mauricia T. Ebrada to file whatever claim
she may have against Adelaida Dominguez in
4) MAURICIA T. EBRADA; connection with this case is hereby reserved. The right
of the estate of Dominguez to file the fourth-party
4. That the aforementioned check was delivered to the defendant complaint against Justina Tinio is also reserved.
MAURICIA T. EBRADA by the Third-Party defendant and Fourth-
Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of SO ORDERED.
encashment;
In her appeal, defendant-appellant presses that the lower court erred:
5. That the signature of defendant MAURICIA T.
EBRADA was affixed on said check on February 27, IN ORDERING THE APPELLANT TO PAY THE
1963 when she encashed it with the plaintiff Bank; APPELLEE THE FACE VALUE OF THE SUBJECT
CHECK AFTER FINDING THAT THE DRAWER
6. That immediately after defendant MAURICIA T. ISSUED THE SUBJECT CHECK TO A PERSON
EBRADA received the cash proceeds of said check in ALREADY DECEASED FOR 11-½ YEARS AND THAT
the sum of P1,246.08 from the plaintiff Bank, she THE APPELLANT DID NOT BENEFIT FROM
immediately turned over the said amount to the third- ENCASHING SAID CHECK.
party defendant and fourth-party plaintiff ADELAIDA
DOMINGUEZ, who in turn handed the said amount to From the stipulation of facts it is admitted that the check in question
the fourth-party defendant JUSTINA TINIO on the was delivered to defendant-appellant by Adelaida Dominguez for the
same date, as evidenced by the receipt signed by her purpose of encashment and that her signature was affixed on said
which will be marked as Exhibit "1-Dominguez"; and check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said
7. That the parties hereto reserve the right to present check. As such indorser, she was supposed to have warranted that
evidence on any other fact not covered by the she has good title to said check; for under Section 65 of the
foregoing stipulations, Negotiable Instruments Law:6

Manila, Philippines, June 6, 1969. Every person negotiating an instrument by delivery or

by qualified indorsement, warrants:
Based on the foregoing stipulation of facts and the documentary
evidence presented, the trial court rendered a decision, the dispositive (a) That the instrument is genuine and in all respects
portion of which reads as follows: what it purports to be.

WHEREFORE, the Court renders judgment ordering (b) That she has good title to it.
the defendant Mauricia T. Ebrada to pay the plaintiff
the amount of ONE THOUSAND TWO FORTY-SIX xxx xxx xxx
08/100 (P1,246.08), with interest at the legal rate from
and under Section 65 of the same Act: Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and
from Adelaida Dominguez to the defendant-appellant who did not
Every indorser who indorses without qualification know of the forgery, should be considered valid and enforceable,
warrants to all subsequent holders in due course: barring any claim of forgery.

(a) The matters and things mentioned in subdivisions What happens then, if, after the drawee bank has paid the amount of
(a), (b), and (c) of the next preceding sections; 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
(b) That the instrument is at the time of his indorsement who encashed the check?
valid and subsisting.
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it
It turned out, however, that the signature of the original payee of the was held that the drawee of a check can recover from the holder the
check, Martin Lorenzo was a forgery because he was already dead 7 money paid to him on a forged instrument. It is not supposed to be its
almost 11 years before the check in question was issued by the duty to ascertain whether the signatures of the payee or indorsers are
Bureau of Treasury. Under action 23 of the Negotiable Instruments genuine or not. This is because the indorser is supposed to warrant to
Law (Act 2031): the drawee that the signatures of the payee and previous indorsers
are genuine, warranty not extending only to holders in due course.
When a signature is forged or made without the One who purchases a check or draft is bound to satisfy himself that
authority of the person whose signature it purports to the paper is genuine and that by indorsing it or presenting it for
be, it is wholly inoperative, and no right to retain the payment or putting it into circulation before presentation he impliedly
instruments, or to give a discharge thereof against any asserts that he has performed his duty and the drawee who has paid
party thereto, can be acquired through or under such the forged check, without actual negligence on his part, may recover
signature unless the party against whom it is sought to the money paid from such negligent purchasers. In such cases the
enforce such right is precluded from setting up the recovery is permitted because although the drawee was in a way
forgery or want of authority. negligent in failing to detect the forgery, yet if the encasher of the
check had performed his duty, the forgery would in all probability,
It is clear from the provision that where the signature on a negotiable have been detected and the fraud defeated. The reason for allowing
instrument if forged, the negotiation of the check is without force or the drawee bank to recover from the encasher is:
effect. But does this mean that the existence of one forged signature
therein will render void all the other negotiations of the check with Every one with even the least experience in business
respect to the other parties whose signature are genuine? knows that no business man would accept a check in
exchange for money or goods unless he is satisfied
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a that the check is genuine. He accepts it only because
check has several indorsements on it, it was held that it is only the he has proof that it is genuine, or because he has
negotiation based on the forged or unauthorized signature which is sufficient confidence in the honesty and financial
inoperative. Applying this principle to the case before Us, it can be responsibility of the person who vouches for it. If he is
safely concluded that it is only the negotiation predicated on the deceived he has suffered a loss of his cash or goods
forged indorsement that should be declared inoperative. This means through his own mistake. His own credulity or
that the negotiation of the check in question from Martin Lorenzo, the recklessness, or misplaced confidence was the sole
original payee, to Ramon R. Lorenzo, the second indorser, should be cause of the loss. Why should he be permitted to shift
declared of no affect, but the negotiation of the aforesaid check from 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 question to defendant-appellant, but it has the remedy to recover from
detect the forgery when the check was presented?8 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
Similarly, in the case before Us, the defendant-appellant, upon author of the supposed forgery, yet as last indorser of the check, she
receiving the check in question from Adelaida Dominguez, was duty- has warranted that she has good title to it 10 even if in fact she did not
bound to ascertain whether the check in question was genuine before have it because the payee of the check was already dead 11 years
presenting it to plaintiff Bank for payment. Her failure to do so makes before the check was issued. The fact that immediately after receiving
her liable for the loss and the plaintiff Bank may recover from her the title cash proceeds of the check in question in the amount of
money she received for the check. As reasoned out above, had she P1,246.08 from the plaintiff Bank, defendant-appellant immediately
performed the duty of ascertaining the genuineness of the check, in all turned over said amount to Adelaida Dominguez (Third-Party
probability the forgery would have been detected and the fraud defendant and the Fourth-Party plaintiff) who in turn handed the
defeated. 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
In our jurisdiction We have a case of similar import. 9 The Great the check for which she is also liable under Section 29 of the
Eastern Life Insurance Company drew its check for P2000.00 on the Negotiable Instruments Law (Act 2031), thus: .An accommodation
Hongkong and Shanghai Banking Corporation payable to the order of party is one who has signed the instrument as maker, drawer,
Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the acceptor, or indorser, without receiving value therefor, and for the
check and forged the signature of Melicor, as an indorser, and then purpose of lending his name to some other person. Such a person is
personally indorsed and presented the check to the Philippine liable on the instrument to a holder for value, notwithstanding such
National Bank where the amount of the check was placed to his holder at the time of taking the instrument knew him to be only an
(Maasin's) credit. On the next day, the Philippine National Bank accommodation party.
indorsed the cheek to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the check to the IN VIEW OF THE FOREGOING, the judgment appealed from is
insurance company. The Court held that the Hongkong and Shanghai hereby affirmed in toto with costs against defendant-appellant.
Banking Corporation was liable to the insurance company for the
amount of the check and that the Philippine National Bank was in turn SO ORDERED.
liable to the Hongkong and Shanghai 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
 Republic of the Philippines under the promissory note (Exhibit "E"), the sum of
SUPREME COURT P86,130.31 with interest from January 29, 1981; under
Manila the promissory note (Exhibit "G"), the sum of
P12,703.70 with interest from November 27, 1980;
SECOND DIVISION under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and
G.R. No. 93073 December 21, 1992 under the promissory note (Exhibit "I"), the sum of
P200,000.00 with interest from January 29, 1981.
REPUBLIC PLANTERS BANK, petitioner,
vs. Under the promissory note (Exhibit "D") defendants
COURT OF APPEALS and FERMIN CANLAS, respondents. Pinch Manufacturing Corporation (formerly named
Worldwide Garment Manufacturing, Inc.), and Shozo
Yamaguchi are ordered to pay jointly and severally, the
plaintiff bank the sum of P367,000.00 with interest of
CAMPOS, JR., J.: 16% per annum from January 29, 1980 until fully paid

This is an appeal by way of a Petition for Review on Certiorari from Under the promissory note (Exhibit "F") defendant
the decision * of the Court of Appeals in CA G.R. CV No. 07302, corporation Pinch (formerly Worldwide) is ordered to
entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch pay the plaintiff bank the sum of P140,000.00 with
Manufacturing Corporation, et al., Defendants, and Fermin Canlas, interest at 16% per annum from November 27, 1980
Defendant-Appellant", which affirmed the decision ** in Civil Case No. until fully paid.
82-5448 except that it completely absolved Fermin Canlas from
liability under the promissory notes and reduced the award for Defendant Pinch (formely Worldwide) is hereby
damages and attorney's fees. The RTC decision, rendered on June ordered to pay the plaintiff the sum of P231,120.81 with
20, 1985, is quoted hereunder: interest at 12% per annum from July 1, 1981, until fully
paid and the sum of P331,870.97 with interest from
WHEREFORE, premises considered, judgment is March 28, 1981, until fully paid.
hereby rendered in favor of the plaintiff Republic
Planters Bank, ordering defendant Pinch Manufacturing All the defendants are also ordered to pay, jointly and
Corporation (formerly Worldwide Garment severally, the plaintiff the sum of P100,000.00 as and
Manufacturing, Inc.) and defendants Shozo Yamaguchi for reasonable attorney's fee and the further sum
and Fermin Canlas to pay, jointly and severally, the equivalent to 3% per annum of the respective principal
plaintiff bank the following sums with interest thereon at sums from the dates above stated as penalty charge
16% per annum from the dates indicated, to wit: until fully paid, plus one percent (1%) of the principal
sums as service charge.
Under the promissory note (Exhibit "A"), the sum of
P300,000.00 with interest from January 29, 1981 until With costs against the defendants.
fully paid; under promissory note (Exhibit "B"), the sum
of P40,000.00 with interest from November 27, 1980; SO ORDERED. 1
under the promissory note (Exhibit "C"), the sum of
P166,466.00 which interest from January 29, 1981;
From the above decision only defendant Fermin Canlas appealed to of WORLDWIDE GARMENT MFG.
the then Intermediate Court (now the Court Appeals). His contention CORP.
was that inasmuch as he signed the promissory notes in his capacity
as officer of the defunct Worldwide Garment Manufacturing, Inc, he These entries were separated from the text of the notes with a bold
should not be held personally liable for such authorized corporate acts line which ran horizontally across the pages.
that he performed. It is now the contention of the petitioner Republic
Planters Bank that having unconditionally signed the nine (9) In the promissory notes marked as Exhibits C, D and F, the name
promissory notes with Shozo Yamaguchi, jointly and severally, Worldwide Garment Manufacturing, Inc. was apparently rubber
defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on stamped above the signatures of defendant and private respondent.
each of the nine notes.
On December 20, 1982, Worldwide Garment Manufacturing, Inc.
We find merit in this appeal. noted to change its corporate name to Pinch Manufacturing
Corporation.
From the records, these facts are established: Defendant Shozo
Yamaguchi and private respondent Fermin Canlas were On February 5, 1982, petitioner bank filed a complaint for the recovery
President/Chief Operating Officer and Treasurer respectively, of of sums of money covered among others, by the nine promissory
Worldwide Garment Manufacturing, Inc.. By virtue of Board notes with interest thereon, plus attorney's fees and penalty charges.
Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi The complainant was originally brought against Worldwide Garment
and private respondent Fermin Canlas were authorized to apply for Manufacturing, Inc. inter alia, but it was later amended to drop
credit facilities with the petitioner Republic Planters Bank in the forms Worldwide Manufacturing, Inc. as defendant and substitute Pinch
of export advances and letters of credit/trust receipts Manufacturing Corporation it its place. Defendants Pinch
accommodations. Petitioner bank issued nine promissory notes, Manufacturing Corporation and Shozo Yamaguchi did not file an
marked as Exhibits A to I inclusive, each of which were uniformly Amended Answer and failed to appear at the scheduled pre-trial
worded in the following manner: conference despite due notice. Only private respondent Fermin
Canlas filed an Amended Answer wherein he, denied having issued
___________, after date, for value received, I/we, the promissory notes in question since according to him, he was not
jointly and severaIly promise to pay to the ORDER of an officer of Pinch Manufacturing Corporation, but instead of
the REPUBLIC PLANTERS BANK, at its office in Worldwide Garment Manufacturing, Inc., and that when he issued
Manila, Philippines, the sum of ___________ said promissory notes in behalf of Worldwide Garment Manufacturing,
PESOS(....) Philippine Currency... Inc., the same were in blank, the typewritten entries not appearing
therein prior to the time he affixed his signature.
On the right bottom margin of the promissory notes appeared the
signatures of Shozo Yamaguchi and Fermin Canlas above their In the mind of this Court, the only issue material to the resolution of
printed names with the phrase "and (in) his personal capacity" this appeal is whether private respondent Fermin Canlas is solidarily
typewritten below. At the bottom of the promissory notes appeared: liable with the other defendants, namely Pinch Manufacturing
"Please credit proceeds of this note to: Corporation and Shozo Yamaguchi, on the nine promissory notes.

________ Savings Account ______XX Current We hold that private respondent Fermin Canlas is solidarily liable on
Account each of the promissory notes bearing his signature for the following
reasons:
No. 1372-00257-6
The promissory motes are negotiable instruments and must be notes. With or without the presence of said phrase, private respondent
governed by the Negotiable Instruments Law. 2 Fermin Canlas is primarily liable as a co-maker of each of the notes
and his liability is that of a solidary debtor.
Under the Negotiable lnstruments Law, persons who write their
names on the face of promissory notes are makers and are liable as Finally, the respondent Court made a grave error in holding that an
such.3 By signing the notes, the maker promises to pay to the order of amendment in a corporation's Articles of Incorporation effecting a
the payee or any holder 4according to the tenor thereof.5 Based on the change of corporate name, in this case from Worldwide Garment
above provisions of law, there is no denying that private respondent manufacturing Inc to Pinch Manufacturing Corporation extinguished
Fermin Canlas is one of the co-makers of the promissory notes. As the personality of the original corporation.
such, he cannot escape liability arising therefrom.
The corporation, upon such change in its name, is in no sense a new
Where an instrument containing the words "I promise to pay" is signed corporation, nor the successor of the original corporation. It is the
by two or more persons, they are deemed to be jointly and severally same corporation with a different name, and its character is in no
liable thereon.6 An instrument which begins" with "I" ,We" , or "Either respect changed.10
of us" promise to, pay, when signed by two or more persons, makes
them solidarily liable. 7 The fact that the singular pronoun is used A change in the corporate name does not make a new corporation,
indicates that the promise is individual as to each other; meaning that and whether effected by special act or under a general law, has no
each of the co-signers is deemed to have made an independent affect on the identity of the corporation, or on its property, rights,
singular promise to pay the notes in full. or liabilities. 11

In the case at bar, the solidary liability of private respondent Fermin The corporation continues, as before, responsible in its new name for
Canlas is made clearer and certain, without reason for ambiguity, by all debts or other liabilities which it had previously contracted or
the presence of the phrase "joint and several" as describing the incurred.12
unconditional promise to pay to the order of Republic Planters Bank.
A joint and several note is one in which the makers bind themselves As a general rule, officers or directors under the old corporate name
both jointly and individually to the payee so that all may be sued bear no personal liability for acts done or contracts entered into by
together for its enforcement, or the creditor may select one or more as officers of the corporation, if duly authorized. Inasmuch as such
the object of the suit. 8 A joint and several obligation in common law officers acted in their capacity as agent of the old corporation and the
corresponds to a civil law solidary obligation; that is, one of several change of name meant only the continuation of the old juridical entity,
debtors bound in such wise that each is liable for the entire amount, the corporation bearing the same name is still bound by the acts of its
and not merely for his proportionate share. 9 By making a joint and agents if authorized by the Board. Under the Negotiable Instruments
several promise to pay to the order of Republic Planters Bank, private Law, the liability of a person signing as an agent is specifically
respondent Fermin Canlas assumed the solidary liability of a debtor provided for as follows:
and the payee may choose to enforce the notes against him alone or
jointly with Yamaguchi and Pinch Manufacturing Corporation as Sec. 20. Liability of a person signing as agent and so
solidary debtors. forth. Where the instrument contains or a person adds
to his signature words indicating that he signs for or on
As to whether the interpolation of the phrase "and (in) his personal behalf of a principal , or in a representative capacity, he
capacity" below the signatures of the makers in the notes will affect is not liable on the instrument if he was duly authorized;
the liability of the makers, We do not find it necessary to resolve and but the mere addition of words describing him as an
decide, because it is immaterial and will not affect to the liability of agent, or as filling a representative character, without
private respondent Fermin Canlas as a joint and several debtor of the
 disclosing his principal, does not exempt him from notes above their typewritten names, they bound themselves as
personal liability. unconditional makers. We take judicial notice of the customary
procedure of commercial banks of requiring their clientele to sign
Where the agent signs his name but nowhere in the instrument has he promissory notes prepared by the banks in printed form with blank
disclosed the fact that he is acting in a representative capacity or the spaces already filled up as per agreed terms of the loan, leaving the
name of the third party for whom he might have acted as agent, the borrowers-debtors to do nothing but read the terms and conditions
agent is personally liable to take holder of the instrument and cannot therein printed and to sign as makers or co-makers. When the notes
be permitted to prove that he was merely acting as agent of another were given to private respondent Fermin Canlas for his signature, the
and parol or extrinsic evidence is not admissible to avoid the agent's notes were complete in the sense that the spaces for the material
personal liability. 13 particular had been filled up by the bank as per agreement. The notes
were not incomplete instruments; neither were they given to private
On the private respondent's contention that the promissory notes were respondent Fermin Canlas in blank as he claims. Thus, Section 14 of
delivered to him in blank for his signature, we rule otherwise. A careful the NegotiabIe Instruments Law is not applicable.
examination of the notes in question shows that they are the
stereotype printed form of promissory notes generally used by The ruling in case of Reformina vs. Tomol relied upon by the appellate
commercial banking institutions to be signed by their clients in court in reducing the interest rate on the promissory notes from 16%
obtaining loans. Such printed notes are incomplete because there are to 12% per annum does not squarely apply to the instant petition. In
blank spaces to be filled up on material particulars such as payee's the abovecited case, the rate of 12% was applied to forebearances of
name, amount of the loan, rate of interest, date of issue and the money, goods or credit and court judgemets thereon, only in the
maturity date. The terms and conditions of the loan are printed on the absence of any stipulation between the parties.
note for the borrower-debtor 's perusal. An incomplete instrument
which has been delivered to the borrower for his signature is In the case at bar however , it was found by the trial court that the rate
governed by Section 14 of the Negotiable Instruments Law which of interest is 9% per annum, which interest rate the plaintiff may at
provides, in so far as relevant to this case, thus: any time without notice, raise within the limits allowed law. And so, as
of February 16, 1984 , the plaintiff had fixed the interest at 16% per
Sec. 14. Blanks: when may be filled. — Where the annum.
instrument is wanting in any material particular, the
person in possesion thereof has a prima facie authority This Court has held that the rates under the Usury Law, as amended
to complete it by filling up the blanks therein. ... In by Presidential Decree No. 116, are applicable only to interests by
order, however, that any such instrument when way of compensation for the use or forebearance of money. Article
completed may be enforced against any person who 2209 of the Civil Code, on the other hand, governs interests by way of
became a party thereto prior to its completion, it must damages.15 This fine distinction was not taken into consideration by
be filled up strictly in accordance with the authority the appellate court, which instead made a general statement that the
given and within a reasonable time... interest rate be at 12% per annum.

Proof that the notes were signed in blank was only the self-serving Inasmuch as this Court had declared that increases in interest rates
testimony of private respondent Fermin Canlas, as determined by the are not subject to any ceiling prescribed by the Usury Law, the
trial court, so that the trial court ''doubts the defendant (Canlas) signed appellate court erred in limiting the interest rates at 12% per annum.
in blank the promissory notes". We chose to believe the bank's Central Bank Circular No. 905, Series of 1982 removed the Usury
testimony that the notes were filled up before they were given to Law ceiling on interest rates. 16
private respondent Fermin Canlas and defendant Shozo Yamaguchi
for their signatures as joint and several promissors. For signing the
In the 1ight of the foregoing analysis and under the plain language of
the statute and jurisprudence on the matter, the decision of the
respondent: Court of Appeals absolving private respondent Fermin
Canlas is REVERSED and SET ASIDE. Judgement is hereby
rendered declaring private respondent Fermin Canlas jointly and
severally liable on all the nine promissory notes with the following
sums and at 16% interest per annum from the dates indicated, to wit:

Under the promissory note marked as exhibit A, the sum of

P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note marked as Exhibit B, the sum of P40,000.00 with
interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest
from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29,
1981 until fully paid; under the promissory note marked as Exhibit E,
the amount of P86,130.31 with interest from January 29, 1981; under
the promissory note marked as Exhibit F, the sum of P140,000.00
with interest from November 27, 1980 until fully paid; under the
promissory note marked as Exhibit G, the amount of P12,703.70 with
interest from November 27, 1980; the promissory note marked as
Exhibit H, the sum of P281,875.91 with interest from January 29,
1981; and the promissory note marked as Exhibit I, the sum of
P200,000.00 with interest on January 29, 1981.

The liabilities of defendants Pinch Manufacturing Corporation

(formerly Worldwide Garment Manufacturing, Inc.) and Shozo
Yamaguchi, for not having appealed from the decision of the trial
court, shall be adjudged in accordance with the judgment rendered by
the Court a quo.

With respect to attorney's fees, and penalty and service charges, the
private respondent Fermin Canlas is hereby held jointly and solidarity
liable with defendants for the amounts found, by the Court a quo. With
costs against private respondent.

SO ORDERED.
G.R. No. 121413 January 29, 2001 August 8, 1995 Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of Citibank Check No.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly SN-04867.
INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs. In G.R. No. 128604, petitioner Ford Philippines assails the October 15,
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, 1996 Decision3 of the Court of Appeals and its March 5, 1997
N.A., respondents. 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
G.R. No. 121479 January 29, 2001
Numbers SN-10597 and 16508.
FORD PHILIPPINES, INC., petitioner-plaintiff,
I. G.R. Nos. 121413 and 121479
vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, respondents. 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
G.R. No. 128604 January 29, 2001 favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third
FORD PHILIPPINES, INC., petitioner, quarter of 1977.
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK The aforesaid check was deposited with the degendant IBAA
and COURT OF APPEALS, respondents. (now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the
QUISUMBING, J.: proceeds of the check was paid to IBAA as collecting or
depository bank.
These consolidated petitions involve several fraudulently negotiated
checks. The proceeds of the same Citibank check of the plaintiff was
never paid to or received by the payee thereof, the Commissioner
The original actions a quo were instituted by Ford Philippines to recover of Internal Revenue.
from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank,
Philippine Commercial International Bank (PCIBank) [formerly Insular As a consequence, upon demand of the Bureau and/or
Bank of Asia and America], the value of several checks payable to the Commissioner of Internal Revenue, the plaintiff was compelled to
Commissioner of Internal Revenue, which were embezzled allegedly by make a second payment to the Bureau of Internal Revenue of its
an organized syndicate. 1âwphi1.nêt

percentage/manufacturers' sales taxes for the third quarter of

1977 and that said second payment of plaintiff in the amount of
G.R. Nos. 121413 and 121479 are twin petitions for review of the March P4,746,114.41 was duly received by the Bureau of Internal
27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, Revenue.
entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia
and America (now Philipppine Commercial International Bank), and the
It is further admitted by defendant Citibank that during the time of government or its authorized agent and instead encashed by
the transactions in question, plaintiff had been maintaining a unauthorized persons, hence, plaintiff has to pay the said amount
checking account with defendant Citibank; that Citibank Check within fifteen days from receipt of the letter. Upon advice of the
No. SN-04867 which was drawn and issued by the plaintiff in plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau
favor of the Commissioner of Internal Revenue was a crossed of Internal Revenue, the amount of P4,746,114.41, representing
check in that, on its face were two parallel lines and written in payment of plaintiff's percentage tax for the third quarter of 1977.
between said lines was the phrase "Payee's Account Only"; and
that defendant Citibank paid the full face value of the check in the As a consequence of defendant's refusal to reimburse plaintiff of
amount of P4,746,114.41 to the defendant IBAA. the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original
It has been duly established that for the payment of plaintiff's complaint before this Court.
percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated On December 24, 1985, defendant IBAA was merged with the
October 20, 1977, designating therein in Muntinlupa, Metro Philippine Commercial International Bank (PCI Bank) with the
Manila, as the authorized agent bank of Metrobanl, Alabang latter as the surviving entity.
branch to receive the tax payment of the plaintiff.
Defendant Citibank maintains that; the payment it made of
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, plaintiff's Citibank Check No. SN-04867 in the amount of
together with the Revenue Tax Receipt No. 18747002, was P4,746,114.41 "was in due course"; it merely relied on the
deposited with defendant IBAA, through its Ermita Branch. The clearing stamp of the depository/collecting bank, the defendant
latter accepted the check and sent it to the Central Clearing IBAA that "all prior indorsements and/or lack of indorsements
House for clearing on the samd day, with the indorsement at the guaranteed"; and the proximate cause of plaintiff's injury is the
back "all prior indorsements and/or lack of indorsements gross negligence of defendant IBAA in indorsing the plaintiff's
guaranteed." Thereafter, defendant IBAA presented the check for Citibank check in question.
payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the It is admitted that on December 19, 1977 when the proceeds of
amount of P4,746,114.41. Consequently, the amount of plaintiff's Citibank Check No. SN-048867 was paid to defendant
P4,746,114.41 was debited in plaintiff's account with the IBAA as collecting bank, plaintiff was maintaining a checking
defendant Citibank and the check was returned to the plaintiff. account with defendant Citibank."5

Upon verification, plaintiff discovered that its Citibank Check No. Although it was not among the stipulated facts, an investigation by the
SN-04867 in the amount of P4,746,114.41 was not paid to the National Bureau of Investigation (NBI) revealed that Citibank Check No.
Commissioner of Internal Revenue. Hence, in separate letters SN-04867 was recalled by Godofredo Rivera, the General Ledger
dated October 26, 1979, addressed to the defendants, the plaintiff Accountant of Ford. He purportedly needed to hold back the check
notified the latter that in case it will be re-assessed by the BIR for because there was an error in the computation of the tax due to the
the payment of the taxes covered by the said checks, then Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank
plaintiff shall hold the defendants liable for reimbursement of the replaced the check with two of its own Manager's Checks (MCs). Alleged
face value of the same. Both defendants denied liability and members of a syndicate later deposited the two MCs with the Pacific
refused to pay. Banking Corporation.

In a letter dated February 28, 1980 by the Acting Commissioner Ford, with leave of court, filed a third-party complaint before the trial court
of Internal Revenue addressed to the plaintiff - supposed to be impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as
Exhibit "D", the latter was officially informed, among others, that third party defendants. But the court dismissed the complaint against
its check in the amount of P4, 746,114.41 was not paid to the
PBC for lack of cause of action. The course likewise dismissed the third- 1. Dismissing the complaint in Civil Case No. 49287
party complaint against Godofredo Rivera because he could not be insofar as defendant Citibank N.A. is concerned;
served with summons as the NBI declared him as a "fugitive from
justice". 2. Ordering the defendant IBAA now PCI Bank to pay the
plaintiff the amount of P4,746,114.41 representing the
On June 15, 1989, the trial court rendered its decision, as follows: face value of plaintiff's Citibank Check No. SN-04867,
with interest thereon at the legal rate starting January 20,
"Premises considered, judgment is hereby rendered as follows: 1983, the date when the original complaint was filed until
the amount is fully paid;
"1. Ordering the defendants Citibank and IBAA (now PCI
Bank), jointly and severally, to pay the plaintiff the amount 3. Dismissing the counterclaims asserted by the
of P4,746,114.41 representing the face value of plaintiff's defendants against the plaintiff as well as that asserted by
Citibank Check No. SN-04867, with interest thereon at the the cross-defendant against the cross-claimant, for lack of
legal rate starting January 20, 1983, the date when the merits.
original complaint was filed until the amount is fully paid,
plus costs; Costs against the defendant IBAA (now PCI Bank).

"2. On defendant Citibank's cross-claim: ordering the IT IS SO ORDERED."7

cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter has PCI Bank moved to reconsider the above-quoted decision of the Court of
paid or may pay to the plaintiff in accordance with next Appeals, while Ford filed a "Motion for Partial Reconsideration." Both
preceding paragraph; motions were denied for lack of merit.

"3. The counterclaims asserted by the defendants against Separately, PCIBank and Ford filed before this Court, petitions for review
the plaintiff, as well as that asserted by the cross- by certiorari under Rule 45.
defendant against the cross-claimant are dismissed, for
lack of merits; and 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
"4. With costs against the defendants. it merely acted on the instruction of Ford and such casue of action had
already prescribed.
SO ORDERED."6
PCIBank sets forth the following issues for consideration:
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari to the I. Did the respondent court err when, after finding that the
Courts of Appeals. On March 27, 1995, the appellate court issued its petitioner acted on the check drawn by respondent Ford on the
judgment as follows: said respondent's instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the said check.
"WHEREFORE, in view of the foregoing, the court AFFIRMS the
appealed decision with modifications. II. Did the respondent court err when it did not find prescription in
favor of the petitioner.8
The court hereby renderes judgment:
In a counter move, Ford filed its petition docketed as G.R. No. 121479, 3. PCIBank is barred from raising issues of fact in the
questioning the same decision and resolution of the Court of Appeals, instant proceedings.12
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 4. Petitioner Ford's cause of action had not prescribed.13
loss.
II. G.R. No. 128604
In G.R. No. 121479, appellant Ford presents the following propositions
for consideration: The same sysndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford's percentage taxes appertaining to the
I. Respondent Citibank is liable to petitioner Ford considering second quarter of 1978 and the first quarter of 1979.
that:
The facts as narrated by the Court of Appeals are as follows:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check and a Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount
depositor of respondent Citibank, an absolute and of P5,851,706.37 representing the percentage tax due for the second
contractual duty to pay the proceeds of the subject check quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR
only to the payee thereof, the Commissioner of Internal Revenue Tax Receipt No. 28645385 was issued for the said purpose.
Revenue.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in
2. Respondent Citibank failed to observe its duty as the amount of P6,311,591.73, representing the payment of percentage
banker with respect to the subject check, which was tax for the first quarter of 1979 and payable to the Commissioner of
crossed and payable to "Payee's Account Only." Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was
issued for the said purpose.
3. Respondent Citibank raises an issue for the first time
on appeal; thus the same should not be considered by the Both checks were "crossed checks" and contain two diagonal lines on its
Honorable Court. upper corner between, which were written the words "payable to the
payee's account only."
4. As correctly held by the trial court, there is no evidence
of gross negligence on the part of petitioner Ford.9 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
II. PCI Bank is liable to petitioner Ford considering that: payments the corresponding periods above-mentioned.

1. There were no instructions from petitioner Ford to As far as the BIR is concernced, the said two BIR Revenue Tax Receipts
deliver the proceeds of the subject check to a person were considered "fake and spurious". This anomaly was confirmed by the
other than the payee named therein, the Commissioner of NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR
the Bureau of Internal Revenue; thus, PCIBank's only a new, while an action was filed against Citibank and PCIBank for the
obligation is to deliver the proceeds to the Commissioner recovery of the amount of Citibank Check Numbers SN-10597 and
of the Bureau of Internal Revenue.10 16508.

2. PCIBank which affixed its indorsement on the subject The Regional Trial Court of Makati, Branch 57, which tried the case,
check ("All prior indorsement and/or lack of indorsement made its findings on the modus operandi of the syndicate, as follows:
guaranteed"), is liable as collecting bank.11
"A certain Mr. Godofredo Rivera was employed by the plaintiff check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR
FORD as its General Ledger Accountant. As such, he prepared Collection Agent who provided the fake and spurious revenue tax
the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] receipts to make it appear that the BIR had received FORD's tax
for payment to the BIR. Instead, however, fo delivering the same payments.
of the payee, he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San Andres Several other persons and entities were utilized by the syndicate
Branch of PCIB.* In connivance with one Winston Dulay, Castro as conduits in the disbursements of the proceeds of the two
himself subsequently opened a Checking Account in the name of checks, but like the aforementioned participants in the
a fictitious person denominated as 'Reynaldo reyes' in the conspiracy, have not been impleaded in the present case. The
Meralco Branch of PCIBank where Dulay works as Assistant manner by which the said funds were distributed among them are
Manager. traceable from the record of checks drawn against the original
"Reynaldo Reyes" account and indubitably identify the parties
After an initial deposit of P100.00 to validate the account, Castro who illegally benefited therefrom and readily indicate in what
deposited a worthless Bank of America Check in exactly the amounts they did so."14
same amount as the first FORD check (Exh. "A", P5,851,706.37)
while this worthless check was coursed through PCIB's main On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
office enroute to the Central Bank for clearing, replaced this drawee-bank, Citibank, liable for the value of the two checks while
worthless check with FORD's Exhibit 'A' and accordingly adsolving PCIBank from any liability, disposing as follows:
tampered the accompanying documents to cover the
replacement. As a result, Exhibit 'A' was cleared by defendant "WHEREFORE, judgment is hereby rendered sentencing
CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' defendant CITIBANK to reimburse plaintiff FORD the total
was credited at the PCIB Meralco Branch with the total amount of amount of P12,163,298.10 prayed for in its complaint, with 6%
the FORD check Exhibit 'A'. The same method was again utilized interest thereon from date of first written demand until full
by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN- payment, plus P300,000.00 attorney's fees and expenses
16508] which was subsequently pilfered by Alexis Marindo, litigation, and to pay the defendant, PCIB (on its counterclaim to
Rivera's Assistant at FORD. crossclaim) the sum of P300,000.00 as attorney's fees and costs
of litigation, and pay the costs.
From this 'Reynaldo Reyes' account, Castro drew various checks
distributing the sahres of the other participating conspirators SO ORDERED."15
namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R.
Both Ford and Citibank appealed to the Court of Appeals which
DE LEON a customs broker who negotiated the initial contact
affirmed, in toto, the decision of the trial court. Hence, this petition.
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 Petitioner Ford prays that judgment be rendered setting aside the portion
accountant who passed on the first check (Exhibit "A") to Castro; of the Court of Appeals decision and its resolution dated March 5, 1997,
(5) REMERTO CASTRO, PCIB's pro-manager at San Andres with respect to the dismissal of the complaint against PCIBank and
who performed the switching of checks in the clearing process holding Citibank solely responsible for the proceeds of Citibank Check
and opened the fictitious Reynaldo Reyes account at the PCIB Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73
Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant respectively.
Manager at its Meralco Branch, who assisted Castro in switching
the checks in the clearing process and facilitated the opening of Ford avers that the Court of Appeals erred in dismissing the complaint
the fictitious Reynaldo Reyes' bank account; (7) ALEXIS against defendant PCIBank considering that:
MARINDO, Rivera's Assistant at FORD, who gave the second
 I. Defendant PCIBank was clearly negligent when it failed to Pursuant to this provision, it is vital to show that the negotiation is made
exercise the diligence required to be exercised by it as a banking by the perpetator in breach of faith amounting to fraud. The person
insitution. 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
II. Defendant PCIBank clearly failed to observe the diligence performance of his duties, he may set up the personal defense to escape
required in the selection and supervision of its officers and liability and recover from other parties who. Though their own negligence,
employees. alowed the commission of the crime.

III. Defendant PCIBank was, due to its negligence, clearly liable In this case, we note that the direct perpetrators of the offense, namely
for the loss or damage resulting to the plaintiff Ford as a the embezzlers belonging to a syndicate, are now fugitives from justice.
consequence of the substitution of the check consistent with They have, even if temporarily, escaped liability for the embezzlement of
Section 5 of Central Bank Circular No. 580 series of 1977. 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
IV. Assuming arguedo that defedant PCIBank did not accept, millions. It all boils down to thequestion of liability based on the degree of
endorse or negotiate in due course the subject checks, it is liable, negligence among the parties concerned.
under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it its Central Foremost, we must resolve whether the injured party, Ford, is guilty of the
bank account.16 "imputed contributory negligence" that would defeat its claim for
reimbursement, bearing ing mind that its employees, Godofredo Rivera
The main issue presented for our consideration by these petitions could and Alexis Marindo, were among the members of the syndicate.
be simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of Citibank points out that Ford allowed its very own employee, Godofredo
the checks intended as payment to the Commissioner of Internal Rivera, to negotiate the checks to his co-conspirators, instead of
Revenue? Or has Ford's cause of action already prescribed? delivering them to the designated authorized collecting bank (Metrobank-
Alabang) of the payee, CIR. Citibank bewails the fact that Ford was
Note that in these cases, the checks were drawn against the drawee remiss in the supervision and control of its own employees, inasmuch as
bank, but the title of the person negotiating the same was allegedly it only discovered the syndicate's activities through the information given
defective because the instrument was obtained by fraud and unlawful by the payee of the checks after an unreasonable period of time.
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 PCIBank also blames Ford of negligence when it allegedly authorized
settlement of the approprite quarterly percentage taxes of Ford, the Godofredo Rivera to divert the proceeds of Citibank Check No. SN-
checks were diverted and encashed for the eventual distribution among 04867, instead of using it to pay the BIR. As to the subsequent run-
the mmbers of the syndicate. As to the unlawful negotiation of the check around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank
the applicable law is Section 55 of the Negotiable Instruments Law (NIL), claims that the proximate cause of the damge to Ford lies in its own
which provides: officers and employees who carried out the fradulent schemes and the
transactions. These circumstances were not checked by other officers of
"When title defective -- The title of a person who negotiates an the company including its comptroller or internal auditor. PCIBank
instrument is defective within the meaning of this Act when he contends that the inaction of Ford despite the enormity of the amount
obtained the instrument, or any signature thereto, by fraud, involved was a sheer negligence and stated that, as between two
duress, or fore and fear, or other unlawful means, or for an illegal innocent persons, one of whom must suffer the consequences of a
consideration, or when he negotiates it in breach of faith or under breach of trust, the one who made it possible, by his act of negligence,
such circumstances as amount to a fraud." must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. was not in theordinary course of business which could have prompted
It avers that there was no evidence presented before the trial court PCIBank to validate the same.
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 As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it
a finding therein that the drawer was negligent, the drawee bank was still was established that these checks were made payable to the CIR. Both
ordered to pay damages. were crossed checks. These checks were apparently turned around by
Ford's emploees, who were acting on their own personal capacity.
Furthermore, Ford contends the Godofredo rivera was not authorized to
make any representation in its behalf, specifically, to divert the proceeds Given these circumstances, the mere fact that the forgery was committed
of the checks. It adds that Citibank raised the issue of imputed by a drawer-payor's confidential employee or agent, who by virtue of his
negligence against Ford for the first time on appeal. Thus, it should not position had unusual facilities for perpertrating the fraud and imposing the
be considered by this Court. forged paper upon the bank, does notentitle the bank toshift the loss to
the drawer-payor, in the absence of some circumstance raising estoppel
On this point, jurisprudence regarding the imputed negligence of against the drawer.21 This rule likewise applies to the checks fraudulently
employer in a master-servant relationship is instructive. Since a master negotiated or diverted by the confidential employees who hold them in
may be held for his servant's wrongful act, the law imputes to the master their possession.
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 With respect to the negligence of PCIBank in the payment of the three
conduct is the negligence or wrongful conduct of the master, for which he checks involved, separately, the trial courts found variations between the
is liable.18 The general rule is that if the master is injured by the negotiation of Citibank Check No. SN-04867 and the misapplication of
negligence of a third person and by the concuring contributory negligence total proceeds of Checks SN-10597 and 16508. Therefore, we have to
of his own servant or agent, the latter's negligence is imputed to his scrutinize, separately, PCIBank's share of negligence when the syndicate
superior and will defeat the superior's action against the third person, achieved its ultimate agenda of stealing the proceeds of these checks.
asuming, of course that the contributory negligence was the proximate
cause of the injury of which complaint is made.19 G.R. Nos. 121413 and 121479

Accordingly, we need to determine whether or not the action of Citibank Check No. SN-04867 was deposited at PCIBank through its
Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis Ermita Branch. It was coursed through the ordinary banking transaction,
Marindo, his assistant, was the proximate cause of the loss or damage. sent to Central Clearing with the indorsement at the back "all prior
AS defined, proximate cause is that which, in the natural and continuous indorsements and/or lack of indorsements guaranteed," and was
sequence, unbroken by any efficient, intervening cause produces the presented to Citibank for payment. Thereafter PCIBank, instead of
injury and without the result would not have occurred.20 remitting the proceeds to the CIR, prepared two of its Manager's checks
and enabled the syndicate to encash the same.
It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not On record, PCIBank failed to verify the authority of Mr. Rivera to
the proximate cause of encashing the checks payable to the CIR. The negotiate the checks. The neglect of PCIBank employees to verify
degree of Ford's negligence, if any, could not be characterized as the whether his letter requesting for the replacement of the Citibank Check
proximate cause of the injury to the parties. No. SN-04867 was duly authorized, showed lack of care and prudence
required in the circumstances.
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 Furthermore, it was admitted that PCIBank is authorized to collect the
instruction to replace the said check with PCIBank's Manager's Check 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 Indeed, the crossing of the check with the phrase "Payee's Account
court, to wit: 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
"xxx. Since the questioned crossed check was deposited with ascertain that the check be deposited in payee's account only. Therefore,
IBAA [now PCIBank], which claimed to be a depository/collecting it is the collecting bank (PCIBank) which is bound to scruninize the check
bank of BIR, it has the responsibility to make sure that the check and to know its depositors before it could make the clearing indorsement
in question is deposited in Payee's account only. "all prior indorsements and/or lack of indorsement guaranteed".

xxx xxx xxx In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
As agent of the BIR (the payee of the check), defendant IBAA
should receive instructions only from its principal BIR and not "Anent petitioner's liability on said instruments, this court is in full
from any other person especially so when that person is not accord with the ruling of the PCHC's Board of Directors that:
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 'In presenting the checks for clearing and for payment, the
one Godofredo Rivera and in his signature considering that the defendant made an express guarantee on the validity of "all prior
plaintiff is not a client of the defendant IBAA." endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS
It is a well-settled rule that the relationship between the payee or holder AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without
of commercial paper and the bank to which it is sent for collection is, in such warranty, plaintiff would not have paid on the checks.'
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 No amount of legal jargon can reverse the clear meaning of
the payee or holder.23 defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
Even considering arguendo, that the diversion of the amount of a check the falsity of its representation."25
payable to the collecting bank in behalf of the designated payee may be
allowed, still such diversion must be properly authorized by the payor. Lastly, banking business requires that the one who first cashes and
Otherwise stated, the diversion can be justified only by proof of authority negotiates the check must take some percautions to learn whether or not
from the drawer, or that the drawer has clothed his agent with apparent it is genuine. And if the one cashing the check through indifference or
authority to receive the proceeds of such check. othe circumstance assists the forger in committing the fraud, he should
not be permitted to retain the proceeds of the check from the drawee
Citibank further argues that PCI Bank's clearing stamp appearing at the whose sole fault was that it did not discover the forgery or the defect in
back of the questioned checks stating that ALL PRIOR INDORSEMENTS the title of the person negotiating the instrument before paying the check.
AND/OR LACK OF INDORSEMENTS GURANTEED should render For this reason, a bank which cashes a check drawn upon another bank,
PCIBank liable because it made it pass through the clearing house and without requiring proof as to the identity of persons presenting it, or
therefore Citibank had no other option but to pay it. Thus, Citibank had no making inquiries with regard to them, cannot hold the proceeds against
other option but to pay it. Thus, Citibank assets that the proximate cause the drawee when the proceeds of the checks were afterwards diverted to
of Ford's injury is the gross negligence of PCIBank. Since the questione the hands of a third party. In such cases the drawee bank has a right to
dcrossed check was deposited with PCIBank, which claimed to be a believe that the cashing bank (or the collecting bank) had, by the usual
depository/collecting bank of the BIR, it had the responsibility to make proper investigation, satisfied itself of the authenticity of the negotiation of
sure that the check in questions is deposited in Payee's account only. 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 SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-
money paid on the check.26 conspirator Assistant Manager apparently performed their activities using
facilities in their official capacity or authority but for their personal and
Having established that the collecting bank's negligence is the proximate private gain or benefit.
cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867. 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
G.R. No. 128604 to perpetrate in the apparent course of their employment; nor will t be
permitted to shirk its responsibility for such frauds, even though no
The trial court and the Court of Appeals found that PCIBank had no benefit may accrue to the bank therefrom. For the general rule is that a
official act in the ordinary course of business that would attribute to it the bank is liable for the fraudulent acts or representations of an officer or
case of the embezzlement of Citibank Check Numbers SN-10597 and agent acting within the course and apparent scope of his employment or
16508, because PCIBank did not actually receive nor hold the two Ford authority.29 And if an officer or employee of a bank, in his official capacity,
checks at all. The trial court held, thus: 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
"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 Moreover, as correctly pointed out by Ford, Section 531 of Central Bank
operation (involving the checks while in transit for "clearing") were Circular No. 580, Series of 1977 provides that any theft affecting items in
the clandestine or hidden actuations performed by the members transit for clearing, shall be for the account of sending bank, which in this
of the syndicate in their own personl, covert and private capacity case is PCIBank.
and done without the knowledge of the defendant PCIBank…"27
But in this case, responsibility for negligence does not lie on PCIBank's
In this case, there was no evidence presented confirming the conscious shoulders alone.
particiapation of PCIBank in the embezzlement. As a general rule,
however, a banking corporation is liable for the wrongful or tortuous acts The evidence on record shows that Citibank as drawee bank was
and declarations of its officers or agents within the course and scope of likewise negligent in the performance of its duties. Citibank failed to
their employment.28 A bank will be held liable for the negligence of its establish that its payment of Ford's checjs were made in due course and
officers or agents when acting within the course and scope of their legally in order. In its defense, Citibank claims the genuineness and due
employment. It may be liable for the tortuous acts of its officers even as execution of said checks, considering that Citibank (1) has no knowledge
regards that species of tort of which malice is an essential element. In of any informity in the issuance of the checks in question (2) coupled by
this case, we find a situation where the PCIBank appears also to be the the fact that said checks were sufficiently funded and (3) the
victim of the scheme hatched by a syndicate in which its own endorsement of the Payee or lack thereof was guaranteed by PCI Bank
management employees had particiapted. (formerly IBAA), thus, it has the obligation to honor and pay the same.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, For its part, Ford contends that Citibank as the drawee bank owes to
received Citibank Check Numbers SN-10597 and 16508. He passed the Ford an absolute and contractual duty to pay the proceeds of the subject
checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco check only to the payee thereof, the CIR. Citing Section 6232 of the
Branch, who helped Castro open a Checking account of a fictitious Negotiable Instruments Law, Ford argues that by accepting the
person named "Reynaldo Reyes." Castro deposited a worthless Bank of instrument, the acceptro which is Citibank engages that it will pay
America Check in exactly the same amount of Ford checks. The according to the tenor of its acceptance, and that it will pay only to the
syndicate tampered with the checks and succeeded in replacing the payee, (the CIR), considering the fact that here the check was crossed
worthless checks and the eventual encashment of Citibank Check Nos. with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the highest degree of diligence in the selection and supervision of their
damages incurred by Ford on Citibank Checks Numbers SN 10597 and employees.38
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with On the issue of prescription, PCIBank claims that the action of Ford had
Ford and such degree of culpability contributed to the damage caused to prescribed because of its inability to seek judicial relief seasonably,
the latter. On this score, we agree with the respondent court's ruling. considering that the alleged negligent act took place prior to December
19, 1977 but the relief was sought only in 1983, or seven years
Citibank should have scrutinized Citibank Check Numbers SN 10597 and thereafter.
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 The statute of limitations begins to run when the bank gives the depositor
at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any notice of the payment, which is ordinarily when the check is returned to
initials. Citibank failed to notice and verify the absence of the clearing the alleged drawer as a voucher with a statement of his account,39 and an
stamps. Had this been duly examined, the switching of the worthless action upon a check is ordinarily governed by the statutory period
checks to Citibank Check Nos. 10597 and 16508 would have been applicable to instruments in writing.40
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 Our laws on the matter provide that the action upon a written contract
checks should be paid only to its designated payee. The fact that the must be brought within ten year from the time the right of action
drawee bank did not discover the irregularity seasonably, in our view, accrues.41 hence, the reckoning time for the prescriptive period begins
consitutes negligence in carrying out the bank's duty to its depositors. when the instrument was issued and the corresponding check was
The point is that as a business affected with public interest and because returned by the bank to its depositor (normally a month thereafter).
of the nature of its functions, the bank is under obligation to treat the Applying the same rule, the cause of action for the recovery of the
accounts of its depositors with meticulous care, always having in mind proceeds of Citibank Check No. SN 04867 would normally be a month
the fiduciary nature of their relationship.33 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
Thus, invoking the doctrine of comparative negligence, we are of the view cause of action was filed on January 20, 1984, barely six years had
that both PCIBank and Citibank failed in their respective obligations and lapsed. Thus, we conclude that Ford's cause of action to recover the
both were negligent in the selection and supervision of their employees amount of Citibank Check No. SN 04867 was seasonably filed within the
resulting in the encashment of Citibank Check Nos. SN 10597 AND period provided by law.
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. 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
Time and again, we have stressed that banking business is so impressed passbook, statements of account, and cancelled checks and to give
with public interest where the trust and confidence of the public in general notice within a reasonable time (or as required by statute) of any
is of paramount umportance such that the appropriate standard of discrepancy which it may in the exercise of due care and diligence find
diligence must be very high, if not the highest, degree of diligence.34 A therein, serves to mitigate the banks' liability by reducing the award of
bank's liability as obligor is not merely vicarious but primary, wherein the interest from twelve percent (12%) to six percent (6%) per annum. As
defense of exercise of due diligence in the selection and supervision of its provided in Article 1172 of the Civil Code of the Philippines, respondibility
employees is of no moment.35 arising from negligence in the performance of every kind of obligation is
also demandable, but such liability may be regulated by the courts,
Banks handle daily transactions involving millions of pesos.36 By the very according to the circumstances. In quasi-delicts, the contributory
nature of their work the degree of responsibility, care and trustworthiness negligence of the plaintiff shall reduce the damages that he may
expected of their employees and officials is far greater than those of recover.42
ordinary clerks and employees.37 Banks are expected to exercise the
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.
1âw phi 1.nêt

Costs against Philippine Commercial International Bank and Citibank

N.A.

SO ORDERED.
G.R. No. 107382/G.R. No. 107612 January 31, 1996 In January 1981, the books of account of the Provincial Treasurer were
post-audited by the Provincial Auditor. It was then discovered that the
ASSOCIATED BANK, petitioner, hospital did not receive several allotment checks drawn by the Province.
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and On February 19, 1981, the Provincial Treasurer requested the manager
PHILIPPINE NATIONAL BANK, respondents. of the PNB to return all of its cleared checks which were issued from
1977 to 1980 in order to verify the regularity of their encashment. After
xxxxxxxxxxxxxxxxxxxxx the checks were examined, the Provincial Treasurer learned that 30
checks amounting to P203,300.00 were encashed by one Fausto
G.R. No. 107612 January 31, 1996 Pangilinan, with the Associated Bank acting as collecting bank.

PHILIPPINE NATIONAL BANK, petitioner, It turned out that Fausto Pangilinan, who was the administrative officer
vs. and cashier of payee hospital until his retirement on February 28, 1978,
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and collected the questioned checks from the office of the Provincial
ASSOCIATED BANK, respondents. Treasurer. He claimed to be assisting or helping the hospital follow up the
release of the checks and had official receipts. 3Pangilinan sought to
encash the first check 4 with Associated Bank. However, the manager of
DECISION
Associated Bank refused and suggested that Pangilinan deposit the
check in his personal savings account with the same bank. Pangilinan
ROMERO, J.: was able to withdraw the money when the check was cleared and paid by
the drawee bank, PNB.
Where thirty checks bearing forged endorsements are paid, who bears
the loss, the drawer, the drawee bank or the collecting bank? After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the second
This is the main issue in these consolidated petitions for review assailing check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as
the decision of the Court of Appeals in "Province of Tarlac v. Philippine for twenty-eight other checks of various amounts and on various dates.
National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. The last check negotiated by Pangilinan was for f8,000.00 and dated
No. CV No. 17962). 1 February 10, 1981. 6 All the checks bore the stamp of Associated Bank
which reads "All prior endorsements guaranteed ASSOCIATED BANK."
The facts of the case are as follows:
Jesus David, the manager of Associated Bank testified that Pangilinan
The Province of Tarlac maintains a current account with the Philippine made it appear that the checks were paid to him for certain projects with
National Bank (PNB) Tarlac Branch where the provincial funds are the hospital. 7 He did not find as irregular the fact that the checks were not
deposited. Checks issued by the Province are signed by the Provincial payable to Pangilinan but to the Concepcion Emergency Hospital. While
Treasurer and countersigned by the Provincial Auditor or the Secretary of he admitted that his wife and Pangilinan's wife are first cousins, the
the Sangguniang Bayan. manager denied having given Pangilinan preferential treatment on this
account. 8
A portion of the funds of the province is allocated to the Concepcion
Emergency Hospital. 2 The allotment checks for said government hospital On February 26, 1981, the Provincial Treasurer wrote the manager of the
are drawn to the order of "Concepcion Emergency Hospital, Concepcion, PNB seeking the restoration of the various amounts debited from the
Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, current account of the Province. 9
Tarlac." The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.
In turn, the PNB manager demanded reimbursement from the Associated Hence these consolidated petitions which seek a reversal of respondent
Bank on May 15, 1981. 10 appellate court's decision.

As both banks resisted payment, the Province of Tarlac brought suit PNB assigned two errors. First, the bank contends that respondent court
against PNB which, in turn, impleaded Associated Bank as third-party erred in exempting the Province of Tarlac from liability when, in fact, the
defendant. The latter then filed a fourth-party complaint against Adena latter was negligent because it delivered and released the questioned
Canlas and Fausto Pangilinan. 11 checks to Fausto Pangilinan who was then already retired as the
hospital's cashier and administrative officer. PNB also maintains its
After trial on the merits, the lower court rendered its decision on March innocence and alleges that as between two innocent persons, the one
21, 1988, disposing as follows: whose act was the cause of the loss, in this case the Province of Tarlac,
bears the loss.
WHEREFORE, in view of the foregoing, judgment is hereby
rendered: Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According
1. On the basic complaint, in favor of plaintiff Province of Tarlac to petitioner bank, respondent appellate Court should have directed
and against defendant Philippine National Bank (PNB), ordering Associated Bank to pay the adjudged liability directly to the Province of
the latter to pay to the former, the sum of Two Hundred Three Tarlac to avoid circuity. 14
Thousand Three Hundred (P203,300.00) Pesos with legal interest
thereon from March 20, 1981 until fully paid; Associated Bank, on the other hand, argues that the order of liability
should be totally reversed, with the drawee bank (PNB) solely and
2. On the third-party complaint, in favor of defendant/third-party ultimately bearing the loss.
plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter Respondent court allegedly erred in applying Section 23 of the Philippine
to reimburse to the former the amount of Two Hundred Three Clearing House Rules instead of Central Bank Circular No. 580, which,
Thousand Three Hundred (P203,300.00) Pesos with legal being an administrative regulation issued pursuant to law, has the force
interests thereon from March 20, 1981 until fully paid;. and effect of law. 15 The PCHC Rules are merely contractual stipulations
among and between member-banks. As such, they cannot prevail over
3. On the fourth-party complaint, the same is hereby ordered the aforesaid CB Circular.
dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person It likewise contends that PNB, the drawee bank, is estopped from
of fourth-party defendant Fausto Pangilinan as against the latter. asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all
4. On the counterclaims on the complaint, third-party complaint prior indorsements), it merely followed a mandatory requirement for
and fourth-party complaint, the same are hereby ordered clearing and had no choice but to place the stamp of guarantee;
dismissed for lack of merit. otherwise, there would be no clearing. The bank will be in a "no-win"
situation and will always bear the loss as against the drawee bank. 16
SO ORDERED. 12
Associated Bank also claims that since PNB already cleared and paid the
value of the forged checks in question, it is now estopped from asserting
PNB and Associated Bank appealed to the Court of
the defense that Associated Bank guaranteed prior indorsements. The
Appeals. 13 Respondent court affirmed the trial court's decision in toto on
drawee bank allegedly has the primary duty to verify the genuineness of
September 30, 1992.
payee's indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims In bearer instruments, the signature of the payee or holder is
that PNB was at fault and should solely bear the loss because it cleared unnecessary to pass title to the instrument. Hence, when the indorsement
and paid the forged checks. is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course. 21
xxx xxx xxx
The checks involved in this case are order instruments, hence, the
The case at bench concerns checks payable to the order of Concepcion following discussion is made with reference to the effects of a forged
Emergency Hospital or its Chief. They were properly issued and bear the indorsement on an instrument payable to order.
genuine signatures of the drawer, the Province of Tarlac. The infirmity in
the questioned checks lies in the payee's (Concepcion Emergency Where the instrument is payable to order at the time of the forgery, such
Hospital) indorsements which are forgeries. At the time of their as the checks in this case, the signature of its rightful holder (here, the
indorsement, the checks were order instruments. payee hospital) is essential to transfer title to the same instrument. When
the holder's indorsement is forged, all parties prior to the forgery may
Checks having forged indorsements should be differentiated from forged raise the real defense of forgery against all parties subsequent thereto. 22
checks or checks bearing the forged signature of the drawer.
An indorser of an order instrument warrants "that the instrument is
Section 23 of the Negotiable Instruments Law (NIL) provides: genuine and in all respects what it purports to be; that he has a good title
to it; that all prior parties had capacity to contract; and that the instrument
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a is at the time of his indorsement valid and subsisting." 23 He cannot
signature is forged or made without authority of the person whose interpose the defense that signatures prior to him are forged.
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 A collecting bank where a check is deposited and which indorses the
payment thereof against any party thereto, can be acquired check upon presentment with the drawee bank, is such an indorser. So
through or under such signature unless the party against whom it even if the indorsement on the check deposited by the banks's client is
is sought to enforce such right is precluded from setting up the forged, the collecting bank is bound by his warranties as an indorser and
forgery or want of authority. cannot set up the defense of forgery as against the drawee bank.

A forged signature, whether it be that of the drawer or the payee, is The bank on which a check is drawn, known as the drawee bank, is
wholly inoperative and no one can gain title to the instrument through it. A under strict liability to pay the check to the order of the payee. The
person whose signature to an instrument was forged was never a party drawer's instructions are reflected on the face and by the terms of the
and never consented to the contract which allegedly gave rise to such check. Payment under a forged indorsement is not to the drawer's order.
instrument. 18 Section 23 does not avoid the instrument but only the forged When the drawee bank pays a person other than the payee, it does not
signature. 19 Thus, a forged indorsement does not operate as the payee's comply with the terms of the check and violates its duty to charge its
indorsement. customer's (the drawer) account only for properly payable items. Since
the drawee bank did not pay a holder or other person entitled to receive
The exception to the general rule in Section 23 is where "a party against payment, it has no right to reimbursement from the drawer. 24 The general
whom it is sought to enforce a right is precluded from setting up the rule then is that the drawee bank may not debit the drawer's account and
forgery or want of authority." Parties who warrant or admit the is not entitled to indemnification from the drawer. 25 The risk of loss must
genuineness of the signature in question and those who, by their acts, perforce fall on the drawee bank.
silence or negligence are estopped from setting up the defense of
forgery, are precluded from using this defense. Indorsers, persons However, if the drawee bank can prove a failure by the customer/drawer
negotiating by delivery and acceptors are warrantors of the genuineness to exercise ordinary care that substantially contributed to the making of
of the signatures on the instrument. 20 the forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of The Court has consistently ruled that "the collecting bank or last endorser
substantially contributing to the loss, then such loss from the forgery can generally suffers the loss because it has the duty to ascertain the
be apportioned between the negligent drawer and the negligent bank. 26 genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the
In cases involving a forged check, where the drawer's signature is forged, party making the presentment has done its duty to ascertain the
the drawer can recover from the drawee bank. No drawee bank has a genuineness of the endorsements." 31
right to pay a forged check. If it does, it shall have to recredit the amount
of the check to the account of the drawer. The liability chain ends with the The drawee bank is not similarly situated as the collecting bank because
drawee bank whose responsibility it is to know the drawer's signature the former makes no warranty as to the genuineness. of any
since the latter is its customer. 27 indorsement. 32 The drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement because the drawer is
In cases involving checks with forged indorsements, such as the present its client.
petition, the chain of liability does not end with the drawee bank. The
drawee bank may not debit the account of the drawer but may generally Moreover, the collecting bank is made liable because it is privy to the
pass liability back through the collection chain to the party who took from depositor who negotiated the check. The bank knows him, his address
the forger and, of course, to the forger himself, if available. 28 In other and history because he is a client. It has taken a risk on his deposit. The
words, the drawee bank canseek reimbursement or a return of the bank is also in a better position to detect forgery, fraud or irregularity in
amount it paid from the presentor bank or person. 29 Theoretically, the the indorsement.
latter can demand reimbursement from the person who indorsed the
check to it and so on. The loss falls on the party who took the check from Hence, the drawee bank can recover the amount paid on the check
the forger, or on the forger himself. bearing a forged indorsement from the collecting bank. However, a
drawee bank has the duty to promptly inform the presentor of the forgery
In this case, the checks were indorsed by the collecting bank (Associated upon discovery. If the drawee bank delays in informing the presentor of
Bank) to the drawee bank (PNB). The former will necessarily be liable to the forgery, thereby depriving said presentor of the right to recover from
the latter for the checks bearing forged indorsements. If the forgery is that the forger, the former is deemed negligent and can no longer recover
of the payee's or holder's indorsement, the collecting bank is held liable, from the presentor. 33
without prejudice to the latter proceeding against the forger.
Applying these rules to the case at bench, PNB, the drawee bank, cannot
Since a forged indorsement is inoperative, the collecting bank had no debit the current account of the Province of Tarlac because it paid checks
right to be paid by the drawee bank. The former must necessarily return which bore forged indorsements. However, if the Province of Tarlac as
the money paid by the latter because it was paid wrongfully. 30 drawer was negligent to the point of substantially contributing to the loss,
then the drawee bank PNB can charge its account. If both drawee bank-
More importantly, by reason of the statutory warranty of a general PNB and drawer-Province of Tarlac were negligent, the loss should be
indorser in section 66 of the Negotiable Instruments Law, a collecting properly apportioned between them.
bank which indorses a check bearing a forged indorsement and presents
it to the drawee bank guarantees all prior indorsements, including the The loss incurred by drawee bank-PNB can be passed on to the
forged indorsement. It warrants that the instrument is genuine, and that it collecting bank-Associated Bank which presented and indorsed the
is valid and subsisting at the time of his indorsement. Because the checks to it. Associated Bank can, in turn, hold the forger, Fausto
indorsement is a forgery, the collecting bank commits a breach of this Pangilinan, liable.
warranty and will be accountable to the drawee bank. This liability
scheme operates without regard to fault on the part of the If PNB negligently delayed in informing Associated Bank of the forgery,
collecting/presenting bank. Even if the latter bank was not negligent, it thus depriving the latter of the opportunity to recover from the forger, it
would still be liable to the drawee bank because of its indorsement. forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province The failure of the Province of Tarlac to exercise due care contributed to a
of Tarlac was equally negligent and should, therefore, share the burden significant degree to the loss tantamount to negligence. Hence, the
of loss from the checks bearing a forged indorsement. Province of Tarlac should be liable for part of the total amount paid on the
questioned checks.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks
when the latter, having already retired from government service, was no The drawee bank PNB also breached its duty to pay only according to the
longer connected with the hospital. With the exception of the first check terms of the check. Hence, it cannot escape liability and should also bear
(dated January 17, 1978), all the checks were issued and released after part of the loss.
Pangilinan's retirement on February 28, 1978. After nearly three years,
the Treasurer's office was still releasing the checks to the retired cashier. As earlier stated, PNB can recover from the collecting bank.
In addition, some of the aid allotment checks were released to Pangilinan
and the others to Elizabeth Juco, the new cashier. The fact that there In the case of Associated Bank v. CA, 35 six crossed checks with forged
were now two persons collecting the checks for the hospital is an indorsements were deposited in the forger's account with the collecting
unmistakable sign of an irregularity which should have alerted employees bank and were later paid by four different drawee banks. The Court found
in the Treasurer's office of the fraud being committed. There is also the collecting bank (Associated) to be negligent and held:
evidence indicating that the provincial employees were aware of
Pangilinan's retirement and consequent dissociation from the hospital.
The Bank should have first verified his right to endorse the
Jose Meru, the Provincial Treasurer, testified:.
crossed checks, of which he was not the payee, and to deposit
the proceeds of the checks to his own account. The Bank was by
ATTY. MORGA: reason of the nature of the checks put upon notice that they were
issued for deposit only to the private respondent's account. . . .
Q Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco? The situation in the case at bench is analogous to the above case, for it
was not the payee who deposited the checks with the collecting bank.
JOSE MERU: Here, the checks were all payable to Concepcion Emergency Hospital but
it was Fausto Pangilinan who deposited the checks in his personal
A Yes, sir. savings account.

Q Will you please tell us how at the time (sic) when the Although Associated Bank claims that the guarantee stamped on the
authorized representative of Concepcion Emergency Hospital is checks (All prior and/or lack of endorsements guaranteed) is merely a
and was supposed to be Miss Juco? requirement forced upon it by clearing house rules, it cannot but remain
liable. The stamp guaranteeing prior indorsements is not an empty rubric
A Well, as far as my investigation show (sic) the assistant cashier which a bank must fulfill for the sake of convenience. A bank is not
told me that Pangilinan represented himself as also authorized to required to accept all the checks negotiated to it. It is within the bank's
help in the release of these checks and we were apparently discretion to receive a check for no banking institution would consciously
misled because they accepted the representation of Pangilinan or deliberately accept a check bearing a forged indorsement. When a
that he was helping them in the release of the checks and check is deposited with the collecting bank, it takes a risk on its depositor.
besides according to them they were, Pangilinan, like the rest, It is only logical that this bank be held accountable for checks deposited
was able to present an official receipt to acknowledge these by its customers.
receipts and according to them since this is a government check
and believed that it will eventually go to the hospital following the A delay in informing the collecting bank (Associated Bank) of the forgery,
standard procedure of negotiating government checks, they which deprives it of the opportunity to go after the forger, signifies
released the checks to Pangilinan aside from Miss Juco.34
negligence on the part of the drawee bank (PNB) and will preclude it from Treasurer's office on March 31, 1981 to return the checks for verification.
claiming reimbursement. The Province of Tarlac returned the checks only on April 22, 1981. Two
days later, Associated Bank received the checks from PNB. 36
It is here that Associated Bank's assignment of error concerning C.B.
Circular No. 580 and Section 23 of the Philippine Clearing House Associated Bank was also furnished a copy of the Province's letter of
Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. demand to PNB dated March 20, 1981, thus giving it notice of the
580, items bearing a forged endorsement shall be returned within twenty- forgeries. At this time, however, Pangilinan's account with Associated had
Sour (24) hours after discovery of the forgery but in no event beyond the only P24.63 in it. 37Had Associated Bank decided to debit Pangilinan's
period fixed or provided by law for filing of a legal action by the returning account, it could not have recovered the amounts paid on the questioned
bank. Section 23 of the PCHC Rules deleted the requirement that items checks. In addition, while Associated Bank filed a fourth-party complaint
bearing a forged endorsement should be returned within twenty-four against Fausto Pangilinan, it did not present evidence against Pangilinan
hours. Associated Bank now argues that the aforementioned Central and even presented him as its rebuttal witness. 38 Hence, Associated
Bank Circular is applicable. Since PNB did not return the questioned Bank was not prejudiced by PNB's failure to comply with the twenty-four-
checks within twenty-four hours, but several days later, Associated Bank hour return rule.
alleges that PNB should be considered negligent and not entitled to
reimbursement of the amount it paid on the checks. Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The
The Court deems it unnecessary to discuss Associated Bank's assertions Court finds this contention unmeritorious. Even if PNB cleared and paid
that CB Circular No. 580 is an administrative regulation issued pursuant the checks, it can still recover from Associated Bank. This is true even if
to law and as such, must prevail over the PCHC rule. The Central Bank the payee's Chief Officer who was supposed to have indorsed the checks
circular was in force for all banks until June 1980 when the Philippine is also a customer of the drawee bank. 39 PNB's duty was to verify the
Clearing House Corporation (PCHC) was set up and commenced genuineness of the drawer's signature and not the genuineness of
operations. Banks in Metro Manila were covered by the PCHC while payee's indorsement. Associated Bank, as the collecting bank, is the
banks located elsewhere still had to go through Central Bank Clearing. In entity with the duty to verify the genuineness of the payee's indorsement.
any event, the twenty-four-hour return rule was adopted by the PCHC
until it was changed in 1982. The contending banks herein, which are PNB also avers that respondent court erred in adjudging circuitous
both branches in Tarlac province, are therefore not covered by PCHC liability by directing PNB to return to the Province of Tarlac the amount of
Rules but by CB Circular No. 580. Clearly then, the CB circular was the checks and then directing Associated Bank to reimburse PNB. The
applicable when the forgery of the checks was discovered in 1981. Court finds nothing wrong with the mode of the award. The drawer,
Province of Tarlac, is a clientor customer of the PNB, not of Associated
The rule mandates that the checks be returned within twenty-four hours Bank. There is no privity of contract between the drawer and the
after discovery of the forgery but in no event beyond the period fixed by collecting bank.
law for filing a legal action. The rationale of the rule is to give the
collecting bank (which indorsed the check) adequate opportunity to The trial court made PNB and Associated Bank liable with legal interest
proceed against the forger. If prompt notice is not given, the collecting from March 20, 1981, the date of extrajudicial demand made by the
bank maybe prejudiced and lose the opportunity to go after its depositor. Province of Tarlac on PNB. The payments to be made in this case stem
from the deposits of the Province of Tarlac in its current account with the
The Court finds that even if PNB did not return the questioned checks to PNB. Bank deposits are considered under the law as loans. 40 Central
Associated Bank within twenty-four hours, as mandated by the rule, PNB Bank Circular No. 416 prescribes a twelve percent (12%) interest per
did not commit negligent delay. Under the circumstances, PNB gave annum for loans, forebearance of money, goods or credits in the absence
prompt notice to Associated Bank and the latter bank was not prejudiced of express stipulation. Normally, current accounts are likewise interest-
in going after Fausto Pangilinan. After the Province of Tarlac informed bearing, by express contract, thus excluding them from the coverage of
PNB of the forgeries, PNB necessarily had to inspect the checks and CB Circular No. 416. In this case, however, the actual interest rate, if any,
conduct its own investigation. Thereafter, it requested the Provincial for the current account opened by the Province of Tarlac with PNB was
not given in evidence. Hence, the Court deems it wise to affirm the trial
court's use of the legal interest rate, or six percent (6%) per annum. The
interest rate shall be computed from the date of default, or the date of
judicial or extrajudicial demand. 41 The trial court did not err in granting
legal interest from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent -

fifty percent (50%-50%). Due to the negligence of the Province of Tarlac
in releasing the checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining
why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to
the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser of
the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was
also remiss in its duty to ascertain the genuineness of the payee's
indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the

Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
GRANTED. The petition for review filed by the Associated Bank (G.R.
No. 107382) is hereby DENIED. The decision of the trial court is
MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of
P203,300.00 to the Province of Tarlac, with legal interest from March 20,
1981 until the payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal
interest from March 20, 1981 until payment is made.

SO ORDERED.
 [G.R. No. 37467. December 11, 1933.] 4. ID.; ID.; ID. — As the money in question was in fact paid to the
plaintiff corporation the China Banking Corporation was indebted
SAN CARLOS MILLING CO., LTD., Plaintiff-Appellant, v. BANK neither to the plaintiff nor to the Bank of the Philippine Islands and
OF THE PHILIPPINES ISLANDS and CHINA BANKING consequently was properly absolved from any responsibility.
CORPORATION, Defendants-Appellees.

Gibbs & McDonough and Roman Ozaeta for Appellant. DECISION

Araneta, De Joya, Zaragoza & Araneta for appellee Bank of

the Philippine Islands. HULL, J.:

Marcelo Nubla and Guevara, Francisco & Recto for appellee

China Banking Corporation. Plaintiff corporation, organized under the laws of the Territory of
Hawaii, is authorized to engage in business in the Philippine
SYLLABUS Islands, and maintains its main office in their Islands in the City of
Manila.
1. BANKS AND BANKING; PAYMENT OF FORGED CHECKS. — It is
an elementary principle of banking that "A bank is bound to know The business of the Philippine Islands was in the hands of Alfred D.
the signatures of its customers; and if it pays a forged check, it Cooper, its agent under general power of attorney with authority of
must be considered as making the payment out of its own funds, substitution. The principal employee in the Manila office was one
and cannot ordinarily charge the amount so paid to the account of Joseph L. Wilson, to whom had been given a general power of
the depositor whose name was forges." (7. C. J., 683.) There is no attorney but without power of substitution. In 1926 Cooper,
act of the plaintiff that led the Bank of the Philippine Islands astray. desiring to go on vacation, gave a general power of attorney to
If it was in fact lulled into a false sense of security, it was by the Newland Baldwin and at the same time revoked the power of
effrontery of D, the messenger to whom it entrusted the large sum Wilson relative to the dealings with the Bank of the Philippine
of money in question. Islands, one of the banks in Manila in which plaintiff maintained a
deposit.
2. ID.; ID.; PROXIMATE CAUSE OF LOSS. — The signatures of the
checks in question being forged, under section 23 of the Negotiable About a year thereafter Wilson, conspiring together with one
Instruments Law they are not a charge against plaintiff nor are the Alfredo Dolores, a messenger-clerk in plaintiff’s Manila office, sent
checks of any value to the defendant. The proximate cause of loss a cablegram in code to the company in Honolulu requesting a
was due to the negligence of the Bank of the Philippine Islands in telegraphic transfer to the China Banking Corporation of Manila of
honoring and cashing the two forged checks. $100,000. The money was transferred by cable, and upon its
receipt the China Banking Corporation, likewise a bank in which
3. ID.; DEPOSITOR AND BANKER; CREDITOR AND DEBTOR. — It is plaintiff maintained a deposit, sent an exchange contract to plaintiff
very clear that the relation of plaintiff with the Bank of the corporation offering the sum of P201,000, which was then the
Philippine Islands in regard to the checks in question, was that of current rate of exchange. On this contract was forged the name of
depositor and banker, creditor and debtor. The contention of the Newland Baldwin and typed on the body of the contract was a
bank that it was a gratuitous bailee is without merit, and absolutely note:jgc:chanrobles.com.ph
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 "Please sent us certified check in our favor when transfer in
a depositor of the bank. Banks are not gratuitous bailees of the received."cralaw virtua1aw library
funds deposited with them by their customers.
A manager’s check on the China Banking Corporation for P201,000
payable to San Carlos Milling Company or order was receipted for defendant bank refusing to credit plaintiff with the amount
by Dolores. On the same date, September 28, 1927, the manager’s withdrawn by the two forged checks of P200,000 and P1, suit was
check was deposited with the Bank of the Philippine Islands by the brought against the Bank of the Philippine Islands, and finally on
following endorsement:jgc:chanrobles.com.ph the suggestion of the defendant bank, an amended complaint was
filed by plaintiff against both the Bank of the Philippine Islands and
"For deposit only with Bank of the Philippine Islands, to credit of the China Banking Corporation.
account of San Carlos Milling Co., Ltd.
At the trial the China Banking Corporation contended that they had
"By (Sgd.) NEWLAND BALDWIN drawn a check to the credit of the plaintiff company, that the check
had been endorsed for deposit, and that as the prior endorsement
"For Agent" had in law been guaranteed by the Bank of the Philippine Islands,
when they presented the cashier’s check to it for payment, the
The endorsement to which the name of the Newland Baldwin was China Banking Corporation was absolved even if the endorsement
affixed was spurious. of Newland Baldwin on the check was a forgery.

The Bank of the Philippine Islands thereupon credited the current The Bank of the Philippine Islands presented many special
account of plaintiff in the sum of P201,000 and passed the defenses, but in the main their contentions were that they had
cashier’s check in the ordinary course of business through the been guilty of no negligence, that they had dealt with the
clearing house, where it was paid by the China Banking accredited representatives of the company in the due course of
Corporation. business, and that the loss was due to the dishonesty of plaintiff’s
employees and the negligence of plaintiff’s general agent.
On the same day the cashier of the Bank of the Philippine Islands
received a letter, purporting to be signed by Newland Baldwin, In plaintiff’s Manila office, besides the general agent, Wilson, and
directing that P200,000 in bills of various denominations, named in Dolores, most of the time there was employed a woman
the letter, be packed for shipment and delivery the next day. The stenographer and cashier. The agent did not keep in his personal
next day, Dolores witnessed the counting and packing of the possession either the code-book or the blank checks of either the
money, and shortly afterwards returned with the check for the sum Bank of the Philippine Islands or the China Banking Corporation.
of P200,000, purporting to be signed by Newland Baldwin as Baldwin was authorized to draw checks on either of the
agent. depositories. Wilson could draw checks in the name of the plaintiff
on the China Banking Corporation.
Plaintiff had frequently withdrawn currency for shipment to its mill
from the Bank of the Philippine Islands but never in so large an After trial in which much testimony was taken, the trial court held
amount, and according to the record, never under the sole that the deposit of P201,000 in the Bank of the Philippine Islands
supervision of Dolores as the representative of plaintiff. being the result of a forged endorsement, the relation of depositor
and banker did not exist, but the bank was only a gratuitous
Before delivering the money, the bank asked Dolores for P1 to bailee; that the Bank of the Philippine Islands acted in good faith in
cover the cost of packing the money, and he left the bank and the ordinary course of its business, was not guilty of negligence,
shortly afterwards returned with another check for P1, purporting and therefore under article 1902 of the Civil Code which should
to be signed by Newland Baldwin. Whereupon the money was control the case, plaintiff could not recover; and that as the cause
turned over to Dolores, who took it to plaintiff’s office, where he of loss was the criminal actions of Wilson and Dolores, employees
turned the money over to Wilson and received as his share, of plaintiff, and as Newland Baldwin, the agent, had not exercised
P10,000. adequate supervision over plaintiff’s Manila office, therefore
plaintiff was guilty of negligence, which ground would likewise
Shortly thereafter the crime was discovered, and upon the defect recovery.
 only a typed endorsement. It accepted the check and duly credited
From the decision of the trial court absolving the defendants, plaintiff’s account with the amount on the face of the check.
plaintiff brings this appeal and makes nine assignments of error Plaintiff was not harmed by the transaction as the only result was
which we do not deem it necessary to discuss it detail. 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
There is a mild assertion on the part of the defendant bank that the would not have authority to draw checks and where funds could
disputed signatures on Newland Baldwin were genuine and that he only be drawn out by the check of Baldwin.
had been in the habit of signing checks in blank and turning the
checks so signed over to Wilson. Plaintiff in its letter of December 23, 1928, to the Bank of the
Philippine Islands said in part:jgc:chanrobles.com.ph
The proof as to the falsity of the questioned signatures of Baldwin
places the matter beyond reasonable doubt, nor is it believed that ". . . we now beg leave to demand that you pay over to us the
Baldwin signed checks in blank and turned them over to Wilson. entire amount of said manager’s check of two hundred one
thousand (P201,000) pesos, together with interest thereon at the
As to the China Banking Corporation, it will be seen that it drew its agreed rate of 3 1/2 per cent per annum on daily balanced of our
check payable to the order of plaintiff and delivered it to plaintiff’s credit in account current with your bank to this date. In the even of
agent who was authorized to receive it. A bank that cashes a check your refusal to pay, we shall claim interest at the legal rate of 6 per
must know to whom it pays. In connection with the cashier’s cent from and after the date of this demand inasmuch as we desire
check, this duty was therefore upon the Bank of the Philippine to withdraw and make use of the money." Such language might
Islands, and the China Banking Corporation was not bound to well be treated as a ratification of the deposit.
inspect and verify all endorsements of the check, even if some of
them were also those of depositors in the bank. It had a right to The contention of the bank that it was a gratuitous bailee is
rely upon the endorsement of the Bank of the Philippine Islands without merit. In the first place, it is absolutely contrary to what
when it gave the latter bank credit for its own cashier’s check. the bank did. It did not take it up as a separate account but it
Even if we would treat the China Banking Corporation’s cashier’s transferred the credit to plaintiff’s current account as a depositor of
check the same as the check of a depositor and attempt to apply that bank. Furthermore, banks are not gratuitous bailees of the
the doctrines of the great Eastern Life Insurance Co. v. Hongkong funds deposited with them by their customers. Banks are run for
& Shanghai Banking Corporation and National Bank (43 Phil., 678), gain, and they solicit deposits in order that they can use the money
and hold the China Banking Corporation indebted to plaintiff, we for that very purpose. In this case the action was neither
would at the same time have to hold that the Bank of the Philippine gratuitous nor was it a bailment.
Islands was indebted to the China Banking Corporation in the same
amount. As, however, the money was in fact paid to plaintiff On the other hand, we cannot agree with the theory of plaintiff that
corporation, we must hold that the China Banking Corporation is the Bank of the Philippine Islands was an intermeddling bank. In
indebted neither to plaintiff not to the Bank of the Philippine the many cases cited by plaintiff where the bank that cashed the
Islands, and the judgment of the lower court so far as it absolved forged endorsement was held as an intermeddler, in none was the
the China Banking Corporation from responsibility is affirmed. claimant a regular depositor of the bank, nor in any of the cases
cited, was the endorsement for deposit only. It is therefore clear
Returning to the relation between plaintiff and the Bank of the that the relation of plaintiff with the Bank of the Philippine Islands
Philippine Islands, we will now consider the effect of the deposit of in regard to this item of P201,000 was that of depositor and
P201,000. It must be noted that this was not a presenting of the banker, creditor and debtor.
check for cash payment but for deposit only. It is a matter of
general knowledge that most endorsements for deposit only, are We now come to consider the legal effect of payment by the bank
informal. Most are by means of a rubber stamp. The bank would of the Dolores of the sum of P200,001, on two checks on which the
have been justified in accepting the check for deposit even with 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 belief that
they are genuine signatures.

The signatures to the checks 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.

Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.

 presently allocated No. 010-500281. The authorized
signature for said Account No. 6 were those of MWSS
Republic of the Philippines treasurer Jose Sanchez, its auditor Pedro Aguilar, and its
SUPREME COURT acting General Manager Victor L. Recio. Their respective
Manila specimen signatures were submitted by the MWSS to and
on file with the PNB. By special arrangement with the
PNB, the MWSS used personalized checks in drawing
SECOND DIVISION
from this account. These checks were printed for MWSS
by its printer, F. Mesina Enterprises, located at 1775 Rizal
G.R. No. L-62943 July 14, 1986 Extension, Caloocan City.

METROPOLITAN WATERWORKS AND SEWERAGE During the months of March, April and May 1969, twenty-
SYSTEM, petitioner, three (23) checks were prepared, processed, issued and
vs. released by NWSA, all of which were paid and cleared by
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) PNB and debited by PNB against NWSA Account No. 6,
and THE PHILIPPINE NATIONAL BANK, respondents. to wit:

Juan J. Diaz and Cesar T. Basa for respondent PNB. Check No. Date Payee Amount Date Paid

San Juan, Africa, Gonzales & San Agustin Law Offices for respondent By PNB
PCIB.
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69

GUTIERREZ, JR., J.: Estrella

This petition for review asks us to set aside the October 29, 1982 2. 59548 3-31-69 Natividad 2,848.86 4-23 69
decision of the respondent Court of Appeals, now Intermediate Appellate
Court which reversed the decision of the Court of First Instance of Manila, Rosario
Branch XL, and dismissed the plaintiff's complaint, the third party
complaint, as well as the defendant's counterclaim. 3. 59547 3-31-69 Pangilinan 195.00 Unreleased

The background facts which led to the filing of the instant petition are Enterprises
summarized in the decision of the respondent Court of Appeals:
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Metropolitan Waterworks and Sewerage System
(hereinafter referred to as MWSS) is a government owned Rosario
and controlled corporation created under Republic Act No.
6234 as the successor-in- interest of the defunct NWSA. 5. 59552 4-1-69 Villarama 987.59 5-6-69
The Philippine National Bank (PNB for short), on the other
hand, is the depository bank of MWSS and its
& Sons
predecessor-in-interest NWSA. Among the several
accounts of NWSA with PNB is NWSA Account No. 6,
otherwise known as Account No. 381-777 and which is 6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering 18. 59587 4-8-69 Delfin 120,000.00 4-11-69

7. 59558 4-2-69 The Evening 112.00 Unreleased Santiago

News 19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

8. 59544 3-27-69 Progressive 18,391.20 4-18 69 Estrella

Const. 20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69 cident Inc.

Int. Inc. 21. 59577 4-8-69 Esla 9,429.78 4-29 69

10. 59568 4-7-69 Roberto 800.00 4-22-69 22. 59601 4-16-69 Justino 20,000.00 4-18-69

Marsan Torres

11. 59570 4-7-69 Paz Andres 200.00 4-22-69 23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69

12. 59574 4-8-69 Florentino 100,000.00 4-11-69 Inc. --------------------

Santos P 320,636.26

13. 59578 4-8-69 Mla. Daily 95.00 Unreleased During the same months of March, April and May 1969,
twenty-three (23) checks bearing the same numbers as
Bulletin the aforementioned NWSA checks were likewise paid and
cleared by PNB and debited against NWSA Account No.
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69 6, to wit:

15. 59582 4-8-69 Galauran 7,729.09 5-6-69 Check Date Payee Amount Date Paid

& Pilar No. Issued By PNB

16. 59581 4-8-69 Manila 110.00 5-12 69 1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69

Chronicle 2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69

17. 59588 4-8-69 Treago 21,583.00 4-11 69 3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69

Tunnel 4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69

5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69 23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69

6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69 ---------------

7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69 P3,457,903.00

8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza The foregoing checks were deposited by the payees Raul
Dizon, Arturo Sison and Antonio Mendoza in their
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69 respective current accounts with the Philippine
Commercial and Industrial Bank (PCIB) and Philippine
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69 Bank of Commerce (PBC) in the months of March, April
and May 1969. Thru the Central Bank Clearing, these
checks were presented for payment by PBC and PCIB to
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
the defendant PNB, and paid, also in the months of
March, April and May 1969. At the time of their
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69 presentation to PNB these checks bear the standard
indorsement which reads 'all prior indorsement and/or
13.59578 4-10-69 Antonio 93,950.00 4-29-69 lack of endorsement guaranteed.'
Mendoza
Subsequent investigation however, conducted by the NBI
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69 showed that Raul Dizon, Arturo Sison and Antonio
Mendoza were all fictitious persons. The respective
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69 balances in their current account with the PBC and/or
PCIB stood as follows: Raul Dizon P3,455.00 as of April
16.59581 4-8-69 Antonio 176,580.00 5-6-69 30, 1969; Antonio Mendoza P18,182.00 as of May 23,
1969; and Arturo Sison Pl,398.92 as of June 30, 1969.
Mendoza
On June 11, 1969, NWSA addressed a letter to PNB
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69 requesting the immediate restoration to its Account No. 6,
of the total sum of P3,457,903.00 corresponding to the
total amount of these twenty-three (23) checks claimed by
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
NWSA to be forged and/or spurious checks. "In view of
the refusal of PNB to credit back to Account No. 6 the
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69 said total sum of P3,457,903.00 MWSS filed the instant
complaint on November 10, 1972 before the Court of First
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69 Instance of Manila and docketed thereat as Civil Case No.
88950.
21.59577 4-14-69 Antonio 260,000.00 5-16-69
In its answer, PNB contended among others, that the
Mendoza checks in question were regular on its face in all respects,
including the genuineness of the signatures of authorized
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69 NWSA signing officers and there was nothing on its face
that could have aroused any suspicion as to its
 genuineness and due execution and; that NWSA was As earlier stated, the respondent court reversed the decision of the Court
guilty of negligence which was the proximate cause of the of First Instance of Manila and rendered judgment in favor of the
loss. respondent Philippine National Bank.

PNB also filed a third party complaint against the A motion for reconsideration filed by the petitioner MWSS was denied by
negotiating banks PBC and PCIB on the ground that they the respondent court in a resolution dated January 3, 1983.
failed to ascertain the Identity of the payees and their title
to the checks which were deposited in the respective new The petitioner now raises the following assignments of errors for the grant
accounts of the payees with them. of this petition:

xxx xxx xxx I. IN NOT HOLDING THAT AS THE SIGNATURES ON

THE CHECKS WERE FORGED, THE DRAWEE BANK
On February 6, 1976, the Court of First Instance of Manila rendered WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF
judgment in favor of the MWSS. The dispositive portion of the decision THE NEGOTIABLE INSTRUMENTS LAW.
reads:
II. IN FAILING TO CONSIDER THE PROXIMATE
WHEREFORE, on the COMPLAINT by a clear NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS
preponderance of evidence and in accordance with CHECKS DESPITE THE OBVIOUS IRREGULARITY OF
Section 23 of the Negotiable Instruments Law, the Court TWO SETS OF CHECKS BEARING IdENTICAL
hereby renders judgment in favor of the plaintiff NUMBER BEING ENCASHED WITHIN DAYS OF EACH
Metropolitan Waterworks and Sewerage System (MWSS) OTHER.
by ordering the defendant Philippine National Bank (PNB)
to restore the total sum of THREE MILLION FOUR III. IN NOT HOLDING THAT THE SIGNATURES OF THE
HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED DRAWEE MWSS BEING CLEARLY FORGED, AND THE
THREE PESOS (P3,457,903.00) to plaintiff's Account No. CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
6, otherwise known as Account No. 010-50030-3, with AGAINST THE ALLEGED DRAWEE.
legal interest thereon computed from the date of the filing
of the complaint and until as restored in the said Account The appellate court applied Section 24 of the Negotiable Instruments Law
No. 6. which provides:

On the THIRD PARTY COMPLAINT, the Court, for lack of Every negotiable instrument is deemed prima facie to
evidence, hereby renders judgment in favor of the third have been issued for valuable consideration and every
party defendants Philippine Bank of Commerce (PBC) person whose signature appears thereon to have become
and Philippine Commercial and Industrial Bank (PCIB) by a party thereto for value.
dismissing the Third Party Complaint.
The petitioner submits that the above provision does not apply to the
The counterclaims of the third party defendants are facts of the instant case because the questioned checks were not those
likewise dismissed for lack of evidence. of the MWSS and neither were they drawn by its authorized signatories.
The petitioner states that granting that Section 24 of the Negotiable
No pronouncement as to costs. Instruments Law is applicable, the same creates only a prima facie
presumption which was overcome by the following documents, to wit: (1)
the NBI Report of November 2, 1970; (2) the NBI Report of November 21,
1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum
of Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank three (23) questioned checks were indeed signed by persons other than
addressed to the Chief Auditor of the petitioner; (5) the admission of the the authorized MWSS signatories. On the contrary, the findings of the
respondent bank's counsel in open court that the National Bureau of National Bureau of Investigation in its Report dated November 2, 1970
Investigation found the signature on the twenty-three (23) checks in show that the MWSS fraud was an "inside job" and that the petitioner's
question to be forgeries; and (6) the admission of the respondent bank's delay in the reconciliation of bank statements and the laxity and loose
witness, Mr. Faustino Mesina, Jr. that the checks in question were not records control in the printing of its personalized checks facilitated the
printed by his printing press. The petitioner contends that since the fraud. Likewise, the questioned Documents Report No. 159-1074 dated
signatures of the checks were forgeries, the respondent drawee bank November 21, 1974 of the National Bureau of Investigation does not
must bear the loss under the rulings of this Court. declare or prove that the signatures appearing on the questioned checks
are forgeries. The report merely mentions the alleged differences in the
A bank is bound to know the signatures of its customers; type face, checkwriting, and printing characteristics appearing in the
and if it pays a forged check it must be considered as standard or submitted models and the questioned typewritings. The NBI
making the payment out of its obligation funds, and Chemistry Report No. C-74-891 merely describes the inks and pens used
cannot ordinarily charge the amount so paid to the in writing the alleged forged signatures.
account of the depositor whose name was forged.
It is clear that these three (3) NBI Reports relied upon by the petitioner
xxx xxx xxx are inadequate to sustain its allegations of forgery. These reports did not
touch on the inherent qualities of the signatures which are indispensable
The signatures to the checks being forged, under Section in the determination of the existence of forgery. There must be conclusive
23 of the Negotiable Instruments Law they are not a findings that there is a variance in the inherent characteristics of the
charge against plaintiff nor are the checks of any value to signatures and that they were written by two or more different persons.
the defendant.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate
It must therefore be held that the proximate cause of loss Court, et al, 139 SCRA 238). It must be established by clear, positive,
was due to the negligence of the Bank of the Philippine and convincing evidence. This was not done in the present case.
Islands in honoring and cashing the two forged checks.
(San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59) The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands,
et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and
It is admitted that the Philippine National Bank cashed the Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
check upon a forged signature, and placed the money to inapplicable in this case because the forgeries in those cases were either
the credit of Maasim, who was the forger. That the clearly established or admitted while in the instant case, the allegations of
Philippine National Bank then endorsed the chock and forgery were not clearly established during trial.
forwarded it to the Shanghai Bank by whom it was paid.
The Philippine National Bank had no license or authority Considering the absence of sufficient security in the printing of the checks
to pay the money to Maasim or anyone else upon a coupled with the very close similarities between the genuine signatures
forged signature. It was its legal duty to know that and the alleged forgeries, the twenty-three (23) checks in question could
Malicor's endorsement was genuine before cashing the have been presented to the petitioner's signatories without their knowing
check. Its remedy is against Maasim to whom it paid the that they were bogus checks. Indeed, the cashier of the petitioner whose
money. (Great Eastern Life Ins. Co. v. Hongkong & signatures were allegedly forged was unable to ten the difference
Shanghai Bank, 43 Phil. 678). between the allegedly forged signature and his own genuine signature.
On the other hand, the MWSS officials admitted that these checks could
We have carefully reviewed the documents cited by the petitioner. There easily be passed on as genuine.
is no express and categorical finding in these documents that the twenty-
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant because it was guilty of negligence not only before the questioned checks
of the drawee Philippine National Bank to Mr. E. Villatuya, Executive were negotiated but even after the same had already been negotiated.
Vice-President of the petitioner dated June 9, 1969 cites an instance (See Republic v. Equitable Banking Corporation, 10 SCRA 8) The
where even the concerned NWSA officials could not ten the differences records show that at the time the twenty-three (23) checks were
between the genuine checks and the alleged forged checks. prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official PNB Commercial blank
At about 12:00 o'clock on June 6, 1969, VP Maramag checks. In the exercise of this special privilege, however, the petitioner
requested me to see him in his office at the Cashier's failed to provide the needed security measures. That there was gross
Dept. where Messrs. Jose M. Sanchez, treasurer of negligence in the printing of its personalized checks is shown by the
NAWASA and Romeo Oliva of the same office were following uncontroverted facts, to wit:
present. Upon my arrival I observed the NAWASA officials
questioning the issue of the NAWASA checks appearing (1) The petitioner failed to give its printer, Mesina Enterprises, specific
in their own list, xerox copy attached. instructions relative to the safekeeping and disposition of excess forms,
check vouchers, and safety papers;
For verification purposes, therefore, the checks were
taken from our file. To everybody there present namely (2) The petitioner failed to retrieve from its printer all spoiled check forms;
VIP Maramag, the two abovementioned NAWASA
officials, AVP, Buhain, Asst. Cashier Castelo, Asst. (3) The petitioner failed to provide any control regarding the paper used
Cashier Tejada and Messrs. A. Lopez and L. Lechuga, in the printing of said checks;
both C/A bookkeepers, no one was able to point out any
difference on the signatures of the NAWASA officials (4) The petitioner failed to furnish the respondent drawee bank with
appearing on the checks compared to their official samples of typewriting, cheek writing, and print used by its printer in the
signatures on file. In fact 3 checks, one of those under printing of its checks and of the inks and pens used in signing the same;
question, were presented to the NAWASA treasurer for and
verification but he could not point out which was his
genuine signature. After intent comparison, he pointed on
(5) The petitioner failed to send a representative to the printing office
the questioned check as bearing his correct signature.
during the printing of said checks.
xxx xxx xxx
This gross negligence of the petitioner is very evident from the sworn
statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the
Moreover, the petitioner is barred from setting up the defense of forgery printing press which printed the petitioner's personalized checks:
under Section 23 of the Negotiable Instruments Law which provides that:
xxx xxx xxx
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When
the signature is forged or made without authority of the
7. Q: Do you have any business
person whose signature it purports to be, it is wholly
transaction with the National Waterworks
inoperative, and no right to retain the instrument, or to
and Sewerage Authority (NAWASA)?
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 A: Yes, sir. I have a contract with the
sought to enforce such right is precluded from setting up NAWASA in printing NAWASA Forms
the forgery or want of authority. such as NAWASA Check

xxx xxx xxx

15. Q: Were you given any ingtruction by 26. Q: What did you do with these excess
the NAWASA in connection with the check vouchers?
printing of these check vouchers?
A: I keep it under lock and key in my firing
A: There is none, sir. No instruction cabinet.
whatsoever was given to me.
xxx xxx xxx
16. Q: Were you not advised as to what
kind of paper would be used in the check 28. Q: Were you not instructed by the
vouchers? NAWASA authorities to bum these excess
check vouchers?
A: Only as per sample, sir.
A: No, sir. I was not instructed.
xxx xxx xxx
29. Q: What do you intend to do with
20. Q: Where did you buy this Hammermill these excess printed check vouchers?
Safety check paper?
A: I intend to use them for future orders
A: From Tan Chiong, a paper dealer with from the
store located at Juan Luna, Binondo,
Manila. (In front of the Metropolitan Bank). xxx xxx xxx

xxx xxx xxx 32. Q: In the process of printing the check

vouchers ordered by the NAWASA, how
24. Q: Were all these check vouchers many sheets were actually spoiled?
printed by you submitted to NAWASA?
A: I cannot approximate, sir. But there are
A: Not all, sir. Because we have to make spoilage in the process of printing and
reservations or allowances for spoilage. perforating.

25. Q: Out of these vouchers printed by 33. Q: What did you do with these
you, how many were spoiled and how spoilages?
many were the excess printed check
vouchers? A: Spoiled printed materials are usually
thrown out, in the garbage can.
A: Approximately four hundred (400)
sheets, sir. I cannot determine the 34. Q: Was there any representative of the
proportion of the excess and spoiled NAWASA to supervise the printing or
because the final act of perforating these watch the printing of these check
check vouchers has not yet been done vouchers?
and spoilage can only be determined after
this final act of printing. A: None, sir.
 xxx xxx xxx reasons known only to Mr. Zaporteza however, he was unreasonably
delayed in taking prompt deliveries of the said bank statements and credit
39. Q: During the period of printing after and debit memos. As a consequence, Mr. Zaporteza failed to reconcile
the days work, what measures do you the bank statements with the petitioner's records. If Mr. Zaporteza had
undertake to safeguard the mold and not been remiss in his duty of taking the bank statements and reconciling
other paraphernalia used in the printing of them with the petitioner's records, the fraudulent encashments of the first
these particular orders of NAWASA? checks should have been discovered, and further frauds prevented. This
negligence was, therefore, the proximate cause of the failure to discover
A: Inasmuch as I have an employee who the fraud. Thus,
sleeps in the printing shop and at the
same time do the guarding, we just leave When a person opens a checking account with a bank, he
the mold attached to the machine and the is given blank checks which he may fill out and use
other finished or unfinished work check whenever he wishes. Each time he issues a check, he
vouchers are left in the rack so that the should also fill out the check stub to which the check is
work could be continued the following day. usually attached. This stub, if properly kept, will contain
the number of the check, the date of its issue, the name of
The National Bureau of Investigation Report dated November 2, 1970 is the payee and the amount thereof. The drawer would
even more explicit. Thus— therefore have a complete record of the checks he issues.
It is the custom of banks to send to its depositors a
monthly statement of the status of their accounts, together
xxx xxx xxx
with all the cancelled checks which have been cashed by
their respective holders. If the depositor has filled out his
60. We observed also that there is some check stubs properly, a comparison between them and
laxity and loose control in the printing of the cancelled checks will reveal any forged check not
NAWASA cheeks. We gathered from taken from his checkbook. It is the duty of a depositor to
MESINA ENTERPRISES, the printing firm carefully examine the bank's statement, his cancelled
that undertook the printing of the check checks, his check stubs and other pertinent records within
vouchers of NAWASA that NAWASA had a reasonable time, and to report any errors without
no representative at the printing press unreasonable delay. If his negligence should cause the
during the process of the printing and no bank to honor a forged check or prevent it from recovering
particular security measure instructions the amount it may have already paid on such check, he
adopted to safeguard the interest of the cannot later complain should the bank refuse to recredit
government in connection with printing of his account with the amount of such check. (First Nat.
this accountable form. Bank of Richmond v. Richmond Electric Co., 106 Va. 347,
56 SE 152, 7 LRA, NS 744 [1907]. See also Leather
Another factor which facilitated the fraudulent encashment of the twenty- Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657
three (23) checks in question was the failure of the petitioner to reconcile [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank
the bank statements with its own records. of Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos
and Campos, Notes and Selected Cases on Negotiable
It is accepted banking procedure for the depository bank to furnish its Instruments Law, 1971, pp. 267-268).
depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee This failure of the petitioner to reconcile the bank statements with its
bank to discontinue the practice of mailing the bank statements, but cancelled checks was noted by the National Bureau of Investigation in its
instead to deliver the same to a certain Mr. Emiliano Zaporteza. For report dated November 2, 1970:
 58. One factor which facilitate this fraud was the delay in Q. Why are you tolerating Mr. Pantig
the reconciliation of bank (PNB) statements with the admitting unauthorized persons in your
NAWASA bank accounts. x x x. Had the NAWASA office?
representative come to the PNB early for the statements
and had the bank been advised promptly of the reported A. I do not want to embarrass Mr. Pantig.
bogus check, the negotiation of practically all of the Most of the people following up checks
remaining checks on May, 1969, totalling P2,224,736.00 are employees of the NAWASA.
could have been prevented.
Q. Was the authority given by the Board of
The records likewise show that the petitioner failed to provide appropriate Directors and the approval by the
security measures over its own records thereby laying confidential Treasurer for employees, and other
records open to unauthorized persons. The petitioner's own Fact Finding persons to encash their checks carry with
Committee, in its report submitted to their General manager underscored it their authority to enter your office?
this laxity of records control. It observed that the "office of Mr. Ongtengco
(Cashier No. VI of the Treasury Department at the NAWASA) is quite A. No, sir.
open to any person known to him or his staff members and that the check
writer is merely on top of his table."
xxx xxx xxx
When confronted with this report at the Anti-Fraud Action Section of the
Q. From the answers that you have given
National Bureau of Investigation. Mr. Ongtengco could only state that:
to us we observed that actually there is
laxity and poor control on your part with
A. Generally my order is not to allow regards to the preparations of check
anybody to enter my office. Only payments inasmuch as you allow
authorized persons are allowed to enter unauthorized persons to follow up their
my office. There are some cases, vouchers inside your office which may
however, where some persons enter my leakout confidential informations or your
office because they are following up their books of account. After being apprised of
checks. Maybe, these persons may have all the shortcomings in your office, as
been authorized by Mr. Pantig. Most of the head of the Cashiers' Office of the
people entering my office are changing Treasury Department what remedial
checks as allowed by the Resolution of measures do you intend to undertake?
the Board of Directors of the NAWASA
and the Treasurer. The check writer was
A. Time and again the Treasurer has been
never placed on my table. There is a place
calling our attention not to allow interested
for the check write which is also under
persons to hand carry their voucher
lock and key.
checks and we are trying our best and if I
can do it to follow the instructions to the
Q. Is Mr. Pantig authorized to allow letter, I will do it but unfortunately the
unauthorized persons to enter your office? persons who are allowed to enter my
office are my co-employees and persons
A. No, sir. who have connections with our higher ups
and I can not possibly antagonize them.
Rest assured that even though that
 everybody will get hurt, I win do my best the defense of forgery under Section 23 of the Negotiable Instruments
not to allow unauthorized persons to enter Law.
my office.
Nonetheless, the petitioner claims that it was the negligence of the
xxx xxx xxx respondent Philippine National Bank that was the proximate cause of the
loss. The petitioner relies on our ruling in Philippine National Bank v.
Q. Is it not possible inasmuch as your Court of Appeals (25 SCRA 693) that.
office is in charge of the posting of check
payments in your books that leakage of Thus, by not returning the cheek to the PCIB, by thereby
payments to the banks came from your indicating that the PNB had found nothing wrong with the
office? check and would honor the same, and by actually paying
its amount to the PCIB, the PNB induced the latter, not
A. I am not aware of it but it only takes us only to believe that the check was genuine and good in
a couple of minutes to process the every respect, but, also, to pay its amount to Augusto Lim.
checks. And there are cases wherein In other words, the PNB was the primary or proximate
every information about the checks may cause of the loss, and, hence, may not recover from the
be obtained from the Accounting PCIB.
Department, Auditing Department, or the
Office of the General Manager. The argument has no merit. The records show that the respondent
drawee bank, had taken the necessary measures in the detection of
Relying on the foregoing statement of Mr. Ongtengco, the National forged checks and the prevention of their fraudulent encashment. In fact,
Bureau of Investigation concluded in its Report dated November 2, 1970 long before the encashment of the twenty-three (23) checks in question,
that the fraudulent encashment of the twenty-three (23)cheeks in the respondent Bank had issued constant reminders to all Current
question was an "inside job". Thus- Account Bookkeepers informing them of the activities of forgery
syndicates. The Memorandum of the Assistant Vice-President and Chief
We have all the reasons to believe that this fraudulent act Accountant of the Philippine National Bank dated February 17, 1966
was an inside job or one pulled with inside connivance at reads in part:
NAWASA. As pointed earlier in this report, the serial
numbers of these checks in question conform with the SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
numbers in current use of NAWASA, aside from the fact
that these fraudulent checks were found to be of the same From reliable information we have gathered that
kind and design as that of NAWASA's own checks. While personalized checks of current account depositors are
knowledge as to such facts may be obtained through the now the target of the forgery syndicate. To protect the
possession of a NAWASA check of current issue, an interest of the bank, you are hereby enjoined to be more
outsider without information from the inside can not careful in examining said checks especially those coming
possibly pinpoint which of NAWASA's various accounts from the clearing, mails and window transactions. As a
has sufficient balance to cover all these fraudulent reminder please be guided with the following:
checks. None of these checks, it should be noted, was
dishonored for insufficiency of funds. . . 1. Signatures of drawers should be properly scrutinized
and compared with those we have on file.
Even if the twenty-three (23) checks in question are considered forgeries,
considering the petitioner's gross negligence, it is barred from setting up
 2. The serial numbers of the checks should be compared
with the serial numbers registered with the Cashier's
Dept.

3. The texture of the paper used and the printing of the

checks should be compared with the sample we have on
file with the Cashier's Dept.

4. Checks bearing several indorsements should be given

a special attention.

5. Alteration in amount both in figures and words should

be carefully examined even if signed by the drawer.

6. Checks issued in substantial amounts particularly by

depositors who do not usually issue checks in big
amounts should be brought to the attention of the drawer
by telephone or any fastest means of communication for
purposes of confirmation.

and your attention is also invited to keep abreast of

previous circulars and memo instructions issued to
bookkeepers.

We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the
petitioner's personalized checks was not done under the supervision and
control of the Bank. There is no evidence on record indicating that
because of this private printing the petitioner furnished the respondent
Bank with samples of checks, pens, and inks or took other precautionary
measures with the PNB to safeguard its interests.

Under the circumstances, therefore, the petitioner was in a better position

to detect and prevent the fraudulent encashment of its checks.

WHEREFORE, the petition for review on certiorari is hereby DISMISSED

for lack of merit. The decision of the respondent Court of Appeals dated
October 29, 1982 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.
 Republic of the Philippines It is not disputed that the signatures of the General Manager and the
SUPREME COURT Auditor of the GSIS on the check, as drawer thereof, are forged; that the
Manila 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
EN BANC 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
G.R. No. L-26001 October 29, 1968 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
PHILIPPINE NATIONAL BANK, petitioner,
sent the check to the PNB, for clearance, through the Central Bank; and
vs.
that, over two (2) months before, or on November 13, 1961, the GSIS
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND
had notified the PNB, which acknowledged receipt of the notice, that said
INDUSTRIAL BANK, respondents.
check had been lost, and, accordingly, requested that its payment be
stopped.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
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
CONCEPCION, C.J.: 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
The Philippine National Bank — hereinafter referred to as the PNB — holding that "clearing" is not "acceptance", in contemplation of the
seeks the review by certiorari of a decision of the Court of Appeals, which Negotiable Instruments law; (5) in not finding that, since the check had
affirmed that of the Court of First Instance of Manila, dismissing plaintiff's not been accepted by the PNB, the latter is entitled to reimbursement
complaint against the Philippine Commercial and Industrial Bank — therefor; and (6) in denying the PNB's right to recover from the PCIB.
hereinafter referred to as the PCIB — for the recovery of P57,415.00.
The first assignment of error will be discussed later, together with the
A partial stipulation of facts entered into by the parties and the decision of last,with which it is interrelated.
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 As regards the second assignment of error, the PNB argues that, since
Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, the signatures of the drawer are forged, so must the signatures of the
drawn against the PNB; that, following an established banking practice in supposed indorsers be; but this conclusion does not necessarily follow
the Philippines, the check was, on the same date, forwarded, for clearing, from said premise. Besides, there is absolutely no evidence, and the PNB
through the Central Bank, to the PNB, which did not return said check the has not even tried to prove that the aforementioned indorsements are
next day, or at any other time, but retained it and paid its amount to the spurious. Again, the PNB refunded the amount of the check to the GSIS,
PCIB, as well as debited it against the account of the GSIS in the PNB; on account of the forgery in the signatures, not of the indorsers or
that, subsequently, or on January 31, 1962, upon demand from the GSIS, supposed indorsers, but of the officers of the GSIS as drawer of the
said sum of P57,415.00 was re-credited to the latter's account, for the instrument. In other words, the question whether or not the indorsements
reason that the signatures of its officers on the check were forged; and have been falsified is immaterial to the PNB's liability as a drawee, or to
that, thereupon, or on February 2, 1962, the PNB demanded from the its right to recover from the PCIB,1 for, as against the drawee, the
PCIB the refund of said sum, which the PCIB refused to do. Hence, the indorsement of an intermediate bank does not guarantee the signature of
present action against the PCIB, which was dismissed by the Court of the drawer,2 since the forgery of the indorsement is notthe cause of the
First Instance of Manila, whose decision was, in turn, affirmed by the loss.3
Court of Appeals.
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 Augusto Lim to draw said amount from his aforementioned current
of the officers of the GSIS who signed on its behalf, because the GSIS account.
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 Thus, by not returning the check to the PCIB, by thereby indicating that
have been availed of by a subsequent indorsee5 or a holder in due the PNB had found nothing wrong with the check and would honor the
course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon same, and by actually paying its amount to the PCIB, the PNB induced
payment by the PNB, as drawee, the check ceased to be a negotiable the latter, not only to believe that the check was genuine and good in
instrument, and became a mere voucher or proof of payment.8 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,
Referring to the fourth and fifth assignments of error, we must bear in hence, may not recover from the PCIB.13
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 It is a well-settled maxim of law and equity that when one of two (2)
the same are payable on demand.10 Indeed, "acceptance" and "payment" innocent persons must suffer by the wrongful act of a third person, the
are, within the purview of said Law, essentially different things, for the loss must be borne by the one whose negligence was the proximate
former is "a promise to perform an act," whereas the latter is the "actual cause of the loss or who put it into the power of the third person to
performance" thereof.11 In the words of the Law,12 "the acceptance of a perpetrate the wrong.14
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 Then, again, it has, likewise, been held that, where the collecting (PCIB)
given sum of money. Upon the other hand, actual payment of the amount and the drawee (PNB) banks are equally at fault, the court will leave the
of a check implies not only an assent to said order of the drawer and a parties where it finds them.15
recognition of the drawer's obligation to pay the aforementioned sum, but,
also, a compliance with such obligation.
Lastly, Section 62 of Act No. 2031 provides:
Let us now consider the first and the last assignments of error. The PNB
The acceptor by accepting the instrument engages that he will
maintains that the lower court erred in not finding that the PCIB had been
pay it according to the tenor of his acceptance; and admits:
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 (a) The existence of the drawer, the genuineness of his signature,
particularity that the PNB had been guilty of a greater degree of and his capacity and authority to draw the instrument; and
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 (b) The existence of the payee and his then capacity to indorse.
stopped. Just as important, if not more important and decisive, is the fact
that the PNB's negligence was the main or proximate cause for the The prevailing view is that the same rule applies in the case of a drawee
corresponding loss. who pays a bill without having previously accepted it.16

In this connection, it will be recalled that the PCIB did not cash the WHEREFORE, the decision appealed from is hereby affirmed, with costs
check upon its presentation by Augusto Lim; that the latter had against the Philippine National Bank. It is so ordered.
merely deposited it in his current account with the PCIB; that, on the
same day, the PCIB sent it, through the Central Bank, to the PNB, for
clearing; that the PNB did not return the check to the PCIB the next 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 would honor it; that, in fact, the PNB honored the check
and paid its amount to the PCIB; and that only then did the PCIB allow
 Treasurer and countersigned by the Provincial Auditor or the Secretary of
the Sangguniang Bayan.
Republic of the Philippines
SUPREME COURT A portion of the funds of the province is allocated to the Concepcion
Manila Emergency Hospital. 2 The allotment checks for said government hospital
are drawn to the order of "Concepcion Emergency Hospital, Concepcion,
SECOND DIVISION Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac." The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.
G.R. No. 107382/G.R. No. 107612 January 31, 1996
In January 1981, the books of account of the Provincial Treasurer were
ASSOCIATED BANK, petitioner,
post-audited by the Provincial Auditor. It was then discovered that the
vs.
hospital did not receive several allotment checks drawn by the Province.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and
PHILIPPINE NATIONAL BANK, respondents.
On February 19, 1981, the Provincial Treasurer requested the manager
of the PNB to return all of its cleared checks which were issued from
xxxxxxxxxxxxxxxxxxxxx
1977 to 1980 in order to verify the regularity of their encashment. After
the checks were examined, the Provincial Treasurer learned that 30
G.R. No. 107612 January 31, 1996 checks amounting to P203,300.00 were encashed by one Fausto
Pangilinan, with the Associated Bank acting as collecting bank.
PHILIPPINE NATIONAL BANK, petitioner,
vs. It turned out that Fausto Pangilinan, who was the administrative officer
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and and cashier of payee hospital until his retirement on February 28, 1978,
ASSOCIATED BANK, respondents. collected the questioned checks from the office of the Provincial
Treasurer. He claimed to be assisting or helping the hospital follow up the
DECISION release of the checks and had official receipts. 3Pangilinan sought to
encash the first check 4 with Associated Bank. However, the manager of
ROMERO, J.: Associated Bank refused and suggested that Pangilinan deposit the
check in his personal savings account with the same bank. Pangilinan
Where thirty checks bearing forged endorsements are paid, who bears was able to withdraw the money when the check was cleared and paid by
the loss, the drawer, the drawee bank or the collecting bank? the drawee bank, PNB.

This is the main issue in these consolidated petitions for review assailing After forging the signature of Dr. Adena Canlas who was chief of the
the decision of the Court of Appeals in "Province of Tarlac v. Philippine payee hospital, Pangilinan followed the same procedure for the second
National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as
No. CV No. 17962). 1 for twenty-eight other checks of various amounts and on various dates.
The last check negotiated by Pangilinan was for f8,000.00 and dated
The facts of the case are as follows: February 10, 1981. 6 All the checks bore the stamp of Associated Bank
which reads "All prior endorsements guaranteed ASSOCIATED BANK."
The Province of Tarlac maintains a current account with the Philippine
National Bank (PNB) Tarlac Branch where the provincial funds are Jesus David, the manager of Associated Bank testified that Pangilinan
deposited. Checks issued by the Province are signed by the Provincial made it appear that the checks were paid to him for certain projects with
the hospital. 7 He did not find as irregular the fact that the checks were not
payable to Pangilinan but to the Concepcion Emergency Hospital. While 4. On the counterclaims on the complaint, third-party complaint
he admitted that his wife and Pangilinan's wife are first cousins, the and fourth-party complaint, the same are hereby ordered
manager denied having given Pangilinan preferential treatment on this dismissed for lack of merit.
account. 8
SO ORDERED. 12
On February 26, 1981, the Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts debited from the PNB and Associated Bank appealed to the Court of
current account of the Province. 9 Appeals. 13 Respondent court affirmed the trial court's decision in toto on
September 30, 1992.
In turn, the PNB manager demanded reimbursement from the Associated
Bank on May 15, 1981. 10 Hence these consolidated petitions which seek a reversal of respondent
appellate court's decision.
As both banks resisted payment, the Province of Tarlac brought suit
against PNB which, in turn, impleaded Associated Bank as third-party PNB assigned two errors. First, the bank contends that respondent court
defendant. The latter then filed a fourth-party complaint against Adena erred in exempting the Province of Tarlac from liability when, in fact, the
Canlas and Fausto Pangilinan. 11 latter was negligent because it delivered and released the questioned
checks to Fausto Pangilinan who was then already retired as the
After trial on the merits, the lower court rendered its decision on March hospital's cashier and administrative officer. PNB also maintains its
21, 1988, disposing as follows: innocence and alleges that as between two innocent persons, the one
whose act was the cause of the loss, in this case the Province of Tarlac,
WHEREFORE, in view of the foregoing, judgment is hereby bears the loss.
rendered:
Next, PNB asserts that it was error for the court to order it to pay the
1. On the basic complaint, in favor of plaintiff Province of Tarlac province and then seek reimbursement from Associated Bank. According
and against defendant Philippine National Bank (PNB), ordering to petitioner bank, respondent appellate Court should have directed
the latter to pay to the former, the sum of Two Hundred Three Associated Bank to pay the adjudged liability directly to the Province of
Thousand Three Hundred (P203,300.00) Pesos with legal interest Tarlac to avoid circuity. 14
thereon from March 20, 1981 until fully paid;
Associated Bank, on the other hand, argues that the order of liability
2. On the third-party complaint, in favor of defendant/third-party should be totally reversed, with the drawee bank (PNB) solely and
plaintiff Philippine National Bank (PNB) and against third-party ultimately bearing the loss.
defendant/fourth-party plaintiff Associated Bank ordering the latter
to reimburse to the former the amount of Two Hundred Three Respondent court allegedly erred in applying Section 23 of the Philippine
Thousand Three Hundred (P203,300.00) Pesos with legal Clearing House Rules instead of Central Bank Circular No. 580, which,
interests thereon from March 20, 1981 until fully paid;. being an administrative regulation issued pursuant to law, has the force
and effect of law. 15 The PCHC Rules are merely contractual stipulations
3. On the fourth-party complaint, the same is hereby ordered among and between member-banks. As such, they cannot prevail over
dismissed for lack of cause of action as against fourth-party the aforesaid CB Circular.
defendant Adena Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as against the latter. It likewise contends that PNB, the drawee bank, is estopped from
asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all
prior indorsements), it merely followed a mandatory requirement for
clearing and had no choice but to place the stamp of guarantee; signature. 19 Thus, a forged indorsement does not operate as the payee's
otherwise, there would be no clearing. The bank will be in a "no-win" indorsement.
situation and will always bear the loss as against the drawee bank. 16
The exception to the general rule in Section 23 is where "a party against
Associated Bank also claims that since PNB already cleared and paid the whom it is sought to enforce a right is precluded from setting up the
value of the forged checks in question, it is now estopped from asserting forgery or want of authority." Parties who warrant or admit the
the defense that Associated Bank guaranteed prior indorsements. The genuineness of the signature in question and those who, by their acts,
drawee bank allegedly has the primary duty to verify the genuineness of silence or negligence are estopped from setting up the defense of
payee's indorsement before paying the check. 17 forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness
While both banks are innocent of the forgery, Associated Bank claims of the signatures on the instrument. 20
that PNB was at fault and should solely bear the loss because it cleared
and paid the forged checks. In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the indorsement
xxx xxx xxx is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course. 21
The case at bench concerns checks payable to the order of Concepcion
Emergency Hospital or its Chief. They were properly issued and bear the The checks involved in this case are order instruments, hence, the
genuine signatures of the drawer, the Province of Tarlac. The infirmity in following discussion is made with reference to the effects of a forged
the questioned checks lies in the payee's (Concepcion Emergency indorsement on an instrument payable to order.
Hospital) indorsements which are forgeries. At the time of their
indorsement, the checks were order instruments. Where the instrument is payable to order at the time of the forgery, such
as the checks in this case, the signature of its rightful holder (here, the
Checks having forged indorsements should be differentiated from forged payee hospital) is essential to transfer title to the same instrument. When
checks or checks bearing the forged signature of the drawer. the holder's indorsement is forged, all parties prior to the forgery may
raise the real defense of forgery against all parties subsequent thereto. 22
Section 23 of the Negotiable Instruments Law (NIL) provides:
An indorser of an order instrument warrants "that the instrument is
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a genuine and in all respects what it purports to be; that he has a good title
signature is forged or made without authority of the person whose to it; that all prior parties had capacity to contract; and that the instrument
signature it purports to be, it is wholly inoperative, and no right to is at the time of his indorsement valid and subsisting." 23 He cannot
retain the instrument, or to give a discharge therefor, or to enforce interpose the defense that signatures prior to him are forged.
payment thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it A collecting bank where a check is deposited and which indorses the
is sought to enforce such right is precluded from setting up the check upon presentment with the drawee bank, is such an indorser. So
forgery or want of authority. even if the indorsement on the check deposited by the banks's client is
forged, the collecting bank is bound by his warranties as an indorser and
A forged signature, whether it be that of the drawer or the payee, is cannot set up the defense of forgery as against the drawee bank.
wholly inoperative and no one can gain title to the instrument through it. A
person whose signature to an instrument was forged was never a party The bank on which a check is drawn, known as the drawee bank, is
and never consented to the contract which allegedly gave rise to such under strict liability to pay the check to the order of the payee. The
instrument. 18 Section 23 does not avoid the instrument but only the forged drawer's instructions are reflected on the face and by the terms of the
check. Payment under a forged indorsement is not to the drawer's order.
When the drawee bank pays a person other than the payee, it does not Since a forged indorsement is inoperative, the collecting bank had no
comply with the terms of the check and violates its duty to charge its right to be paid by the drawee bank. The former must necessarily return
customer's (the drawer) account only for properly payable items. Since the money paid by the latter because it was paid wrongfully. 30
the drawee bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. 24 The general More importantly, by reason of the statutory warranty of a general
rule then is that the drawee bank may not debit the drawer's account and indorser in section 66 of the Negotiable Instruments Law, a collecting
is not entitled to indemnification from the drawer. 25 The risk of loss must bank which indorses a check bearing a forged indorsement and presents
perforce fall on the drawee bank. it to the drawee bank guarantees all prior indorsements, including the
forged indorsement. It warrants that the instrument is genuine, and that it
However, if the drawee bank can prove a failure by the customer/drawer is valid and subsisting at the time of his indorsement. Because the
to exercise ordinary care that substantially contributed to the making of indorsement is a forgery, the collecting bank commits a breach of this
the forged signature, the drawer is precluded from asserting the forgery. warranty and will be accountable to the drawee bank. This liability
scheme operates without regard to fault on the part of the
If at the same time the drawee bank was also negligent to the point of collecting/presenting bank. Even if the latter bank was not negligent, it
substantially contributing to the loss, then such loss from the forgery can would still be liable to the drawee bank because of its indorsement.
be apportioned between the negligent drawer and the negligent bank. 26
The Court has consistently ruled that "the collecting bank or last endorser
In cases involving a forged check, where the drawer's signature is forged, generally suffers the loss because it has the duty to ascertain the
the drawer can recover from the drawee bank. No drawee bank has a genuineness of all prior endorsements considering that the act of
right to pay a forged check. If it does, it shall have to recredit the amount presenting the check for payment to the drawee is an assertion that the
of the check to the account of the drawer. The liability chain ends with the party making the presentment has done its duty to ascertain the
drawee bank whose responsibility it is to know the drawer's signature genuineness of the endorsements." 31
since the latter is its customer. 27
The drawee bank is not similarly situated as the collecting bank because
In cases involving checks with forged indorsements, such as the present the former makes no warranty as to the genuineness. of any
petition, the chain of liability does not end with the drawee bank. The indorsement. 32 The drawee bank's duty is but to verify the genuineness of
drawee bank may not debit the account of the drawer but may generally the drawer's signature and not of the indorsement because the drawer is
pass liability back through the collection chain to the party who took from its client.
the forger and, of course, to the forger himself, if available. 28 In other
words, the drawee bank canseek reimbursement or a return of the Moreover, the collecting bank is made liable because it is privy to the
amount it paid from the presentor bank or person. 29 Theoretically, the depositor who negotiated the check. The bank knows him, his address
latter can demand reimbursement from the person who indorsed the and history because he is a client. It has taken a risk on his deposit. The
check to it and so on. The loss falls on the party who took the check from bank is also in a better position to detect forgery, fraud or irregularity in
the forger, or on the forger himself. the indorsement.

In this case, the checks were indorsed by the collecting bank (Associated Hence, the drawee bank can recover the amount paid on the check
Bank) to the drawee bank (PNB). The former will necessarily be liable to bearing a forged indorsement from the collecting bank. However, a
the latter for the checks bearing forged indorsements. If the forgery is that drawee bank has the duty to promptly inform the presentor of the forgery
of the payee's or holder's indorsement, the collecting bank is held liable, upon discovery. If the drawee bank delays in informing the presentor of
without prejudice to the latter proceeding against the forger. the forgery, thereby depriving said presentor of the right to recover from
the forger, the former is deemed negligent and can no longer recover
from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot A Yes, sir.
debit the current account of the Province of Tarlac because it paid checks
which bore forged indorsements. However, if the Province of Tarlac as Q Will you please tell us how at the time (sic) when the
drawer was negligent to the point of substantially contributing to the loss, authorized representative of Concepcion Emergency Hospital is
then the drawee bank PNB can charge its account. If both drawee bank- and was supposed to be Miss Juco?
PNB and drawer-Province of Tarlac were negligent, the loss should be
properly apportioned between them. A Well, as far as my investigation show (sic) the assistant cashier
told me that Pangilinan represented himself as also authorized to
The loss incurred by drawee bank-PNB can be passed on to the help in the release of these checks and we were apparently
collecting bank-Associated Bank which presented and indorsed the misled because they accepted the representation of Pangilinan
checks to it. Associated Bank can, in turn, hold the forger, Fausto that he was helping them in the release of the checks and
Pangilinan, liable. besides according to them they were, Pangilinan, like the rest,
was able to present an official receipt to acknowledge these
If PNB negligently delayed in informing Associated Bank of the forgery, receipts and according to them since this is a government check
thus depriving the latter of the opportunity to recover from the forger, it and believed that it will eventually go to the hospital following the
forfeits its right to reimbursement and will be made to bear the loss. standard procedure of negotiating government checks, they
released the checks to Pangilinan aside from Miss Juco.34
After careful examination of the records, the Court finds that the Province
of Tarlac was equally negligent and should, therefore, share the burden The failure of the Province of Tarlac to exercise due care contributed to a
of loss from the checks bearing a forged indorsement. significant degree to the loss tantamount to negligence. Hence, the
Province of Tarlac should be liable for part of the total amount paid on the
The Province of Tarlac permitted Fausto Pangilinan to collect the checks questioned checks.
when the latter, having already retired from government service, was no
longer connected with the hospital. With the exception of the first check The drawee bank PNB also breached its duty to pay only according to the
(dated January 17, 1978), all the checks were issued and released after terms of the check. Hence, it cannot escape liability and should also bear
Pangilinan's retirement on February 28, 1978. After nearly three years, part of the loss.
the Treasurer's office was still releasing the checks to the retired cashier.
In addition, some of the aid allotment checks were released to Pangilinan As earlier stated, PNB can recover from the collecting bank.
and the others to Elizabeth Juco, the new cashier. The fact that there
were now two persons collecting the checks for the hospital is an In the case of Associated Bank v. CA, 35 six crossed checks with forged
unmistakable sign of an irregularity which should have alerted employees indorsements were deposited in the forger's account with the collecting
in the Treasurer's office of the fraud being committed. There is also bank and were later paid by four different drawee banks. The Court found
evidence indicating that the provincial employees were aware of the collecting bank (Associated) to be negligent and held:
Pangilinan's retirement and consequent dissociation from the hospital.
Jose Meru, the Provincial Treasurer, testified:.
The Bank should have first verified his right to endorse the
crossed checks, of which he was not the payee, and to deposit
ATTY. MORGA: the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were
Q Now, is it true that for a given month there were two releases of issued for deposit only to the private respondent's account. . . .
checks, one went to Mr. Pangilinan and one went to Miss Juco?
The situation in the case at bench is analogous to the above case, for it
JOSE MERU: was not the payee who deposited the checks with the collecting bank.
Here, the checks were all payable to Concepcion Emergency Hospital but
it was Fausto Pangilinan who deposited the checks in his personal Rules but by CB Circular No. 580. Clearly then, the CB circular was
savings account. applicable when the forgery of the checks was discovered in 1981.

Although Associated Bank claims that the guarantee stamped on the The rule mandates that the checks be returned within twenty-four hours
checks (All prior and/or lack of endorsements guaranteed) is merely a after discovery of the forgery but in no event beyond the period fixed by
requirement forced upon it by clearing house rules, it cannot but remain law for filing a legal action. The rationale of the rule is to give the
liable. The stamp guaranteeing prior indorsements is not an empty rubric collecting bank (which indorsed the check) adequate opportunity to
which a bank must fulfill for the sake of convenience. A bank is not proceed against the forger. If prompt notice is not given, the collecting
required to accept all the checks negotiated to it. It is within the bank's bank maybe prejudiced and lose the opportunity to go after its depositor.
discretion to receive a check for no banking institution would consciously
or deliberately accept a check bearing a forged indorsement. When a The Court finds that even if PNB did not return the questioned checks to
check is deposited with the collecting bank, it takes a risk on its depositor. Associated Bank within twenty-four hours, as mandated by the rule, PNB
It is only logical that this bank be held accountable for checks deposited did not commit negligent delay. Under the circumstances, PNB gave
by its customers. prompt notice to Associated Bank and the latter bank was not prejudiced
in going after Fausto Pangilinan. After the Province of Tarlac informed
A delay in informing the collecting bank (Associated Bank) of the forgery, PNB of the forgeries, PNB necessarily had to inspect the checks and
which deprives it of the opportunity to go after the forger, signifies conduct its own investigation. Thereafter, it requested the Provincial
negligence on the part of the drawee bank (PNB) and will preclude it from Treasurer's office on March 31, 1981 to return the checks for verification.
claiming reimbursement. The Province of Tarlac returned the checks only on April 22, 1981. Two
days later, Associated Bank received the checks from PNB. 36
It is here that Associated Bank's assignment of error concerning C.B.
Circular No. 580 and Section 23 of the Philippine Clearing House Associated Bank was also furnished a copy of the Province's letter of
Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. demand to PNB dated March 20, 1981, thus giving it notice of the
580, items bearing a forged endorsement shall be returned within twenty- forgeries. At this time, however, Pangilinan's account with Associated had
Sour (24) hours after discovery of the forgery but in no event beyond the only P24.63 in it. 37Had Associated Bank decided to debit Pangilinan's
period fixed or provided by law for filing of a legal action by the returning account, it could not have recovered the amounts paid on the questioned
bank. Section 23 of the PCHC Rules deleted the requirement that items checks. In addition, while Associated Bank filed a fourth-party complaint
bearing a forged endorsement should be returned within twenty-four against Fausto Pangilinan, it did not present evidence against Pangilinan
hours. Associated Bank now argues that the aforementioned Central and even presented him as its rebuttal witness. 38 Hence, Associated
Bank Circular is applicable. Since PNB did not return the questioned Bank was not prejudiced by PNB's failure to comply with the twenty-four-
checks within twenty-four hours, but several days later, Associated Bank hour return rule.
alleges that PNB should be considered negligent and not entitled to
reimbursement of the amount it paid on the checks. Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The
The Court deems it unnecessary to discuss Associated Bank's assertions Court finds this contention unmeritorious. Even if PNB cleared and paid
that CB Circular No. 580 is an administrative regulation issued pursuant the checks, it can still recover from Associated Bank. This is true even if
to law and as such, must prevail over the PCHC rule. The Central Bank the payee's Chief Officer who was supposed to have indorsed the checks
circular was in force for all banks until June 1980 when the Philippine is also a customer of the drawee bank. 39 PNB's duty was to verify the
Clearing House Corporation (PCHC) was set up and commenced genuineness of the drawer's signature and not the genuineness of
operations. Banks in Metro Manila were covered by the PCHC while payee's indorsement. Associated Bank, as the collecting bank, is the
banks located elsewhere still had to go through Central Bank Clearing. In entity with the duty to verify the genuineness of the payee's indorsement.
any event, the twenty-four-hour return rule was adopted by the PCHC
until it was changed in 1982. The contending banks herein, which are
both branches in Tarlac province, are therefore not covered by PCHC
PNB also avers that respondent court erred in adjudging circuitous IN VIEW OF THE FOREGOING, the petition for review filed by the
liability by directing PNB to return to the Province of Tarlac the amount of Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
the checks and then directing Associated Bank to reimburse PNB. The GRANTED. The petition for review filed by the Associated Bank (G.R.
Court finds nothing wrong with the mode of the award. The drawer, No. 107382) is hereby DENIED. The decision of the trial court is
Province of Tarlac, is a clientor customer of the PNB, not of Associated MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of
Bank. There is no privity of contract between the drawer and the P203,300.00 to the Province of Tarlac, with legal interest from March 20,
collecting bank. 1981 until the payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal
The trial court made PNB and Associated Bank liable with legal interest interest from March 20, 1981 until payment is made.
from March 20, 1981, the date of extrajudicial demand made by the
Province of Tarlac on PNB. The payments to be made in this case stem SO ORDERED.
from the deposits of the Province of Tarlac in its current account with the
PNB. Bank deposits are considered under the law as loans. 40 Central
Bank Circular No. 416 prescribes a twelve percent (12%) interest per
annum for loans, forebearance of money, goods or credits in the absence
of express stipulation. Normally, current accounts are likewise interest-
bearing, by express contract, thus excluding them from the coverage of
CB Circular No. 416. In this case, however, the actual interest rate, if any,
for the current account opened by the Province of Tarlac with PNB was
not given in evidence. Hence, the Court deems it wise to affirm the trial
court's use of the legal interest rate, or six percent (6%) per annum. The
interest rate shall be computed from the date of default, or the date of
judicial or extrajudicial demand. 41 The trial court did not err in granting
legal interest from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent -

fifty percent (50%-50%). Due to the negligence of the Province of Tarlac
in releasing the checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining
why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to
the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser of
the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was
also remiss in its duty to ascertain the genuineness of the payee's
indorsement.
 Republic of the Philippines March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules
SUPREME COURT of Court setting forth the following as the alleged errors of the respondent
Manila Court:1

SECOND DIVISION I

THE RESPONDENT COURT OF APPEALS ERRED IN

RULING THAT THE NEGLIGENCE OF THE DRAWER IS
G.R. No. 92244 February 9, 1993 THE PROXIMATE CAUSE OF THE RESULTING INJURY
TO THE DRAWEE BANK, AND THE DRAWER IS
NATIVIDAD GEMPESAW, petitioner, PRECLUDED FROM SETTING UP THE FORGERY OR
vs. WANT OF AUTHORITY.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents. II

L.B. Camins for petitioner. THE RESPONDENT COURT OF APPEALS ALSO

ERRED IN NOT FINDING AND RULING THAT IT IS THE
Angara, Abello, Concepcion, Regals & Cruz for private respondent GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN
FORGING THE SIGNATURE OF THE PAYEES AND
CAMPOS, JR., J.: THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO
PERSONS, OTHER THAN TO THE INTENDED PAYEES
SPECIFIED IN THE CHECKS, IS THE DIRECT AND
From the adverse decision * of the Court of Appeals (CA-G.R. CV No.
PROXIMATE CAUSE OF THE DAMAGE TO
16447), petitioner, Natividad Gempesaw, appealed to this Court in a
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
Petition for Review, on the issue of the right of the drawer to recover from
DEBITED.
the drawee bank who pays a check with a forged indorsement of the
payee, debiting the same against the drawer's account.
III
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications THE RESPONDENT COURT OF APPEALS ALSO
(respondent drawee Bank) for recovery of the money value of eighty-two ERRED IN NOT ORDERING THE RESPONDENT BANK
(82) checks charged against the petitioner's account with the respondent TO RESTORE OR RE-CREDIT THE CHECKING
drawee Bank on the ground that the payees' indorsements were ACCOUNT OF THE PETITIONER IN THE CALOOCAN
forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO
which tried the case, rendered a decision on November 17, 1987 (82) CHECKS WHICH IS IN THE AMOUNT OF
dismissing the complaint as well as the respondent drawee Bank's P1,208,606.89 WITH LEGAL INTEREST.
counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds, From the records, the relevant facts are as follows:
namely (1) that the plaintiff's (petitioner herein) gross negligence in
issuing the checks was the proximate cause of the loss and (2) assuming Petitioner Natividad O. Gempesaw (petitioner) owns and operates four
that the bank was also negligent, the loss must nevertheless be borne by grocery stores located at Rizal Avenue Extension and at Second Avenue,
the party whose negligence was the proximate cause of the loss. On Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 13- dated August 9, 1984 in favor of Malinta Exchange Mart
00038-1 with the Caloocan City Branch of the respondent drawee Bank. for P11,107.16 (Exh. A-62), her obligation was only
To facilitate payment of debts to her suppliers, petitioner draws checks P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated
against her checking account with the respondent bank as drawee. Her August 11, 1984 in favor of Grocer's International Food
customary practice of issuing checks in payment of her suppliers was as Corp. in the amount of P11,335.60 (Exh. A-66), her
follows: the checks were prepared and filled up as to all material obligation was only P1,335.60 (Exh. E and E-1); (7) in
particulars by her trusted bookkeeper, Alicia Galang, an employee for Check No. 589019 dated March 17, 1984 in favor of
more than eight (8) years. After the bookkeeper prepared the checks, the Sophy Products in the amount of P11,648.00 (Exh. A-78),
completed checks were submitted to the petitioner for her signature, her obligation was only P648.00 (Exh. G); (8) in Check
together with the corresponding invoice receipts which indicate the No. 589028 dated March 10, 1984 for the amount of
correct obligations due and payable to her suppliers. Petitioner signed P11,520.00 in favor of the Yakult Philippines (Exh. A-73),
each and every check without bothering to verify the accuracy of the the latter's invoice was only P520.00 (Exh. H-2); (9) in
checks against the corresponding invoices because she reposed full and Check No. 62033 dated May 23, 1984 in the amount of
implicit trust and confidence on her bookkeeper. The issuance and P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-
delivery of the checks to the payees named therein were left to the 34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
bookkeeper. Petitioner admitted that she did not make any verification as
to whether or not the checks were delivered to their respective payees. Practically, all the checks issued and honored by the respondent drawee
Although the respondent drawee Bank notified her of all checks bank were crossed checks.3 Aside from the daily notice given to the
presented to and paid by the bank, petitioner did not verify he correctness petitioner by the respondent drawee Bank, the latter also furnished her
of the returned checks, much less check if the payees actually received with a monthly statement of her transactions, attaching thereto all the
the checks in payment for the supplies she received. In the course of her cancelled checks she had issued and which were debited against her
business operations covering a period of two years, petitioner issued, current account. It was only after the lapse of more two (2) years that
following her usual practice stated above, a total of eighty-two (82) petitioner found out about the fraudulent manipulations of her
checks in favor of several suppliers. These checks were all presented by bookkeeper.
the indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited the All the eighty-two (82) checks with forged signatures of the payees were
amounts thereof against petitioner's checking account numbered 30- brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank
00038-1. Most of the aforementioned checks were for amounts in excess at the Buendia branch, who, without authority therefor, accepted them all
of her actual obligations to the various payees as shown in their for deposit at the Buendia branch to the credit and/or in the accounts of
corresponding invoices. To mention a few: 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)
. . . 1) in Check No. 621127, dated June 27, 1984 in the checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
amount of P11,895.23 in favor of Kawsek Inc. (Exh. A- Romero at the respondent drawee Bank's Buendia branch, and four (4)
60), appellant's actual obligation to said payee was only checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on of the checks were deposited in Account No. 0443-4, under the name of
September 18, 1984 in favor of Senson Enterprises in the Benito Lam at the Elcaño branch of the respondent drawee Bank.
amount of P11,041.20 (Exh. A-67) appellant's actual
obligation to said payee was only P1,041.20 (Exh. 7); (3) About thirty (30) of the payees whose names were specifically written on
in Check No. 589092 dated April 7, 1984 for the amount the checks testified that they did not receive nor even see the subject
of P11,672.47 in favor of Marchem (Exh. A-61) appellant's checks and that the indorsements appearing at the back of the checks
obligation was only P1,672.47 (Exh. B); (4) in Check No. were not theirs.
620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only
The team of auditors from the main office of the respondent drawee Bank
P677.10 (Exhs. C and C-1); (5) in Check No. 651862
which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under in due course. Thus, if a person's signature is forged as a maker
the rules of the respondent drawee Bank, only a Branch Manager and no of a promissory note, he cannot be made to pay because he
other official of the respondent drawee bank, may accept a second never made the promise to pay. Or where a person's signature as
indorsement on a check for deposit. In the case at bar, all the deposit a drawer of a check is forged, the drawee bank cannot charge the
slips of the eighty-two (82) checks in question were initialed and/or amount thereof against the drawer's account because he never
approved for deposit by Ernest L. Boon. The Branch Managers of the gave the bank the order to pay. And said section does not refer
Ongpin and Elcaño branches accepted the deposits made in the Buendia only to the forged signature of the maker of a promissory note
branch and credited the accounts of Alfredo Y. Romero and Benito Lam and of the drawer of a check. It covers also a forged
in their respective branches. indorsement, i.e., the forged signature of the payee or indorsee of
a note or check. Since under said provision a forged signature is
On November 7, 1984, petitioner made a written demand on respondent "wholly inoperative", no one can gain title to the instrument
drawee Bank to credit her account with the money value of the eighty-two through such forged indorsement. Such an indorsement prevents
(82) checks totalling P1,208.606.89 for having been wrongfully charged any subsequent party from acquiring any right as against any
against her account. Respondent drawee Bank refused to grant party whose name appears prior to the forgery. Although rights
petitioner's demand. On January 23, 1985, petitioner filed the complaint may exist between and among parties subsequent to the forged
with the Regional Trial Court. indorsement, not one of them can acquire rights against parties
prior to the forgery. Such forged indorsement cuts off the rights of
This is not a suit by the party whose signature was forged on a check all subsequent parties as against parties prior to the forgery.
drawn against the drawee bank. The payees are not parties to the case. However, the law makes an exception to these rules where a
Rather, it is the drawer, whose signature is genuine, who instituted this party is precluded from setting up forgery as a defense.
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 As a matter of practical significance, problems arising from forged
where the indorsements of the payees were forged. How and by whom indorsements of checks may generally be broken into two types of cases:
the forgeries were committed are not established on the record, but the (1) where forgery was accomplished by a person not associated with the
respective payees admitted that they did not receive those checks and drawer — for example a mail robbery; and (2) where the indorsement
therefore never indorsed the same. The applicable law is the Negotiable was forged by an agent of the drawer. This difference in situations would
Instruments Law4 (heretofore referred to as the NIL). Section 23 of the determine the effect of the drawer's negligence with respect to forged
NIL provides: indorsements. While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast to a duty
When a signature is forged or made without the authority imposed upon him to look for forgeries of his own name, a depositor is
of the person whose signature it purports to be, it is wholly under a duty to set up an accounting system and a business procedure
inoperative, and no right to retain the instrument, or to as are reasonably calculated to prevent or render difficult the forgery of
give a discharge therefor, or to enforce payment thereof indorsements, particularly by the depositor's own employees. And if the
against any party thereto, can be acquired through or drawer (depositor) learns that a check drawn by him has been paid under
under such signature, unless the party against whom it is a forged indorsement, the drawer is under duty promptly to report such
sought to enforce such right is precluded from setting up fact to the drawee bank.5For his negligence or failure either to discover or
the forgery or want of authority. to report promptly the fact of such forgery to the drawee, the drawer loses
his right against the drawee who has debited his account under a forged
indorsement.6 In other words, he is precluded from using forgery as a
Under the aforecited provision, forgery is a real or absolute
basis for his claim for re-crediting of his account.
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 In the case at bar, petitioner admitted that the checks were filled up and
instrument. Since his signature does not appear in the instrument, completed by her trusted employee, Alicia Galang, and were given to her
he cannot be held liable thereon by anyone, not even by a holder
for her signature. Her signing the checks made the negotiable instrument participation of the latter. Most of the cases involving forgery by an agent
complete. Prior to signing the checks, there was no valid contract yet. or employee deal with the payee's indorsement. The drawer and the
payee often time shave business relations of long standing. The
Every contract on a negotiable instrument is incomplete and revocable continued occurrence of business transactions of the same nature
until delivery of the instrument to the payee for the purpose of giving provides the opportunity for the agent/employee to commit the fraud after
effect thereto.7 The first delivery of the instrument, complete in form, to having developed familiarity with the signatures of the parties. However,
the payee who takes it as a holder, is called issuance of the sooner or later, some leak will show on the drawer's books. It will then be
instrument.8 Without the initial delivery of the instrument from the drawer just a question of time until the fraud is discovered. This is specially true
of the check to the payee, there can be no valid and binding contract and when the agent perpetrates a series of forgeries as in the case at bar.
no liability on the instrument.
The negligence of a depositor which will prevent recovery of an
Petitioner completed the checks by signing them as drawer and unauthorized payment is based on failure of the depositor to act as a
thereafter authorized her employee Alicia Galang to deliver the eighty-two prudent businessman would under the circumstances. In the case at bar,
(82) checks to their respective payees. Instead of issuing the checks to the petitioner relied implicitly upon the honesty and loyalty of her
the payees as named in the checks, Alicia Galang delivered them to the bookkeeper, and did not even verify the accuracy of amounts of the
Chief Accountant of the Buendia branch of the respondent drawee Bank, checks she signed against the invoices attached thereto. Furthermore,
a certain Ernest L. Boon. It was established that the signatures of the although she regularly received her bank statements, she apparently did
payees as first indorsers were forged. The record fails to show the not carefully examine the same nor the check stubs and the returned
identity of the party who made the forged signatures. The checks were checks, and did not compare them with the same invoices. Otherwise,
then indorsed for the second time with the names of Alfredo Y. Romero she could have easily discovered the discrepancies between the checks
and Benito Lam, and were deposited in the latter's accounts as earlier and the documents serving as bases for the checks. With such discovery,
noted. The second indorsements were all genuine signatures of the the subsequent forgeries would not have been accomplished. It was not
alleged holders. All the eighty-two (82) checks bearing the forged until two years after the bookkeeper commenced her fraudulent scheme
indorsements of the payees and the genuine second indorsements of that petitioner discovered that eighty-two (82) checks were wrongfully
Alfredo Y. Romero and Benito Lam were accepted for deposit at the charged to her account, at which she notified the respondent drawee
Buendia branch of respondent drawee Bank to the credit of their bank.
respective savings accounts in the Buendia, Ongpin and Elcaño
branches of the same bank. The total amount of P1,208,606.89, It is highly improbable that in a period of two years, not one of Petitioner's
represented by eighty-two (82) checks, were credited and paid out by suppliers complained of non-payment. Assuming that even one single
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and complaint had been made, petitioner would have been duty-bound, as far
debited against petitioner's checking account No. 13-00038-1, Caloocan as the respondent drawee Bank was concerned, to make an adequate
branch. investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
As a rule, a drawee bank who has paid a check on which an indorsement adequate inquiry constituted negligence which resulted in the bank's
has been forged cannot charge the drawer's account for the amount of honoring of the subsequent checks with forged indorsements. On the
said check. An exception to this rule is where the drawer is guilty of such other hand, since the record mentions nothing about such a complaint,
negligence which causes the bank to honor such a check or checks. If a the possibility exists that the checks in question covered inexistent sales.
check is stolen from the payee, it is quite obvious that the drawer cannot But even in such a case, considering the length of a period of two (2)
possibly discover the forged indorsement by mere examination of his years, it is hard to believe that petitioner did not know or realize that she
cancelled check. This accounts for the rule that although a depositor was paying more than she should for the supplies she was actually
owes a duty to his drawee bank to examine his cancelled checks for getting. A depositor may not sit idly by, after knowledge has come to her
forgery of his own signature, he has no similar duty as to forged that her funds seem to be disappearing or that there may be a leak in her
indorsements. A different situation arises where the indorsement was business, and refrain from taking the steps that a careful and prudent
forged by an employee or agent of the drawer, or done with the active businessman would take in such circumstances and if taken, would result
in stopping the continuance of the fraudulent scheme. If she fails to take Petitioner argues that respondent drawee Bank should not have honored
steps, the facts may establish her negligence, and in that event, she the checks because they were crossed checks. Issuing a crossed check
would be estopped from recovering from the bank.9 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
One thing is clear from the records — that the petitioner failed to examine drawee bank for payment in cash. Instead, the check can only be
her records with reasonable diligence whether before she signed the deposited with the payee's bank which in turn must present it for payment
checks or after receiving her bank statements. Had the petitioner against the drawee bank in the course of normal banking transactions
examined her records more carefully, particularly the invoice receipts, between banks. The crossed check cannot be presented for payment but
cancelled checks, check book stubs, and had she compared the sums it can only be deposited and the drawee bank may only pay to another
written as amounts payable in the eighty-two (82) checks with the bank in the payee's or indorser's account.
pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales Petitioner likewise contends that banking rules prohibit the drawee bank
invoices. Had she noticed these discrepancies, she should not have from having checks with more than one indorsement. The banking rule
signed those checks, and should have conducted an inquiry as to the banning acceptance of checks for deposit or cash payment with more
reason for the irregular entries. Likewise had petitioner been more vigilant than one indorsement unless cleared by some bank officials does not
in going over her current account by taking careful note of the daily invalidate the instrument; neither does it invalidate the negotiation or
reports made by respondent drawee Bank in her issued checks, or at transfer of the said check. In effect, this rule destroys the negotiability of
least made random scrutiny of cancelled checks returned by respondent bills/checks by limiting their negotiation by indorsement of only the payee.
drawee Bank at the close of each month, she could have easily Under the NIL, the only kind of indorsement which stops the further
discovered the fraud being perpetrated by Alicia Galang, and could have negotiation of an instrument is a restrictive indorsement which prohibits
reported the matter to the respondent drawee Bank. The respondent the further negotiation thereof.
drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the Sec. 36. When indorsement restrictive. — An indorsement
proximate cause of her loss. And since it was her negligence which is restrictive which either
caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the (a) Prohibits further negotiation of the instrument; or
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
xxx xxx xxx
NIL, she is now precluded from using the forgery to prevent the bank's
debiting of her account.
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
The doctrine in the case of Great Eastern Life Insurance
so that any subsequent party may be forewarned that ceases to be
Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar
negotiable. However, the restrictive indorsee acquires the right to receive
because in said case, the check was fraudulently taken and the signature
payment and bring any action thereon as any indorser, but he can no
of the payee was forged not by an agent or employee of the drawer. The
longer transfer his rights as such indorsee where the form of the
drawer was not found to be negligent in the handling of its business
indorsement does not authorize him to do so. 12
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 Although the holder of a check cannot compel a drawee bank to honor it
negligent, the drawee was duty-bound to restore to the drawer's account because there is no privity between them, as far as the drawer-depositor
the amount theretofore paid under the check with a forged payee's is concerned, such bank may not legally refuse to honor a negotiable bill
indorsement because the drawee did not pay as ordered by the drawer. 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 We hold that banking business is so impressed with public interest where
liability on the check unless he accepts it. But the drawee will make itself the trust and confidence of the public in general is of paramount
liable to a suit for damages at the instance of the drawer for wrongful importance such that the appropriate standard of diligence must be a
dishonor of the bill or check. high degree of diligence, if not the utmost diligence. Surely, respondent
drawee Bank cannot claim it exercised such a degree of diligence that is
Thus, it is clear that under the NIL, petitioner is precluded from raising the required of it. There is no way We can allow it now to escape liability for
defense of forgery by reason of her gross negligence. But under Section such negligence. Its liability as obligor is not merely vicarious but primary
196 of the NIL, any case not provided for in the Act shall be governed by wherein the defense of exercise of due diligence in the selection and
the provisions of existing legislation. Under the laws of quasi-delict, she supervision of its employees is of no moment.
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 Premises considered, respondent drawee Bank is adjudged liable to
because negligence is the proximate cause thereof and under Article share the loss with the petitioner on a fifty-fifty ratio in accordance with
2179 of the Civil Code, she may not be awarded damages. However, Article 172 which provides:
under Article 1170 of the same Code the respondent drawee Bank may
be held liable for damages. The article provides — Responsibility arising from negligence in the performance
of every kind of obligation is also demandable, but such
Those who in the performance of their obligations are liability may be regulated by the courts according to the
guilty of fraud, negligence or delay, and those who in any circumstances.
manner contravene the tenor thereof, are liable for
damages. 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
There is no question that there is a contractual relation between petitioner based on law and substantial justice and not on mere equity. And
as depositor (obligee) and the respondent drawee bank as the obligor. In although the case was brought before the court not on breach of
the performance of its obligation, the drawee bank is bound by its internal contractual obligations, the courts are not precluded from applying to the
banking rules and regulations which form part of any contract it enters circumstances of the case the laws pertinent thereto. Thus, the fact that
into with any of its depositors. When it violated its internal rules that petitioner's negligence was found to be the proximate cause of her loss
second endorsements are not to be accepted without the approval of its does not preclude her from recovering damages. The reason why the
branch managers and it did accept the same upon the mere approval of decision dealt on a discussion on proximate cause is due to the error
Boon, a chief accountant, it contravened the tenor of its obligation at the pointed out by petitioner as allegedly committed by the respondent court.
very least, if it were not actually guilty of fraud or negligence. And in breaches of contract under Article 1173, due diligence on the part
of the defendant is not a defense.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second PREMISES CONSIDERED, the case is hereby ordered REMANDED to
indorsement for deposit even without the approval of the branch manager the trial court for the reception of evidence to determine the exact amount
despite periodic inspection conducted by a team of auditors from the of loss suffered by the petitioner, considering that she partly benefited
main office constitutes negligence on the part of the bank in carrying out from the issuance of the questioned checks since the obligation for which
its obligations to its depositors. Article 1173 provides — she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be
The fault or negligence of the obligor consists in the considered as loss of which one half must be paid by respondent drawee
omission of that diligence which is required by the nature bank to herein petitioner.
of the obligation and corresponds with the circumstance
of the persons, of the time and of the place. . . . SO ORDERED.