[G.R. No. 138510. October 10, 2002.

TRADERS ROYAL BANK, petitioner, vs. RADIO

PHILIPPINES NETWORK, INC., INTERCONTINENTAL
BROADCASTING CORPORATION and BANAHAW
BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS, and
SECURITY BANK AND TRUST
COMPANY,  respondents.

Herrera Teehankee Faylona & Cabrera Law  Offices  for

petitioner.
Mercado Aguillardo & Aceron Law  Firm  for Radio Phil.
Network, Inc.
Castro Yan Biñas Ortile Samillano & Mangorobang  for
Security Bank  Corp.

SYNOPSIS

Respondent networks purchased from petitioner Traders

Royal Bank (TRB) three manager's checks
payable to the Bureau of Internal Revenue
(TRB) to be used as payment for their tax liabilities. It was,
however, discovered that the three checks were never
paid to the payee BIR but were presented for
payment to respondent Security Bank and Trust Company
(SBTC) by some unknown persons who, in order to receive
payment therefor, forged the name of the payee. Despite this
fraud, petitioner paid the three checks. Thus, the respondent
networks filed a complaint for damages against the two
banks. The trial court found both banks liable. On
appeal, the Court of Appeals absolved SBTC from liability and
held TRB solely liable to respondent networks.
Hence, the instant petition for review on certiorari.
 The Supreme Court held that petitioner TRB was remiss in
its duty and obligation, and must, therefore,
suffer the consequences of its negligence and
disregard of established banking rules and procedures. It held
that petitioner TRB has no right to reimbursement because it
did not pay the rightful holder or other person or entity
entitled to receive payment. Petitioner ought to have known
that, where a check was drawn payable to the order of one
person and was presented for payment by another and purports
upon its face to have been duly indorsed
by the payee of the check, it was the primary
duty of petitioner to know that the check was duly indorsed
by the original payee and, where it
pays the amount of the check to a third person who has
forged the signature of the payee, the loss falls upon
petitioner who cashed the check. Its only remedy was
against the person to whom it paid the money. The Court
noted further that one of the subject checks was crossed.
Thus, the crossing of one of the subject checks should have
put petitioner on guard. It was duty-
bound to ascertain the indorser's title to the check
or the nature of his possession. By encashing in
favor of unknown persons checks which were on their face
payable to the BIR, a government agency which can act only
through its agents, petitioner did so at its peril and must
suffer the consequences of the unauthorized or wrongful
endorsement. Accordingly, the Court
affirmed the decision of the Court of Appeals, but
modified the award of damages by
deleting the award of exemplary damages and
reducing the amount of attorney's fees.

SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW;
CHECKS; BANK IS CONSIDERED AS PAYING OUT OF ITS
FUNDS WHEN IT PAYS A FORGED CHECK. — "When a
signature is forged or made
without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto,
can be acquired through or under such signature."
Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor.
2. ID.; ID.; ID.; DUTY OF DRAWEE BANK WHERE A CHECK
DRAWN PAYABLE TO THE ORDER OF ONE
PERSON IS PRESENTED FOR PAYMENT BY ANOTHER. —
Petitioner ought to have known that, where a check is drawn
payable to the order of one person and is presented for
payment by another and purports upon its face to have been
duly indorsed by the payee of the check, it is the primary
duty of petitioner to know that the check was duly indorsed
by the original payee and, where it
pays the amount of the check to a third person who has
forged the signature of the payee, the loss falls upon
petitioner who cashed the check. Its only
remedy is against the person to whom it paid the money.
3. ID.; ID.; ID.; CROSSED CHECK; EFFECTS. — It
should be noted further that one of the subject checks was
crossed. The crossing of one of the subject checks should
have put petitioner on guard; it was duty-
bound to ascertain the indorser's title to the check
or the nature of his possession. Petitioner should have
known the effects of a crossed check:
(a) the check may not be encashed but only deposited
in the bank; (b) the check may be negotiated only
once to one who has an account with a bank and
(c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise,
he is not a holder in due course.
4. ID.; ID.; ID.; DRAWEE BANK MUST
SUFFER THE CONSEQUENCES OF THE UNAUTHORIZED OR
WRONGFUL ENDORSEMENT WHEN IT ENCASHED IN
FAVOR OF UNKNOWN PERSON, CHECKS WHICH WERE ON
THEIR FACE PAYABLE TO A GOVERNMENT AGENCY. — By
encashing in favor of unknown persons checks which were on
their face payable to the BIR, a government agency which can
act only through its agents, petitioner did so at its peril and must
suffer the consequences of the unauthorized or wrongful
endorsement. In this light, petitioner TRB cannot exculpate itself
from liability by claiming that respondent networks were
themselves negligent.
5. ID.; ID.; ID.; COLLECTING BANK SHALL BE LIABLE
WHEN IT ENDORSES A CHECK BEARING A
FORGED INDORSEMENT AND PRESENTS IT TO THE DRAWEE
BANK FOR PAYMENT. — A collecting bank which indorses a
check bearing a forged indorsement and presents
it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately
should be held liable therefor. However, it is doubtful
if the subject checks were ever presented to and accepted by
SBTC so as to hold it liable as a collecting bank, as held
by the Court of Appeals.
6. ID.; ID.; ID.; DRAWEE BANK HAS NO
RIGHT TO REIMBURSEMENT WHEN IT DID NOT
PAY THE RIGHTFUL HOLDER. — Since TRB did not
pay the rightful holder or other person or entity
entitled to receive payment, it has no right to reimbursement.
Petitioner TRB was remiss in its duty and obligation, and must
therefore suffer the consequences of its own negligence and
disregard of established banking rules and procedures.
7. ID.; BANK; DUTY. — A bank is engaged in a business
impressed with public interest and it is its duty to protect its
many clients and depositors who transact business with it.
It is under the obligation to treat the accounts of the depo
sitors and clients with meticulous care, whether such accounts
consist only of a few hundreds or millions of pesos.
8. CIVIL LAW; DAMAGES; EXEMPLARY DAMAGES;
CANNOT BE AWARDED WHERE WRONGFUL ACT WAS NOT
DONE IN BAD FAITH. — We agree with petitioner, however, that it
should not be made to pay exemplary damages to RPN, IBC
and BBC because its wrongful act was not done in bad faith, and
it did not act in a wanton, fraudulent, reckless or malevolent
manner.
9. ID.; ID.; ATTORNEY'S FEES; AWARD THEREOF
SHALL BE REDUCED IF FOUND TO BE MANIFESTLY
EXORBITANT. — We find the award of attorney's fees,
25% of P10 million, to be manifestly exorbitant.
Considering the nature and extent of the services rendered by
respondent networks' counsel, however, the Court deems it
appropriate to award the amount of P100,000 as attorney's
fees. 
cHECAS

DECISION

CORONA,  J  : p

Petitioner seeks the review and prays

for the reversal of the Decision 1 of April 30,
1999 of Court of Appeals in CA-G.R. CV No.
54656, the dispositive portion of which reads:
WHEREFORE, the appealed decision is AFFIRMED
with modification in the sense that appellant
SBTC is hereby absolved from any liability. Appellant
TRB is solely liable to the appellees for the damages
and costs of suit specified in the dispositive
portion of the appealed decision. Costs against
appellant TRB.
 SO ORDERED. 2

As found by the Court of Appeals, the antecedent
facts of the case are as follows:
On April 15, 1985, the Bureau of Internal Revenue
(BIR) assessed plaintiffs Radio Philippines Network (RPN),
Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of their tax
obligations for the taxable years 1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs'
comptroller, sent a letter to the BIR requesting
settlement of plaintiffs' tax obligations.
The BIR granted the request and accordingly, on
June 26, 1986, plaintiffs purchased from defendant
Traders Royal Bank (TRB) three (3) manager's
checks to be used as payment for their tax
liabilities, to wit:
Check Number Amount
   
30652 P4,155,835.0
0
30650 3,949,406.12
30796 1,685,475.75
Defendant TRB, through Aida Nuñez, TRB Branch
Manager at Broadcast City Branch, turned
over the checks to Mrs. Vera who was
supposed to deliver the same to the BIR in
payment of plaintiffs' taxes.
Sometime in September, 1988, the BIR again
assessed plaintiffs for their tax liabilities for the years
1979-82. It was then they discovered that the three (3)
managers checks (Nos. 30652, 30650 and 30796)
intended as payment for their taxes were never delivered
nor paid to the BIR by Mrs. Vera. Instead, the checks
were presented for payment by unknown
persons to defendant Security Bank and Trust Company
(SBTC), Taytay Branch as shown by the bank's routing
 symbol transit number (BRSTN 01140027) or clearing code
stamped on the reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle
their obligations, the BIR issued warrants of levy,
distraint and garnishment against them. Thus, they were
constrained to enter into a compromise and paid BIR
P18,962,225.25 in settlement of their unpaid deficiency
taxes.
Thereafter, plaintiffs sent letters to both
defendants, demanding that the amounts covered
by the checks be reimbursed or credited to their
account. The defendants refused, hence, the instant
suit. 3
 

On February 17, 1985, the trial court rendered its decision,

thus:
WHEREFORE, in view of the foregoing
considerations, judgment is hereby rendered in
favor of the plaintiffs and against the defendants by:
a) Condemning the defendant Traders Royal
Bank to pay actual damages in the sum of Nine
Million Seven Hundred Ninety Thousand and Seven
Hundred Sixteen Pesos and Eighty-Seven Centavos
(P9,790,716.87) broken down as follows:
1) To plaintiff RPN-9  - P4,155,835.0
0
2) To Plaintiff IBC-13  - P3,949,406.1
2
3) To Plaintiff BBC-2  - P1,685,475.7
2
 plus interest at the legal rate
from the filing of this case in court.
b) Condemning the defendant Security Bank and Trust
Company, being collecting
bank, to reimburse the defendant Traders Royal
 Bank, all the amounts which the latter would
pay to the aforenamed plaintiffs;
c) Condemning both
defendants to pay to each of the plaintiffs the s
um of Three Hundred Thousand (P300,000.00)
Pesos as exemplary damages and attorney's fees
equivalent to twenty-five percent of the total
amount recovered; and
d) Costs of suit.
SO ORDERED. 4

Defendants Traders Royal Bank and Security Bank and Trust

Company, Inc. both appealed the trial court's
decision to the Court of Appeals. However, as quoted
in the beginning hereof, the appellate court absolved
defendant SBTC from any liability and held TRB solely
liable to respondent networks for damages and costs of suit.
In the instant petition for review
on certiorari of the Court of Appeals' decision, petitioner TRB
assigns the following errors: (a) the Honorable
Court of Appeals manifestly overlooked facts which would
justify the conclusion that negligence on the part of RPN, IBC
and BBC bars them from recovering anything from TRB,
(b) the Honorable Court of Appeals plainly erred and
misapprehended the facts in relieving SBTC of its
liability to TRB as collecting bank and indorser by
overturning the trial court's factual finding that SBTC did
endorse the three (3) managers checks
subject of the instant case, and (c) the Honorable
Court of Appeals plainly misapplied the law in
affirming the award of exemplary damages in favor of RPN,
IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRB's
petition raises questions of fact in violation of Rule
45 of the 1997 Revised Rules on Civil Procedure which restricts
petitions for review
on certiorari of the decisions of the Court of Appeals on
pure questions of law. RPN, IBC and BBC maintain
that the issue of whether or not respondent networks had been
negligent were already passed upon both by the trial and
appellate courts, and that the factual findings of both courts
are binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground
that it had no participation in the negotiation of the checks,
emphasizing that the BRSTN imprints
at the back of the checks cannot be considered as proof
that respondent SBTC accepted the disputed checks and
presented them to Philippine Clearing House Corporation for
clearing.
Setting aside the factual
ramifications of the instant case, the threshold issue
now is whether or not TRB should be held solely liable when it
paid the amount of the checks in question to a person other
than the payee indicated
on the face of the check, the Bureau of Internal Revenue.
"When a signature is forged or made
without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto,
can be acquired through or
under such signature." 5 Consequently, if a bank pays a forged
check, it must be considered as paying out of its funds and
cannot charge the amount so
paid to the account of the depositor.
In the instant case, the 3 checks were
payable to the BIR. It was established, however, that said
checks were never delivered or paid to the payee BIR but were
in fact presented for payment by some unknown persons who, in
order to receive payment therefor,
forged the name of the payee. Despite this fraud, petitioner
TRB paid the 3 checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a
check is drawn payable to the order of one person
and is presented for payment by another and purports upon its
face to have been duly indorsed by the payee of the check,
it is the primary duty of petitioner to know that the check
was duly indorsed by the original payee and, where it
pays the amount of the check to a third person who has
forged the signature of the payee, the loss falls upon
petitioner who cashed the check. Its only
remedy is against the person to whom it paid the money. 6
It should be noted further that one of the subject checks
was crossed. The crossing of one of the subject checks
should have put petitioner on guard; it was duty-
bound to ascertain the indorser's title to the check
or the nature of his possession. Petitioner should have
known the effects of a crossed check:
(a) the check may not be encashed but only deposited
in the bank; (b) the check may be negotiated only
once to one who has an account with a bank and
(c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise,
he is not a holder in due course. 7
By encashing in favor of unknown persons checks which
were on their face payable to the BIR, a government agency
which can only act only through its agents, petitioner did so at
its peril and must suffer the consequences of the unauthorized
or wrongful endorsement. 8 In this light, petitioner TRB cannot
exculpate itself from liability by claiming that respondent
networks were themselves negligent.
A bank is engaged in a business impressed with public
interest and it is its duty to protect its many clients and
depositors who transact business with it.
It is under the obligation to treat the accounts of the depo
sitors and clients with meticulous care, whether such accounts
consist only of a few hundreds or millions of pesos. 9
Petitioner argues that respondent SBTC, as the collecting
bank and indorser, should be held responsible instead
for the amount of the checks.
The Court of Appeals addressed exactly the same issue
and made the following findings and conclusions:
As to the alleged liability of appellant SBTC, a
close examination of the records constrains
us to deviate from the lower court's finding that
SBTC, as a collecting bank, should similarly
bear the loss.
"A collecting bank where a
check is deposited and which indorses the check
upon presentment with the drawee
bank, is such an indorser. So even
if the indorsement on the check deposited
by the bank's client is forged, the collecting
bank is bound by his warranties as an indorser
and cannot set
up the defense of forgery as against the drawee
bank."
To hold appellant SBTC liable,
it is necessary to determine whether it is a
party to the disputed transactions.
Section
3 of the Negotiable Instruments Law reads:
"SECTION 63. When person  deemed  indorser.
— A person placing his signature
upon an instrument otherwise than as maker,
drawer, or acceptor, is deemed to be an indorser
unless he clearly indicates by appropriate words his
intention to be bound in some other capacity."
 Upon the other hand, the Philippine Clearing
House Corporation (PCHC) rules provide:
"Sec. 17. BANK GUARANTEE. — All checks
cleared through the PCHC shall
bear the guarantee affixed thereto
by the Presenting Bank/Branch which shall
read as follows:
"Cleared thru the Philippine Clearing House
Corporation. All prior endorsements and/or
lack of endorsement guaranteed.
NAME OF BANK/BRANCH BRSTN
(Date of clearing)."
Here, not one of the disputed checks
bears the requisite endorsement of appellant SBTC.
What appears to be a guarantee stamped
at the back of the checks is that of the Philippine
National Bank, Buendia Branch, thereby indicating that it
was the latter Bank which received the same.
It was likewise established during the trial that
whenever appellant SBTC receives a check for deposit, its
practice is to stamp on its face the words, "non-
negotiable," Lana Echevarria's testimony is relevant:
"ATTY. ROMANO: Could you tell us
briefly the procedure you follow in receiving
checks?
"A: First of all, I verify the check
itself, the place, the date, the amount in words
and everything. And then, if all these things are in
order and verified in the data sheet I stamp my non-
negotiable stamp at the face of the check."
Unfortunately, the words "non-negotiable" do not
appear on the face of either of the three (3) disputed
checks.
Moreover, the aggregate
amount of the checks is not reflected in the clearing
 documents of appellant SBTC. Section
19 of the Rules of the PCHC states:
"Section 19.– Regular Item Procedure:
Each clearing participant, through its
authorized representatives, shall
deliver to the PCHC fully qualified MICR checks
grouped in 200 or less items to a batch and
supported by an add-list, a batch control slip, and a
delivery statement.
It bears stressing that through the add-
list, the PCHC can countercheck and determine which
checks have been presented on a particular day by a
particular bank for processing and clearing. In this case,
however, the add-list submitted by appellant SBTC
together with the checks it presented for clearing on
August 3, 1987 does not show that Check No. 306502
in the sum of P3,949,406.12 was among those that
passed for clearing with the PCHC on
that date. The same is true with Check No. 30652 with
a face amount of P4,155,835.00 presented for clearing on
August 11, 1987 and Check No. 30796 with a face
amount of P1,685,475.75.
The foregoing circumstances taken altogether
create a serious doubt on whether the disputed checks
passed through the hands of appellant SBTC." 10

We subscribe to the foregoing findings and

conclusions of the Court of Appeals.
A collecting bank which indorses a check bearing a
forged indorsement and presents it to the drawee bank
guarantees all prior indorsements,
including the forged indorsement itself, and ultimately
should be held liable therefor. However, it is doubtful
if the subject checks were ever presented to and accepted by
SBTC so as to hold it liable as a collecting bank, as held
by the Court of Appeals.
 Since TRB did not pay the rightful holder or other person or
entity entitled to receive payment, it has no
right to reimbursement. Petitioner TRB was remiss in its duty
and obligation, and must therefore
suffer the consequences of its own negligence and
disregard of established banking rules and procedures.
We agree with petitioner, however, that it should
not be made to pay exemplary damages to RPN, IBC and BBC
because its wrongful act was not done in bad faith, and it did not
act in a wanton, fraudulent, reckless or malevolent manner. 11
We find the award of attorney's fees, 25% of P10
million, to be manifestly exorbitant. 12 Considering the nature
and extent of the services rendered by respondent networks'
counsel, however, the Court deems it
appropriate to award the amount of P100,000 as attorney's
fees.
WHEREFORE, the appealed decision is MODIFIED by
deleting the award of exemplary damages. Further, respondent
networks are granted the amount of P100,000 as attorney's
fees. In all other respects, the Court of Appeals'
decision is hereby AFFIRMED.
SO ORDERED.
Puno, Panganiban and Carpio-Morales, JJ., concur.
Sandoval-Gutierrez, J.,  took no part.
 
Footnotes

1.Penned by Associate Justice Angelina Sandoval-Gutierrez and

concurred in by Associate Justices Romeo A. Brawner and
Martin S. Villarama, Jr. (Ninth Division).
2.Rollo, p. 74.
3.Rollo, pp. 63-65.
4.Rollo, p. 54.
 5.Section 23, Negotiable  Instruments  Law.
6.Great Eastern Life Insurance vs. Hongkong & Shanghai Banking
Corporation, 43 Phil. 678 (1922).
7.Bataan Cigar and Cigarette Factory, Inc. vs. CA, 230 SCRA 643
(1994).
8.Insular Drug Co. vs. National, 58 Phil. 685 (1933).
9.PNB vs. CA, 315 SCRA 309 (1999).
10.Rollo, pp. 69-73.
11.Cervantes vs. CA, 304 SCRA 25 (1999).
12.Barons Marketing Corporation vs. CA, 286 SCRA 96 (1998).

 (Traders Royal Bank v. Radio Philippines Network, Inc., G.R.

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No. 138510, [October 10, 2002], 439 PHIL 475-486)