ADALIA FRANCISCO, petitioner, vs.

COURT OF APPEALS , HERBY

COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C.
ONG,respondents.
D E C I S I O N
GONZAGA
_
REYES, J .:
Assailed in this petition for review on certiorari is the decision
[1]
of the Court of
Appeals affirming the decision
[2]
rendered by Branch 168 of the Regional Trial Court
of Pasig in Civil Case No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and
Construction Contract which was entered into on June 23, 1977 by A. Francisco
Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco
(Francisco) is the president, and private respondent Herby Commercial &
Construction Corporation (HCCC), represented by its President and General Manager
private respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at
San Jose del Monte, Bulacan, financed by the Government Service Insurance
System (GSIS). Under the contract, HCCC agreed to undertake the construction of
35 housing units and the development of 35 hectares of land. The payment of HCCC
for its services was on a turn-key basis, that is, HCCC was to be paid on the basis of
the completed houses and developed lands delivered to and accepted by AFRDC
and the GSIS. To facilitate payment, AFRDC executed a Deed of Assignment in favor
of HCCC to enable the latter to collect payments directly from the GSIS. Furthermore,
the GSIS and AFRDC put up an Executive Committee Account with the Insular Bank
of Asia & America (IBAA) in the amount of P4,000,000.00 from which checks would
be issued and co-signed by petitioner Francisco and the GSIS Vice-President
Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint
[3]
with the Regional Trial Court of
Quezon City against Francisco, AFRDC and the GSIS for the collection of the unpaid
balance under the Land Development and Construction Contract in the amount of
P515,493.89 for completed and delivered housing units and land
development. However, the parties eventually arrived at an amicable settlement of
their differences, which was embodied in a Memorandum Agreement executed by
HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that
HCCC had turned over 83 housing units which have been accepted and paid for by
the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50
representing incomplete construction of housing units, incomplete land development
and 5% retention, which amount will be discharged when the defects and deficiencies
are finally completed by HCCC. It was also provided that HCCC was indebted to
AFRDC in the amount of P180,234.91 which the former agreed would be paid out of
the proceeds from the 40 housing units still to be turned over by HCCC or from any
amount due to HCCC from the GSIS. Consequently, the trial court dismissed the
case upon the filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong
discovered that Diaz and Francisco had executed and signed seven checks
[4]
, of
various dates and amounts, drawn against the IBAA and payable to HCCC for
completed and delivered work under the contract. Ong, however, claims that these
checks were never delivered to HCCC. Upon inquiry with Diaz, Ong learned that the
GSIS gave Francisco custody of the checks since she promised that she would
deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without
his knowledge or consent, at the dorsal portion of the said checks to make it appear
that HCCC had indorsed the checks; Francisco then indorsed the checks for a
second time by signing her name at the back of the checks and deposited the checks
in her IBAA savings account. IBAA credited Franciscos account with the amount of
the checks and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon
City, charging Francisco with estafa thru falsification of commercial documents.
Francisco denied having forged Ongs signature on the checks, claiming that Ong
himself indorsed the seven checks in behalf of HCCC and delivered the same to
Francisco in payment of the loans extended by Francisco to HCCC. According to
Francisco, she agreed to grant HCCC the loans in the total amount of P585,000.00
and covered by eighteen promissory notes in order to obviate the risk of the non-
completion of the project. As a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCCs receivables from the
GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to Franciscos claims
and accordingly, dismissed the complaints, which dismissal was affirmed by the
Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979
against Francisco and IBAA for the recovery of P370,475.00, representing the total
value of the seven checks, and for damages, attorneys fees, expenses of litigation
and costs. After trial on the merits, the trial court rendered its decision in favor of
private respondents, the dispositive portion of which provides -
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiffs and against the defendants INSULAR BANK OF ASIA & AMERICA and
ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount of
P370.475.00 plus interest thereon at the rate of 12% per annum from the date of the
filing of the complaint until the full amount is paid; moral damages to plaintiff Jaime
Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation
expenses of P5,000.00; and attorneys fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty.
Adalia Francisco, the latter is ordered to reimburse the former for the sums that the
Bank shall pay to the plaintiff on the forged checks including the interests paid
thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of
Investigation (NBI), the trial court held that Francisco had indeed forged the signature
of Ong to make it appear that he had indorsed the checks. Also, the court ruled that
there were no loans extended, reasoning that it was unbelievable that HCCC was
experiencing financial difficulties so as to compel it to obtain the loans from AFRDC in
view of the fact that the GSIS had issued checks in favor of HCCC at about the same
time that the alleged advances were made. The trial court stated that it was plausible
that Francisco concealed the fact of issuance of the checks from private respondents
in order to make it appear as if she were accommodating private respondents, when
in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and
HCCC in Civil Case No. Q-24628, the trial court held that the same did not make any
mention of the forged checks since private respondents were as of yet unaware of
their existence, that fact having been effectively concealed by Francisco, until private
respondents acquired knowledge of Franciscos misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks
despite such obvious irregularities as the lack of initials to validate the alterations
made on the check, the absence of the signature of a co-signatory in the corporate
checks of HCCC and the deposit of the checks on a second indorsement in the
savings account of Francisco. However, the trial court allowed IBAA recourse against
Francisco, who was ordered to reimburse the IBAA for any sums it shall have to pay
to private respondents.
[5]

Both Francisco and IBAA appealed the trial courts decision, but the Court of
Appeals dismissed IBAAs appeal for its failure to file its brief within the 45-day
extension granted by the appellate court. IBAAs motion for reconsideration and
petition for review on certiorari filed with this Court were also similarly denied. On
November 21, 1989, IBAA and HCCC entered into a Compromise Agreement which
was approved by the trial court, wherein HCCC acknowledged receipt of the amount
of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the
right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence
this petition for review on certiorari filed by petitioner, assigning the following errors to
the appealed decision
1. The respondent Court of Appeals erred in concluding that private respondents did
not owe Petitioner the sum covered by the Promissory Notes Exh.2-2-A-2-P
(FRANCISCO). Such conclusion was based mainly on conjectures, surmises and
speculation contrary to the unrebutted pleadings and evidence presented by
petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the
signature of private respondent ONG on the checks in question without any authority
therefor which is patently contradictory to the unrebutted pleading and evidence that
petitioner was expressly authorized by respondent HERBY thru ONG to collect all
receivables of HERBY from GSIS to pay the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in
question were not taken up in the liquidation and reconciliation of all outstanding
account between AFRDC and HERBY as acknowledged by the parties in
Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and speculation
contrary to the unrebutted evidence presented by petitioners. It is an inference made
which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court
and dismissing the appeal.
[6]

The pivotal issue in this case is whether or not Francisco forged the signature of
Ong on the seven checks. In this connection, we uphold the lower courts finding that
the subject matter of the present case, specifically the seven checks, drawn by GSIS
and AFRDC, dated between October to November 1977, in the total amount of
P370,475.00 and payable to HCCC, was not included in the Memorandum
Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed
by the trial court, aside from there being absolutely no mention of the checks in the
said agreement, the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978 because private
respondents only discovered Franciscos acts of forgery in 1979. The lower courts
found that Francisco was able to easily conceal from private respondents even the
fact of the issuance of the checks since she was a co-signatory thereof.
[7]
We also
note that Francisco had custody of the checks, as proven by the check vouchers
bearing her uncontested signature,
[8]
by which she, in effect, acknowledged having
received the checks intended for HCCC. This contradicts Franciscos claims that the
checks were issued to Ong who delivered them to Francisco already indorsed.
[9]

As regards the forgery, we concur with the lower courts finding that Francisco
forged the signature of Ong on the checks to make it appear as if Ong had indorsed
said checks and that, after indorsing the checks for a second time by signing her
name at the back of the checks, Francisco deposited said checks in her savings
account with IBAA. The forgery was satisfactorily established in the trial court upon
the strength of the findings of the NBI handwriting expert.
[10]
Other than petitioners
self-serving denials, there is nothing in the records to rebut the NBIs findings. Well-
entrenched is the rule that findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence on
record,
[11]
as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs name on
the checks by virtue of the Certification executed by Ong in her favor giving her the
authority to collect all the receivables of HCCC from the GSIS, including the
questioned checks.
[12]
Petitioners alternative defense must similarly fail. The
Negotiable Instruments Law provides that where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative
personal liability.
[13]
An agent, when so signing, should indicate that he is merely
signing in behalf of the principal and must disclose the name of his principal;
otherwise he shall be held personally liable.
[14]
Even assuming that Francisco was
authorized by HCCC to sign Ongs name, still, Francisco did not indorse the
instrument in accordance with law. Instead of signing Ongs name, Francisco should
have signed her own name and expressly indicated that she was signing as an agent
of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of
forgery.
Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.
[15]
Due to her forgery of Ongs
signature which enabled her to deposit the checks in her own account, Francisco
deprived HCCC of the money due it from the GSIS pursuant to the Land
Development and Construction Contract. Thus, we affirm respondent courts award
of compensatory damages in the amount of P370,475.00, but with a modification as
to the interest rate which shall be six percent (6%) per annum, to be computed from
the date of the filing of the complaint since the amount of damages was alleged in the
complaint;
[16]
however, the rate of interest shall be twelve percent (12%) per annum
from the time the judgment in this case becomes final and executory until its
satisfaction and the basis for the computation of this twelve percent (12%) rate of
interest shall be the amount of P370,475.00. This is in accordance with the doctrine
enunciated in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al.,
[17]
which was
reiterated in Philippine National Bank vs. Court of Appeals,
[18]
Philippine Airlines, Inc.
vs. Court of Appeals
[19]
and in Keng Hua Paper Products Co., Inc. vs. Court of
Appeals,
[20]
which provides that -
1. When an obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of six percent (6%) per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be twelve percent (12%) per annum from such finality until
its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00.
Under Article 2229 of the Civil Code, exemplary damages are imposed by way of
example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. Considering petitioners fraudulent act, we hold
that an award of P50,000.00 would be adequate, fair and reasonable. The grant of
exemplary damages justifies the award of attorneys fees in the amount of
P50,000.00, and the award of P5,000.00 for litigation expenses.
[21]

The appellate courts award of P50,000.00 in moral damages is
warranted. Under Article 2217 of the Civil Code, moral damages may be granted
upon proof of physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar
injury.
[22]
Ong testitified that he suffered sleepless nights, embarrassment, humiliation
and anxiety upon discovering that the checks due his company were forged by
petitioner and that petitioner had filed baseless criminal complaints against him before
the fiscals office of Quezon City which disrupted HCCCs business operations.
[23]

WHEREFORE, we AFFIRM the respondent courts decision promulgated on
June 29, 1992, upholding the February 16, 1988 decision of the trial court in favor of
private respondents, with the modification that the interest upon the actual damages
awarded shall be at six percent (6%) per annum, which interest rate shall be
computed from the time of the filing of the complaint on November 19,
1979. However, the interest rate shall be twelve percent (12%) per annum from the
time the judgment in this case becomes final and executory and until such amount is
fully paid. The basis for computation of the six percent and twelve percent rates of
interest shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD., plaintiff-appellant,
vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING
CORPORATION, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking
Corporation.

HULL, J .:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized
to engaged in business in the Philippine Islands, and maintains its main office in
these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent
under general power of attorney with authority of substitution. The principal employee
in the Manila office was one Joseph L. Wilson, to whom had been given a general
power of attorney but without power of substitution. In 1926 Cooper, desiring to go on
vacation, gave a general power of attorney to Newland Baldwin and at the same time
revoked the power of Wilson relative to the dealings with the Bank of the Philippine
Islands, one of the banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a
messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the company
in Honolulu requesting a telegraphic transfer to the China Banking Corporation of
Manila of $100,00. The money was transferred by cable, and upon its receipt the
China Banking Corporation, likewise a bank in which plaintiff maintained a deposit,
sent an exchange contract to plaintiff corporation offering the sum of P201,000, which
was then the current rate of exchange. On this contract was forged the name of
Newland Baldwin and typed on the body of the contract was a note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San
Carlos Milling Company or order was receipted for by Dolores. On the same date,
September 28, 1927, the manger's check was deposited with the Bank of the
Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of
San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff
in the sum of P201,000 and passed the cashier's check in the ordinary course of
business through the clearing house, where it was paid by the China Banking
Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter,
purporting to be signed by Newland Baldwin, directing that P200,000 in bills of
various denominations, named in the letter, be packed for shipment and delivery the
next day. The next day, Dolores witnessed the counting and packing of the money,
and shortly afterwards returned with the check for the sum of P200,000, purporting to
be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of
the Philippine Islands but never in so large an amount, and according to the record,
never under the sole supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of
packing the money, and he left the bank and shortly afterwards returned with another
check for P1, purporting to be signed by Newland Baldwin. Whereupon the money
was turned over to Dolores, who took it to plaintiff's office, where he turned the money
over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to
credit plaintiff with the amount withdrawn by the two forged checks of P200,000 and
P1, suit was brought against the Bank of the Philippine Islands, and finally on the
suggestion of the defendant bank, an amended complaint was filed by plaintiff against
both the Bank of the Philippine Islands and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to
the credit of the plaintiff company, that the check had been endorsed for deposit, and
that as the prior endorsement had in law been guaranteed by the Bank of the
Philippine Islands, when they presented the cashier's check to it for payment, the
China Banking Corporation was absolved even if the endorsement of Newland
Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main
their contentions were that they had been guilty of no negligence, that they had dealt
with the accredited representatives of the company in the due course of business,
and that the loss was due to the dishonesty of plaintiff's employees and the
negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the
time there was employed a woman stenographer and cashier. The agent did not keep
in his personal possession either the code-book or the blank checks of either the
Bank of the Philippine Islands or the China Banking Corporation. Baldwin was
authorized to draw checks on either of the depositaries. Wilson could draw checks in
the name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of
P201,000 in the Bank of the Philippine Islands being the result of a forged
endorsement, the relation of depositor and banker did not exist, but the bank was only
a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in the
ordinary course of its business, was not guilty of negligence, and therefore under
article 1902 of the Civil Code which should control the case, plaintiff could not
recover; and that as the cause of loss was the criminal actions of Wilson and Dolores,
employees of plaintiff, and as Newland Baldwin, the agent, had not exercised
adequate supervision over plaintiff's Manila office, therefore plaintiff was guilty of
negligence, which ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this
appeal and makes nine assignments of error which we do not deem it necessary to
discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed
signatures of Newland Baldwin were genuine and that he had been in the habit of
signing checks in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter
beyond reasonable doubt, nor is it believed that Baldwin signed checks in blank and
turned them over to Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to
the order of plaintiff and delivered it to plaintiff's agent who was authorized to receive
it. A bank that cashes a check must know to whom it pays. In connection with the
cashier's check, this duty was therefore upon the Bank of the Philippine Islands, and
the China Banking Corporation was not bound to inspect and verify all endorsements
of the check, even if some of them were also those of depositors in that bank. It had a
right to rely upon the endorsement of the Bank of the Philippine Islands when it gave
the latter bank credit for its own cashier's check. Even if we would treat the China
Banking Corporation's cashier's check the same as the check of a depositor and
attempt to apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong
& Shanghai Banking Corporation and National Bank (43 Phil., 678), and hold the
China Banking Corporation indebted to plaintiff, we would at the same time have to
hold that the Bank of the Philippine Islands was indebted to the China Banking
Corporation in the same amount. As, however, the money was in fact paid to plaintiff
corporation, we must hold that the China Banking Corporation is indebted neither to
plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower court
far as it absolves the China Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we
will now consider the effect of the deposit of P201,000. It must be noted that this was
not a presenting of the check for cash payment but for deposit only. It is a matter of
general knowledge that most endorsements for deposit only, are informal. Most are
by means of a rubber stamp. The bank would have been justified in accepting the
check for deposit even with only a typed endorsement. It accepted the check and duly
credited plaintiff's account with the amount on the face of the check. Plaintiff was not
harmed by the transaction as the only result was the removal of that sum of money
from a bank from which Wilson could have drawn it out in his own name to a bank
where Wilson would not have authority to draw checks and where funds could only be
drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in
part:
". . . we now leave to demand that you pay over to us the entire amount of
said manager's check of two hundred one thousand (P201,000) pesos,
together with interest thereon at the agreed rate of 3 per cent per annum
on daily balances of our credit in account current with your bank to this date.
In the event of your refusal to pay, we shall claim interest at the legal rate of
6 per cent from and after the date of this demand inasmuch as we desire to
withdraw and make use of the money." Such language might well be treated
as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first
place, it is absolutely contrary to what the bank did. It did not take it up as a separate
account but it transferred the credit to plaintiff's current account as a depositor of that
bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them
by their customers. Banks are run for gain, and they solicit deposits in order that they
can use the money for that very purpose. In this case the action was neither
gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the
Philippine Islands was an intermeddling bank. In the many cases cited by plaintiff
where the bank that cashed the forged endorsement was held as an intermeddler, in
none was the claimant a regular depositor of the bank, nor in any of the cases cited,
was the endorsement for deposit only. It is therefore clear that the relation of plaintiff
with the Bank of the Philippine Islands in regard to this item of P201,000 was that of
depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the
sum of P201,000, on two checks on which the name of Baldwin was forged as
drawer. As above stated, the fact that these signatures were forged is beyond
question. It is an elementary principle both of banking and of the Negotiable
Instruments Law that
A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it
was in fact lulled into a false sense of security, it was by the effrontery of Dolores, the
messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported
signatures of Baldwin. These, they never questioned at the time its employees should
have used care. In fact, even today the bank represents that it has a relief that they
are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence
of the Bank of the Philippine Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be
reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank
of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal
interest thereon from December 23,1928, until payment, together with costs in both
instances. So ordered.

PNB vs. National City Bank, 1936Facts:
An unknown person or persons negotiated with Motor Service Co. checks
purportedlyissued by the Pangasinan Transportation Co. by JL Klar, Manager and
Treasurer, againstPNB and in favor of International Auto Repair Shop for P144.50
and P215.75. Said checkswere indorsed by said unknown persons in the manner
indicated at the back thereof. Thechecks were indorsed fro deposit at the National
City Bank of New York (NCBNY) and MotorService Co. was credited with
the amounts thereof. Said checks were cleared at the clearinghouse and PNB
credited NCBNY for the amounts thereof, believing that the signatures of thedrawer
are genuine, etc. PNB found that the signature were forged when so informed by
thePangasinan Transportation Co. It demanded reimbursement from NCBNY and
Motor ServiceCo. Both refused. Pangasinan Transportation objected to its deduction
of its deposit.
Issue [1]:
Whether the payment of the checks made by the drawee bank constitutes
anacceptance.
Held [1]:
A check is a bill of exchange payable on demand and only the rules governingbills of
exchange payable on demand are applicable to it (Section 185). The fact
thatacceptance is a step unnecessary insofar as bills of exchange payable on
demand are
concerned, it follows that the provisions relative to acceptance are without app
lication tochecks. There is nothing in law, however, against the presentation of checks
for acceptancebefore they are paid. Certification is equivalent to acceptance (Section
187). When certified,the drawer will perform his promise by any other means than the
payment of money(Section 132). When certified, the drawer and all indorsers are
discharged from liabilitythereon (Section 188), and then the check operates as an
assignment of a part of the fundsto the credit of the drawer with the bank
(Section 189). Acceptance has a technical meaning
in the Negotiable Instruments Law. With few exceptions, payment neither includes
orimplies payment. Payment of the check, cashing it on presentment is not
acceptance.


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43596 October 31, 1936
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY,
INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J .:
This case was submitted for decision to the court below on the following
stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by
virtue of a special act of the Philippine Legislature, with office as principal
place of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; that
the defendant National City Bank of New York is a foreign banking
corporation with a branch office duly authorized and licensed to carry and
engage in banking business in the Philippine Islands, with branch office and
place of business in the National City Bank Bldg., City of Manila, P. I., and
that the defendant Motor Service Company, Inc., is a corporation organized
and existing under and by virtue of the general corporation law of the
Philippine Islands, with office and principal place of business at 408 Rizal
Avenue, City of Manila, P. I., engaged in the purchase and sale of
automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated
with defendant Motor Service Company, Inc., the checks marked as Exhibits
A and A-1, respectively, which are made parts of the stipulation, in payment
for automobile tires purchased from said defendant's stores, purporting to
have been issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar,
Manager and Treasurer", against the Philippine National Bank and in favor
of the International Auto Repair Shop, for P144.50 and P215.75; and said
checks were indorsed by said unknown persons in the manner indicated at
the back thereof, the Motor Service Co., Inc., believing at the time that the
signature of J. L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the
defendant Motor Service Company, Inc, at the National City Bank of New
York and the former was accordingly credited with the amounts thereof, or
P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing
house and the Philippine National Bank credited the National City Bank of
New York for the amounts thereof, believing at the time that the signatures
of the drawer were genuine, that the payee is an existing entity and the
endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures
of J. L. Klar, as Manager and Treasurer of the Pangasinan Transportation
Company, Inc., in said Exhibits A and A-1 were forged when so informed by
the said Company, and it accordingly demanded from the defendants the
reimbursement of the amounts for which it credited the National City Bank of
New York at the clearing house and for which the latter credited the Motor
Service Co., but the defendants refused, and continue to refuse, to make
such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds
of said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the
municipal court of Manila and forming part of the record of the present case,
are admitted by the parties as genuine and are made part of this stipulation
as well as Exhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant
National City Bank of New York. a decision was thereafter rendered giving plaintiff
judgment for the total amount of P360.25, with interest and costs. From this decision
the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by
the plaintiff from the decision of the municipal court of Manila where this case
originated, became perfected because of plaintiff's failure to attach to the record
within 15 days from receipt of notice of said decision, the certificate of appeal bond
required by section 76 of the Code of Civil Procedure. It is not disputed that both the
appeal docket fee and the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the official receipt
showing that such deposit was made within the said period is a sufficient ground to
dismiss plaintiff's appeal. This question was settled by our decision in the case of
Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no
further consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by
this appeal, namely, whether the appellee has the right to recover from the appellant,
under the circumstances of this case, the value of the checks on which the signatures
of the drawer were forged. The appellant maintains that the question should be
answered in the negative and in support of its contention appellant advanced various
reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made
by the drawee bank constitutes an "acceptance", and, consequently, the case should
be governed by the provisions of section 62 of the Negotiable Instruments Law, which
says:
SEC. 62. Liability of acceptor. The acceptor by accepting the
instrument engages that he will pay it according to the tenor of his
acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on
demand and only the rules governing bills of exchange payable on demand are
applicable to it, according to section 185 of the Negotiable Instruments Law. In view
of the fact that acceptance is a step unnecessary, in so far as bills of exchange
payable on demand are concerned (sec. 143), it follows that the provisions relative to
"acceptance" are without application to checks. Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case of the payment of
a check because from the moment a check is paid it is withdrawn from circulation.
The warranty established by section 62, is in favor of holders of the instrument after
its acceptance. When the drawee bank cashes or pays a check, the cycle of
negotiation is terminated, and it is illogical thereafter to speak of subsequent holders
who can invoke the warranty provided in section 62 against the drawee. Moreover,
according to section 191, "acceptance" means "an acceptance completed by delivery
or notification" and this concept is entirely incompatible with payment, because when
payment is made the check is retained by the bank, and there is no such thing as
delivery or notification to the party receiving the payment. Checks are not to be
accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.)
There can be no such thing as "acceptance" in the ordinary sense of the term. A
check being payable immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has no right to demand
from the bank anything but payment of the check, and the bank has no right, as
against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is
not an instrument which in the ordinary course of business calls for acceptance. The
holder can never claim acceptance as his legal right. He can present for payment,
and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the
presentation of checks for acceptance, before they are paid, in which case we have a
"certification" equivalent to "acceptance" according to section 187, which provides
that "where a check is certified by the bank on which it is drawn, the certification is
equivalent to an acceptance", and it is then that the warranty under section 62 exists.
This certification or acceptance consists in the signification by the drawee of his
assent to the order of the drawer, which must not express that the drawee will
perform his promise by any other means than the payment of money. (Sec. 132.)
When the holder of a check procures it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon (sec. 188), and then the check
operates as an assignment of a part of the funds to the credit of the drawer with the
bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a bill of exchange or
draft may be accepted. The bank may accept if it chooses; and it is frequently
induced by convenience, by the exigencies of business, or by the desire to oblige
customers, voluntarily to incur the obligation. The act by which the bank places itself
under obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to assume the
obligation, or some act from which the law will imperatively imply such valid promise
or undertaking. The most ordinary form which such an act assumes is the acceptance
by the bank of the check, or, as it is perhaps more often called, the certifying of the
check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in
any event to pay the check upon demand, but this is not an "acceptance" of the check
in the true sense of that term. Although a check does not call for acceptance, and the
holder can present it only for payment, the certification of checks is a means in
constant and extensive use in the business of banking, and its effects and
consequences are regulated by the law merchant. Checks drawn upon banks or
bankers, thus marked and certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the payment of debts, the
purchase of property, and in the transfer of balances from one house and one bank to
another. In the great commercial centers, they make up no inconsiderable portion of
the circulation, and thus perform a useful, valuable, and an almost indispensable
office. The purpose of procuring a check to be certified is to impart strength and credit
to the paper by obtaining an acknowledgment from the certifying bank that the drawer
has funds therein sufficient to cover the check and securing the engagement of the
bank that the check will be paid upon presentation. A certified check has a distinctive
character as a species of commercial paper, and performs important functions in
banking and commercial business. When a check is certified, it ceases to possess the
character, or to perform the functions, of a check, and represents so much money on
deposit, payable to the holder on demand. The check becomes a basis of credit an
easy mode of passing money from hand to hand, and answers the purposes of
money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be
accepted, though acceptance is not usual. By the law merchant, the certificate of the
bank that a check is good is equivalent to acceptance. It implies that the check is
drawn upon sufficient funds in the hands of the drawee, that they have been set apart
for its satisfaction, and that they shall be so applied whenever the check is presented
for payment. It is an undertaking that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes of circulation, a certificate of
deposit payable to the order of the depositor, or any other obligation it can assume.
The object of certifying a check, as regards both parties is to enable the holder to use
it as money. The transferee takes it with the same readiness and sense of security
that he would take the notes of the bank. It is available also to him for all the purposes
of money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by payment. It
cannot be doubted that the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these important securities only a
snare and a delusion. A bank incurs no greater risk in certifying a check than in giving
a certificate of deposit. In well-regulated banks the practice is at once to charge the
check to the account of the drawer, to credit it in a certified check account, and, when
the check is paid, to debit that account with the amount. Nothing can be simpler or
safer than this process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647;
19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and
evidenced by some word or mark, usually the words "good", "certified" or "accepted"
written upon the check by the banker or bank officer. (1 Morse, Banks and Banking,
915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we
have the money of the drawer here ready to pay it. We will pay it now if you will
receive it. The holder says, No, I will not take the money; you may certify the check
and retain the money for me until this check is presented. The law will not permit a
check, when due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money being due
and the check presented, it is his own fault if the holder declines to receive the pay,
and for his own convenience has the money appropriated to that check subject to its
future presentment at any time within the statute of limitations. (1 Morse on Banks
and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its
view is vitiated by the fact that they take the word "acceptance" in its ordinary
meaning and not in the technical sense in which it is used in the Negotiable
Instruments Law. Appellant says that when payment is made, such payment amounts
to an acceptance, because he who pays accepts. This is true in common parlance but
"acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning
in the Negotiable Instruments Law, and, as has been above stated, in the instant case
there was payment but no acceptatance, or what is equivalent to acceptance,
certification.
With few exceptions, the weight of authority is to the effect that "payment"
neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S.
W., 513), the court asks, if a mere promise to pay a check is binding on a bank, why
should not the absolute payment of the check have the same effect? In response, it is
submitted that the two things, that is acceptance and payment, are entirely
different. If the drawee accepts the paper after seeing it, and then permits it to go into
circulation as genuine, on all the principles of estoppel, he ought to be prevented from
setting up forgery to defeat liability to one who has taken the paper on the faith of the
acceptance, or certification. On the other hand, mere payment of the paper at the
termination of its course does not act as an estoppel. The attempt to state a general
rule covering both acceptance and payment is responsible for a large part of the
conflicting arguments which have been advanced by the courts with respect to the
rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085),
the court said:
We are of the opinion that "payment is not acceptance". Acceptance,
as defined by section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express
language of the statute, discharges the liability only of the persons named in
the statute, to wit, the drawer and all indorsers, and the contract of
indorsement by the negotiator if the check is discharged by acceptance,
certification, or payment. But clearly the statute does not say that the
contract of warranty of the negotiator, created by section 65, is discharged
by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment
of a check on a forged or unauthorized indorsement of the payee's name, and
charging the same to the drawer's account, do not amount to an acceptance so as to
make the bank liable to the payee, is supported by all of the recent cases in which the
question is considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized
indorsement is not an acceptance thereof so as to render the drawee bank liable to
the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264
Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989,
991, 992), the court said:
The defendant in error contends that the payment of the check shows
acceptance by the bank, urging that there can be no more definite act by the bank
upon which a check has been drawn, showing acceptance than the payment of the
check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the
provisions of the act applicable to bills of exchange apply to a check, and section 131
(sec. 149), that the acceptance of a bill must be in writing signed by the drawee.
Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in
the future and continues the life of the bill. It was held in the First National
Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a
forged indorsement did not operate as an acceptance in favor of the true owner. The
contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7
L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable
Instruments Act was not in force in those states. The opinion of the Supreme Court of
the United States seems more logical, and the provision of the Negotiable
Instruments Act now require an acceptance to be in writing. Under this statute the
payment of a check on a forged indorsement, stamping it "paid," and charging it to the
account of the drawer, do not constitute an acceptance of the check or create a
liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker
Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D,
1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837;
State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991,
992.)
Before drawee's acceptance of check there is no privity of contract between
drawee and payee. Drawee's payment of check on unauthorized indorsement does
not constitute "acceptance" of check. (Sinclair Refining Co.vs. Moultrie Banking Co.,
165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a
forged or unauthorized indorsement and the stamping of it "paid" does not constitute
an acceptance. (Dakota Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N.
W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South
Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard
Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637
[1908]), the language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very
unauthorized payments of which they complain. This suggestion does not
seem forceful to us. It is the contention which was made before the Supreme
Court of the United States in First National Bank vs. Whitman (94 U. S.,
343), and repudiated by that court. The language of the opinion in that case
is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates
a privity between the payee and the bank is established by the payment of
the amount of this check in the manner described. This argument is based
upon the erroneous assumption that the bank has paid this check. If this
were true, it would have discharged all of its duty, and there would be an end
to the claim against it. The bank supposed that it had paid the check, but this
was an error. The money it paid was upon a pretended and not a real
indorsement of the name of the payee. . . . We cannot recognize the
argument that payment of the amount of the check or sight draft under such
circumstances amounts to an acceptance creating a privity of contract with
the real owner.
"It is difficult to construe a payment as an acceptance under any
circumstances. . . . A banker or individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged
indorsement does not operate as an acceptance of the check so as to
authorize an action by the real owner to recover its amount from the drawee
bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of
the authorities supporting the rule will be found in a footnote to the foregoing
citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So.,
570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-
1074), this question was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand
upon the narrow ledge that the payment of the check by the two banks will constitute
an acceptance. The drawee bank simply marked it "paid" and did not write anything
else except the date. The bank first paying the check, the Commercial National Bank
and Trust Company, simply wrote its name as indorser and passed the check on to
the drawee bank; does this constitute an acceptance? The precise question has not
been presented to this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written its name across
the paper and therefore, under the strict terms of the statute, could not be bound as
an acceptor; in the second place, it does not appear to us to be illogical and unsound
to say that the payment of a check by the drawee, and the stamping of it "paid", is
equivalent to the same thing as the acceptance of a check; however, there is a variety
of opinions in the various jurisdictions on this question. Counsel correctly states that
the theory upon which the numerous courts hold that the payment of a check creates
privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the
payment of the check, when not authorized to be done by the drawee bank, might
under such circumstances create liability on the part of the drawee to the drawer.
Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A.,
93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check
was necessary in order to give the holder thereof a right of action thereon against the
bank, and further held in a case similar to this, so far as this question is concerned,
that the acceptance of a check so as to give a right of action to the payee is inferred
from the retention of the check by the bank and its subsequent charge of the amount
to the drawer, although it was presented by, and payment made, an unauthorized
person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10
Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not
having such a case before it, threw out the suggestion that, if it was shown that a
bank had charged the check on its books against the drawer and made settlement
with the drawee that the holder could recover on account of money had and received,
invoking the rule of justice and fairness, it might be said there was an implied promise
to the holder to pay it on demand. (SeeNational Bank of the Republic vs. Millard, 10
Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would
be inequitable and unconscionable for the owner and payee of the check to be limited
to an action against an insolvent drawer and might thereby lose the debt. They
recognized the legal principle that there is no privity between the drawer bank and the
holder, or payee, of the check, and proceeded to hold that no particular kind of writing
was necessary to constitute an acceptance and that it became a question of fact, and
the bank became liable when it stamped it "paid" and charged it to the account of the
drawer, and cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa.,
483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and
Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable
Instruments Law by the State of Tennessee. However, in this case Judge
Snodgrass points out that the Millard case, supra, was dicta. The Dodge
case, from the Ohio court, held exactly as the Tennessee court, but
subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St.,
406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court
held to the contrary, called attention to the fact that the Dodge case was no
longer the law, and proceeded to announce that, whatever might have been
the law before the passage of the Negotiable Instrument Act in that state, it
was no longer the law; that the rule announced in the Dodge case had been
"discarded." The court, in the latter case, expressed its doubts that the
courts of Tennessee and Pennsylvania would adhere to the rule announced
in the Pickle case, quoted supra, in the face of the Negotiable Instrument
Law. Subsequent to the Millard case, the Supreme Court of the United
States, in the case of First National Bank of Washington vs. Whitman (94 U.
S., 343, 347; 24 L. ed., 229), where the bank, without any knowledge that
the indorsement of the payee was unauthorized, paid the check, and it was
contended that by the payment the privity of contract existing between the
drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as
creates a privity between the payee and the bank is established by the
payment of the amount of this check in the manner described. This
argument is based upon the erroneous assumption that the bank has paid
this check. If this were true, it would have discharged all of its duty, and
there would be an end of the claim against it. The bank supposed that it had
paid the check; but this was an error. The money it paid was upon a
pretended and not a real indorsement of the name of the payee. The real
indorsement of the payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains unpaid. Its pretended
payment did not diminish the funds of the drawer in the bank, or put money
in the pocket of the person entitled to the payment. The state of the account
was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a
check or sight draft under such circumstances amounts to an acceptance,
creating a privity of contract with the real owner. It is difficult to construe a
payment as an acceptance under any circumstances. The two things are
essentially different. One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of
the check "paid" and the charging of the amount thereof to the drawer
constituted an acceptance, but we are of opinion that none of these cases
cited hold that it is in compliance with the Negotiable Instruments Act; paying
the check and stamping same is not the equivalent of accepting the check in
writing signed by the drawee. The cases holding that payment as indicated
above constituted acceptance were rendered prior to the adoption of the
Negotiable Instruments Act in the particular state, and these decisions are
divided into two classes: the one holding that the check delivered by the
drawer to the holder and presented to the bank or drawee constitutes an
assignment pro tanto; the other holding that the payment of the check and
the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the
assignment pro tanto theory, and since the adoption of the Negotiable
Instrument Act by this state we are compelled to say that payment of a
check is not equivalent to accepting a check in writing and signing the name
of the acceptor thereon. Payment of the check and the charging of same to
the drawer does not constitute an acceptance. Payment of the check is the
end of the voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea. What we have
said applies to the holder and not to the drawer of the check. On this
question we conclude that the general rule is that an action cannot be
maintained by a payee of the check against the bank on which is draw
unless the check has been certified or accepted by the bank in compliance
with the statute, even though at the time the check is that an action cannot
be maintained by a payee of the drawer of the check out of which the check
is legally payable; and that the payment of the check by the bank on which it
is drawn, even though paid on the unauthorized indorsement of the name of
the holder (without notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and without
acceptance or certification, as provided by statute, there is no privity of
contract between the drawee bank and the payee, or holder of the check.
Neither is there an assignmentpro tanto of the funds where the check is not
drawn on a particular fund, or does not show on its face that it is an
assignment of a particular fund. The above rule as stated seems to have
been the rule in the majority of the states even before the passage of the
uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59
Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled
by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N.
E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117
Pac., 293, 296, at page 396), it was said: "The payment of a bill or check by
the drawee amounts to more than an acceptance. The rule, holding that
such a payment has all the efficacy of an acceptance, is founded upon the
principle that the greater includes the less." We are unable to agree with this
statement as there is no similarity between acceptance and payment;
payment discharges the instrument, and no one else is expected to advance
anything on the faith of it; acceptance, contemplates further circulation,
induced by the fact of acceptance. The rule that the acceptor made certain
admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can
never exist.
II. The old doctrine that a bank was bound to know its correspondent's
signature and that a drawee could not recover money paid upon a forgery of the
drawer's name, because it was said, the drawee was negligent not to know the
forgery and it must bear the consequence of its negligence, is fast fading into the
misty past, where it belongs. It was founded in misconception of the fundamental
principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no
circumstances (except, of course, where the purchaser of the bill has participated in
the fraud upon the drawee) would the drawee be allowed to recover bank money paid
under a mistake of fact upon a bill of exchange to which the name of the drawer had
been forged. This doctrine has been freely criticized by the eminent authorities, as a
rule too favorable to the holder, not the most fair, nor best calculated to effectuate
justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading
case of Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice
Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of
Dedham National Bank vs. Everett National Bank (177 Mass., 392). "Probably the
rule was adopted from an impression of convenience rather than for any more
academic reason; or perhaps we may say that Lord Mansfield took the case out of the
doctrine as to payments under a mistake of fact by the assumption that a holder who
simply presents negotiable paper for payment makes no representation as to the
signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of
the United States Supreme adopted in the case of Bank of United States vs. Georgia
(10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C.,
180), it was held that "an unrestricted indorsement of a draft and presentation to the
drawee is a representation that the signature of the drawer is genuine", and in Lisbon
First National Bank vs.Wyndmere Bank (15 N. D., 299), it was also held that "the
drawee of a forged check who has paid the same without detecting the forgery, may
upon discovery of the forgery, recover the money paid from the party who received
the money, even though the latter was a good faith holder, provided the latter has not
been misled or prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or
payment from denying genuineness of the drawer's name, the loss is thrown upon
him on the ground of negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine. But the holder has preceded him in negligence, by
himself not ascertaining the true character of the paper before he received it, or
presented it for acceptance or payment. And although, as a general rule, the drawee
is more likely to know the drawer's handwriting than a stranger is, if he is in fact
deceived as to its genuineness, we do not perceive that he should suffer more deeply
by mistake than a stranger, who, without knowing the handwriting, has taken the
paper without previously ascertaining its genuineness. And the mistake of the drawee
should always be allowed to be corrected, unless the holder, acting upon faith and
confidence induced by his honoring the draft, would be placed in a worse position by
according such privilege to him. This view has been applied in a well considered
case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it
is going a great way to charge the acceptor with knowledge of his correspondent's
handwriting, "unless some bona fide holder has purchased the paper on the faith of
such an act." Negligence in making payment under a mistake of fact is not now
deemed a bar to recovery of it, and we do not see why any exception should be made
to the principle, which would apply as well as to release an obligation not
consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative
rights of a drawee who, under a mistake of fact, has paid, and a holder who has
received such payment, upon a check to which the name of the drawer has been
forged, it is only fair to consider the question of diligence or negligence of the parties
in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929,
932.) The responsibility of the drawee who pays a forged check, for the genuineness
of the drawer's signature, is absolute only in favor of one who has not, by his own
fault or negligence, contributed to the success of the fraud or to mislead the drawee.
(National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and
Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann., 310; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.)
If it appears that the one to whom payment was made was not an innocent sufferer,
but was guilty of negligence in not doing something, which plain duty demanded, and
which, if it had been done, would have avoided entailing loss on any one, he is not
entitled to retain the moneys paid through a mistake on the part of the drawee bank.
(First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E.,
44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769;
36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824;
113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of
Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L.
R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A.
S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash.,
484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged
check to retain the money obtained he must be able to show that the whole
responsibility of determining the validity of the signature was upon the drawee, and
that the negligence of such drawee was not lessened by any failure of any precaution
which, from his implied assertion in presenting the check as a sufficient voucher, the
drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust
Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429;
First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B.
Ford & Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted in
such case, because, although the drawee was constructively negligent in failing to
detect the forgery, yet if the purchaser had performed his duty, the forgery would in all
probability have been detected and the fraud defeated. (First National Bank of
Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence
of actual fault on the part of the drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will not preclude his recovery from
one who took the check under circumstances of suspicion without proper precaution,
or whose conduct has been such as to mislead the drawee or induce him to pay the
check without the usual scrutiny or other precautions against mistake or fraud.
(National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National
Bank, 30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National
Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which
must be borne by one of two parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is unreasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has succeeded.
(Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First
National Bank of Salem,supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and
paying the check or draft, or has reason to believe that the instrument is not genuine,
but fails to inform the drawee of his suspicions the indorser according to the
reasoning of some courts will be held liable to the drawee upon his implied warranty
that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L.
R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or
draft is bound to satisfy himself that the paper is genuine; and that by indorsing it or
presenting it for payment or putting it into circulation before presentation he impliedly
asserts that he has performed his duty, the drawee, who has, without actual
negligence on his part, paid the forged demand, may recover the money paid from
such negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of
course, the drawee must, in order to recover back the holder, show that he himself
was free from fault. (See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence
only, the loss has occurred, the drawee may recover the amount it paid on the forged
draft or check. (Security Commercial & Sav. Bank vs.Southern Trust & C. Bank
[1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to
know the signature of the drawer of a bill or check which he undertakes to pay has
been held to be decisive in favor of a payee of a forged bill or check to which he has
himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann.,
458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat.
Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A.
L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a mistake
which his negligent disregard of duty has contributed to induce the drawee to commit.
. . . The holder must refund, if by his negligence he has contributed to the
consummation of the mistake on the part of the drawee by misleading him. . . . If the
only fault attributable to the drawee is the constructive fault which the law raises from
the bald fact that he has failed to detect the forgery, and if he is not chargeable with
actual fault in addition to such constructive fault, then he is not precluded from
recovery from a holder whose conduct has been such as to mislead the drawee or
induce him to pay the check or bill of exchange without the usual security against
fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder
was negligent in not making due inquiry concerning the validity of the check before he
took it, and if the drawee can be said to have been excused from making inquiry
before taking the check because of having had a right to, presume that the holder had
made such inquiry."
The rule that one who first negotiates forged paper without taking some
precaution to learn whether or not it is genuine should not be allowed to retain the
proceeds of the draft or check from the drawee, whose sole fault was that he did not
discover the forgery before he paid the draft or check, has been followed by the later
cases. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925],
74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank
[1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged
check, purchases it, indorses it, generally, and presents it to the drawee bank, which
pays it, the latter may recover if its only negligence was its mistake in having failed to
detect the forgery, since its mistake, did not mislead the purchaser or bring about a
change in position. (Security Commercial & Savings Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of
a forged check cashed by the latter and deposited by the forger in the second bank
and never withdrawn, upon the discovery of the forgery three months later, after the
drawee had paid the check and returned the voucher to the purported drawer, where
the purchasing bank was negligent in taking the check, and was not injured by the
drawee's negligence in discovering and reporting the forgery as to the amount left on
deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First
Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount
paid on the check, after discovery of the forgery, from another bank, which put the
check into circulation by cashing it for the one who had forged the signature of both
drawer and payee without making any inquiry as to who he was although he was a
stranger, after which the check reached, and was paid by, the drawee, after going
through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085),
the following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising
upon the act of the Brule National Bank in putting the check in circulation, was not
discharged by payment of the check by the drawee (First National Bank), nor was the
Brule National Bank deceived or misled to its prejudice by such payment. The Brule
National Bank by its indorsement and delivery warranted its own identification of Kost
and the genuineness of his signature. The indorsement of the check by the Brule
National Bank was such as to assign the title to the check to its assignee, the
Whitbeck National Bank, and the amount was credited to the indorser. The check
bore no indication that it was deposited for collection, and was not in any manner
restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit
farther negotiation of the instrument, nor did it appear to be in trust for, or to the use
of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified
in relying upon the warrant of genuineness, which implied the full identification of
Kost, and his signature by the defendant bank. This view of the statute is in accord
with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769;
3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151
Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88
Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71
A. L. R., 331), decided in 1929. We have carefully examined this decision and we do
not feel justified in accepting its conclusions. It is but a restatement of the long
abandoned rule of Neal vs. Price, and it predicated on the wrong premise that the
payment includes acceptance, and that a bank drawee paying a check drawn on it
becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable
Instruments Act. Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the
Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to
discover it was a forgery. It was bound to know the signature of its customer,
Armstrong, and it was derelict in failing to give his signature to the check
sufficient attention and examination to enable it to discover instantly the
forgery. The appellant, when the check was presented to it by Banfield,
failed to make an inquiry of or about him and did not cause or have him to be
identified. Its act in so paying to him the check is a degree of negligence on
its part equivalent to positive negligence. It indorsed the check, and, while
such indorsement may not be regarded within the meaning of the Negotiable
Instrument Law as amounting to a warranty to appellant of that which it
indorsed, it at least substantially served as a representation to it that it had
exercised ordinary care and had complied with the rules and customs of
prudent banking. Its indorsement was calculated, if it did not in fact do so, to
lull the drawee bank into indifference as to the drawer's signature to it when
paying the check and charging it to its customer's account and remitting its
proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check
both are without fault, no recovery may be had of the money so paid.
(Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases
cited.) Or the rule may be more accurately stated that, where the drawee
pays the money, he cannot recover it back from a holder in good faith, for
value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of
culpable negligence, a recovery may be had by the drawee of such holder.
The negligence of the Bank of Louisa in failing to inquire of and about
Banfield, and to cause or to have him identified before it parted with its
money on the forged check, may be regarded as the primary and proximate
cause of the loss. Its negligence in this respect reached in its effect the
appellee, and induced incaution on its part. In comparison of the degrees of
the negligence of the two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently made a mistake,
doubtless due to a hurry incident to business. The first and most grievous
one was made by the appellant , amounting to its disregard of the duty, it
owed itself as well as the duty it owed to the appellee, and it cannot on
account thereof retain as against the appellee the money which it so
received. It cannot shift the loss to the appellee, for such disregard of its duty
inevitably contributed to induce the appellee to omit its duty critically to
examine the signature of Armstrong, even if it did not know it instantly at the
time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in
purchasing the checks in question is such as to give the appellee the right to recover
upon said checks, and on the other hand, whether the drawee bank was not itself
negligent, except for its constructive fault in not knowing the signature of the drawer
and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933,
whereas check Exhibit A-1 bears number 637020-D and is dated April 7,
1933. Therefore, the latter check, which is prior in number to the former
check, is however, issued on a later date. This circumstance must have
aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown
persons. And not only this; check Exhibit A is indorsed by a subagent of the
agent of the payee, International Auto Repair Shop. The Motor Service Co.,
Inc., made no inquiry whatsoever as to the extent of the authority of these
unknown persons. Our Supreme Court said once that "any person taking
checks made payable to a corporation, which can act only by agents, does
so at his peril, and must abide by the consequences if the agent who
indorses the same is without authority" (Insular Drug Co. vs. National Bank,
58, Phil., 684).
x x x x x x x x x
Check Exhibit A-1, aside from having been indorsed by a supposed
agent of the international Auto Repair Shop is crossed generally. The
existence of two parallel lines transversally drawn on the face of this check
was a warning that the check could only be collected through a banking
institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of
Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc.,
accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part
thereof, the Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm
and we received checks from them every month in payment of their account.
The two checks in question seem to be exactly similar to the checks which
we received from the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the
drawer's signature in the two checks, may be considered as an omission in
good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a
customer of both the Motor Service Co., Inc., and the Philippine National
Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between
two equally innocent persons, the drawee bank and the holder, and that they are
governed by the authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence.
The drawee who has paid upon the forged signature is held to bear the loss,
because he has been negligent in failing to recognize that the handwriting is
not that of his customer. But it follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in default, if he has himself
been guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker's negligence, then he may
lose his right to cast the loss upon the banker. The courts have shown a
steadily increasing disposition to extend the application of this rule over the
new conditions of fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake. Without any
actual change in the abstract doctrines of the law, which are clear, just, and
simple enough, the gradual but sure tendency and effect of the decisions
have been to put as heavy a burden of responsibility upon the payee as
upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and
Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089),
the following statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for
money had and received. If his claim did not rest upon a transaction relating
to a negotiable instrument plaintiff could recover as for money paid under
mistake, unless defendant could show some equitable reason, such as
changed condition since, and relying upon, payment by plaintiff. In the
Wyndmere Case, the North Dakota court holds that this rule giving right to
recover money paid under mistake should extend to negotiable paper, and it
rejects in its entirety the theory of estoppel and puts a case of this kind on
exactly the same basis as the ordinary case of payment under mistake. But
the great weight of authority, and that based on the better reasoning, holds
that the exigencies of business demand a different rule in relation to
negotiable paper. What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent such holder has been?
It surely is not. The correct rule recognizes the fact that, in case of payment
without a prior acceptance or certification, the holder takes the paper upon
the of the prior indorsers and the credit of the drawer, and not upon the
credit of the drawee, in making payment, has a right to rely upon the
assumption that the payee used due diligence, especially where such payee
negotiated the bill or check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the maker that it was willing
to warrant as relates thereto to all subsequent holders. (Uniform Act, secs.
65 and 66.) Such correct rule denies the drawee the right to recover when
the holder was without fault or when there has been some change of
position calling for equitable relief. When a holder of a bill of exchange uses
all due care in the taking of bill or check and the drawee thereafter pays
same, the transaction is absolutely closed modern business could not be
done on any other basis. While the correct rule promotes the fluidity of two
recognized mediums of exchange, those mediums by which the great bulk of
business is carried on, checks and drafts, upon the other hand it encourages
and demands prudent business methods upon the part of those receiving
such mediums of exchange. (Pennington County Bank vs. First State Bank,
110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W.,
119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294;
36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va.,
545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60
Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American
Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188;
113 Pac., 711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R.
A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is
clear. It took this check from a stranger without other identification than that
given by another stranger; its cashier witnessed the mark of such stranger
thus vouching for the identity and signature of the maker; and it indorsed the
check as "Paid," thus further throwing plaintiff off guard. Defendant could not
but have known, when negotiating such check and putting it into the channel
through which it would finally be presented to plaintiff for payment, that
plaintiff, if it paid such check, as defendant was asking it to do, would have
to rely solely upon the apparent faith and credit that defendant had placed in
the drawer. From the very circumstances of this case plaintiff had to act on
the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by
plaintiff, that in "equity and good conscience" plaintiff should not recover it
says it did not pay over any money to the forger until after plaintiff had paid
the check. There would be merit in such contention if defendant had
indorsed the check for "collection," thus advising plaintiff that it was relying
on plaintiff and not on the drawer. It stands in court where it would have
been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has
by his conduct, however innocent, misled or deceived the drawee to his
damage, it would be unjust for him to be allowed to shield himself from the
results of his own carelessness by asserting that the drawee was bound in
law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a
signature is forged or made without the authority of the person whose signature it
purports to be, is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought
to enforce such right is precluded from setting up the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the
genuineness of the checks in question, by its acceptance thereof, nor did it perform
any act which would have induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not be said that the
appellee is precluded from setting up the forgery and, therefore, the appellant is not
entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived
by a forgery of the drawer's signature may recover the payment back, unless his
mistake has placed an innocent holder of the paper in a worse position than he would
have been in if the discovery of the forgery had been made on presentation. (5 R. C.
L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the
eye of the most cautious experts; and when a bank has been deceived, it is a harsh
rule which compels it to suffer although no one has suffered by its being deceived.
(17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's
position would not become worse than if the drawee had refused the payment of
these checks upon their presentation. The appellant has lost nothing by anything
which the drawee has done. It had in its hands some forged worthless papers. It did
not purchase or acquire these papers because of any representation made to it by the
drawee. It purchased them from unknown persons and under suspicious
circumstances. It had no valid title to them, because the persons from whom it
received them did not have such title. The appellant could not have compelled the
drawee to pay them, and the drawee could have refused payment had it been able to
detect the forgery. By making a refund, the appellant would only returning what it had
received without any title or right. And when appellant pays back the money it had
received it will be entitled to have restored to it the forged papers it parted with. There
is no good reason why the accidental payment made by the appellant should inure to
the benefit of the appellant. If there were injury to the appellant said injury was
caused not by the failure of the appellee to detect the forgery but by the very
negligence of the appellant in purchasing commercial papers from unknown persons
without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is
drawn, the bank is estopped to deny the genuineness of the drawer's
signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted
or certified by the said bank it cannot recover from a holder who did not
participate in the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in
the sense that this word is used in section 62 of the Negotiable Instruments
Law;
4. That in the case of the payment of a forged check, even without former
acceptance, the drawee can not recover from a holder in due course not
chargeable with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained
thereon, there must be a showing that the duty to ascertain the genuineness
of the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected by
any disregard of duty on the part of the holder, or by failure of any precaution
which, from his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and detecting
the forgery will nor preclude his recovery from one who took the check under
circumstances of suspicion and without proper precaution, or whose conduct
has been such as to mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that
the paper is genuine, and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly asserts that he
performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the
issue as the correct one, will not hinder the circulation of two recognized
mediums of exchange by which the great bulk of business is carried on,
namely, drafts and checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such mediums of
exchange;
9. That it being a matter of record in the present case, that the appellee bank
in no more chargeable with the knowledge of the drawer's signature than the
appellant is, as the drawer was as much the customer of the appellant as of
the appellee, the presumption that a drawee bank is bound to know more
than any indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in
purchasing the papers in question from unknown persons without making
any inquiry as to the identity and authority of the said persons negotiating
and indorsing them, acted negligently and contributed to the appellee's
constructive negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed
to recover, there will be no change of position as to the injury or prejudice of
the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed
from must be, as it is hereby, affirmed, with costs against the appellant. So ordered.

PNB V. CA - Acceptance of Checks25 SCRA 693FACTS:Lim deposited in his PCIB account a GSIS check drawn against
PNB. Following standardbanking procedures, the check was sent to petitioner for clearing. He didnt return said checkbut paid
the amount to PCIB as well as debited it against the account of GSIS. Thereafter, ademand was received from GSIS asking
for the credit of the amount since the signaturesfound in the check were forged. This was done by PNB and it now comes after
PCIB but the latter wouldnt want to return the money.
HELD:Acceptance is not required for checks, for the same are payable on demand. Acceptanceand payment are distinguished
with each other. The former pertains to a promise to perform anact while the latter is the actual performance of the act.PNB had
also been negligent with the particularity that it had been guilty of a greater degree of negligence because it had a previous and
formal notice from GSIS that the check had been lost,with the request that payment be stopped. Just as important is that it is
its acts, which are theproximate cause of the loss.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J .:
The Philippine National Bank hereinafter referred to as the PNB seeks the
review by certiorari of a decision of the Court of Appeals, which affirmed that of the
Court of First Instance of Manila, dismissing plaintiff's complaint against the Philippine
Commercial and Industrial Bank hereinafter referred to as the PCIB for the
recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of
Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his
current account with the PCIB branch at Padre Faura, Manila, GSIS Check No.
645915- B, in the sum of P57,415.00, drawn against the PNB; that, following an
established banking practice in the Philippines, the check was, on the same date,
forwarded, for clearing, through the Central Bank, to the PNB, which did not return
said check the next day, or at any other time, but retained it and paid its amount to
the PCIB, as well as debited it against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of
P57,415.00 was re-credited to the latter's account, for the reason that the signatures
of its officers on the check were forged; and that, thereupon, or on February 2, 1962,
the PNB demanded from the PCIB the refund of said sum, which the PCIB refused to
do. Hence, the present action against the PCIB, which was dismissed by the Court of
First Instance of Manila, whose decision was, in turn, affirmed by the Court of
Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the
GSIS on the check, as drawer thereof, are forged; that the person named in the check
as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel
Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the
PCIB stamped the following on the back of the check: "All prior indorsements and/or
Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre
Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB,
for clearance, through the Central Bank; and that, over two (2) months before, or on
November 13, 1961, the GSIS had notified the PNB, which acknowledged receipt of
the notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB
guilty of negligence; (2) in not finding that the indorsements at the back of the check
are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's
warranty on the back of the check; (4) in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding
that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which it
is interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures
of the drawer are forged, so must the signatures of the supposed indorsers be; but
this conclusion does not necessarily follow from said premise. Besides, there is
absolutely no evidence, and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the PNB refunded the amount of
the check to the GSIS, on account of the forgery in the signatures, not of the
indorsers or supposed indorsers, but of the officers of the GSISas drawer of the
instrument. In other words, the question whether or not the indorsements have been
falsified is immaterial to the PNB's liability as a drawee, or to its right to recover from
the PCIB,
1
for, as against the drawee, the indorsement of an intermediate bank does
not guarantee the signature of the drawer,
2
since the forgery of the indorsement
is not the cause of the loss.
3

With respect to the warranty on the back of the check, to which the third assignment
of error refers, it should be noted that the PCIB thereby guaranteed "all
prior indorsements," not the authenticity of the signatures of the officers of the GSIS
who signed on its behalf, because the GSIS is not an indorser of the check, but its
drawer.
4
Said warranty is irrelevant, therefore, to the PNB's alleged right to recover
from the PCIB. It could have been availed of by a subsequent indorsee
5
or a holder in
due course
6
subsequent to the PCIB, but, the PNB is neither.
7
Indeed, upon payment
by the PNB, as drawee, the check ceased to be a negotiable instrument, and became
a mere voucher or proof of payment.
8

Referring to the fourth and fifth assignments of error, we must bear in mind that, in
general, "acceptance", in the sense in which this term is used in the Negotiable
Instruments Law
9
is not required for checks, for the same are payable on
demand.
10
Indeed, "acceptance" and "payment" are, within the purview of said Law,
essentially different things, for the former is "a promise to perform an act," whereas
the latter is the "actual performance" thereof.
11
In the words of the Law,
12
"the
acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of
money. Upon the other hand, actual payment of the amount of a check implies not
only an assent to said order of the drawer and a recognition of the drawer's obligation
to pay the aforementioned sum, but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains
that the lower court erred in not finding that the PCIB had been guilty of negligence in
not discovering that the check was forged. Assuming that there had been such
negligence on the part of the PCIB, it is undeniable, however, that the PNB has, also,
been negligent, with the particularity that the PNB had been guilty of a greater
degree of negligence, because it had a previous and formal notice from the GSIS that
the check had been lost, with the request that payment thereof be stopped. Just as
important, if not more important and decisive, is the fact that the PNB's negligence
was the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its
presentation by Augusto Lim; that the latter had 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 Augusto Lim to draw said amount from
his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe that the
check was genuine and good in every respect, but, also, to pay its amount to Augusto
Lim. In other words, the PNB was the primary or proximate cause of the loss, and,
hence, may not recover from the PCIB.
13

It is a well-settled maxim of law and equity that when one of two (2) innocent persons
must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power of
the third person to perpetrate the wrong.
14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and the
drawee (PNB) banks are equally at fault, the court will leave the parties where it finds
them.
15

Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a
bill without having previously accepted it.
16

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
Philippine National Bank. It is so ordered.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE
NATIONAL BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking
corporations, and each is duly licensed to do its respective business in the Philippines
Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai
Banking Corporation with whom it had an account, payable to the order of Lazaro
Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor's
signature, as an endorser, and then personally endorsed and presented it to the
Philippine National Bank where the amount of the check was placed to his credit.
After having paid the check, and on the next day, the Philippine national Bank
endorsed the check to the Hongkong and Shanghai Banking Corporation which paid it
and charged the amount of the check to the account of the plaintiff. In the ordinary
course of business, the Hongkong Shanghai Banking Corporation rendered a bank
statement to the plaintiff showing that the amount of the check was charged to its
account, and no objection was then made to the statement. About four months after
the check was charged to the account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had never received it, and that his
signature, as an endorser, was forged by Maasim, who presented and deposited it to
his private account in the Philippine National Bank. With this knowledge , the plaintiff
promptly made a demand upon the Hongkong and Shanghai Banking Corporation
that it should be given credit for the amount of the forged check, which the bank
refused to do, and the plaintiff commenced this action to recover the P2,000 which
was paid on the forged check. On the petition of the Shanghai Bank, the Philippine
National Bank was made defendant. The Shanghai Bank denies any liability, but
prays that, if a judgment should be rendered against it, in turn, it should have like
judgment against the Philippine National Bank which denies all liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the
plaintiff and in favor of the defendants, from which the plaintiff appeals, claiming that
the court erred in dismissing the case, notwithstanding its finding of fact, and in not
rendering a judgment in its favor, as prayed for in its complaint.


JOHNS, J .:
There is no dispute about any of the findings of fact made by the trial court, and the
plaintiff relies upon them for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check
drawn and payable to order, when its value was collected by a third person
by means of forgery of the signature of the payee? Is it the drawee or the
last indorser, who ignored the forgery at the time of making the payment, or
the forger?
To lower court found that Melicor's name was forged to the check. "So that the person
to whose order the check was issued did not receive the money, which was collected
by E. M. Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment
of made to Maasim in good faith of the amount of the check, because the
indorsement of Maasim is unquestionable and his signature perfectly
genuine, and the bank was not obliged to identify the signature of the former
indorser. Neither could the Hongkong and Shanghai Banking Corporation be
held responsible in making payment in good faith to the National Bank,
because the latter is a holder in due course of the check in question. In other
words, the two defendant banks can not be held civilly responsible for the
consequences of the falsification or forgery of the signature of Lazaro
Melicor, the National Bank having had no notice of said forgery in making
payment to Maasim, nor the Hongkong bank in making payment to National
Bank. Neither bank incurred in any responsibility arising from that crime, nor
was either of the said banks by subsequent acts, guilty of negligence or
fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In
other words, the plaintiff authorized and directed the Shanghai Bank to pay Melicor,
or his order, P2,000. It did not authorize or direct the bank to pay the check to any
other person than Melicor, or his order, and the testimony is undisputed that Melicor
never did part with his title or endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound by the banks statement, which
was made to it by the Shanghai Bank. This is not a case where the plaintiff's own
signature was forged to one of it checks. In such a case, the plaintiff would have
known of the forgery, and it would have been its duty to have promptly notified the
bank of any forged signature, and any failure on its part would have released bank
from any liability. That is not this case. Here, the forgery was that of Melicor, who was
the payee of the check, and the legal presumption is that the bank would not honor
the check without the genuine endorsement of Melicor. In other words, when the
plaintiff received it banks statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it
out to anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai
Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and
was never paid to Melicor, and he never paid to Melicor, and he never personally
endorsed the check, or authorized any one to endorse it for him, and the alleged
endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the
Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed the check upon a forged
signature, and placed the money to the credit of Maasim, who was a forger. That the
Philippine National Bank then endorsed the check and forwarded it to the Shanghai
Bank by whom it was paid. The Philippine National Bank had no license or authority
to pay the money to Maasim or anyone else upon a forge signature. It was its legal
duty to know that Melicor's endorsment was genuine before cashing the check. Its
remedy is against Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be entered here in favor of
the plaintiff and against the Hongkong and Shanghai Banking Corporation for the
P2,000, with interest thereon from November 8, 1920 at the rate of 6 per cent per
annum, and the costs of this action, and a corresponding judgment will be entered in
favor of the Hongkong Shanghai Banking Corporation against the Philippine National
Bank for the same amount, together with the amount of its costs in this action. So
ordered.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J .:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review, on
the issue of the right of the drawer to recover from the drawee bank who pays a
check with a forged indorsement of the payee, debiting the same against the drawer's
account.
The records show that on January 23, 1985, petitioner filed a Complaint against the
private respondent Philippine Bank of Communications (respondent drawee Bank) for
recovery of the money value of eighty-two (82) checks charged against the
petitioner's account with the respondent drawee Bank on the ground that the payees'
indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan
City, which tried the case, rendered a decision on November 17, 1987 dismissing the
complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision
of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross
negligence in issuing the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must nevertheless be borne by
the party whose negligence was the proximate cause of the loss. On March 5, 1990,
the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court:
1

I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING
THAT THE NEGLIGENCE OF THE DRAWER IS THE
PROXIMATE CAUSE OF THE RESULTING INJURY TO THE
DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF
THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT
BANK IN FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO
PERSONS, OTHER THAN TO THE INTENDED PAYEES
SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE
CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING
(SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-
CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN
THE CALOOCAN CITY BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores
located at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among
these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner
maintains a checking account numbered 13-00038-1 with the Caloocan City Branch
of the respondent drawee Bank. To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account with the respondent bank as
drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her
trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After
the bookkeeper prepared the checks, the completed checks were submitted to the
petitioner for her signature, together with the corresponding invoice receipts which
indicate the correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the checks against
the corresponding invoices because she reposed full and implicit trust and confidence
on her bookkeeper. The issuance and delivery of the checks to the payees named
therein were left to the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all checks presented to and paid
by the bank, petitioner did not verify he correctness of the returned checks, much less
check if the payees actually received the checks in payment for the supplies she
received. In the course of her business operations covering a period of two years,
petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the
indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against
petitioner's checking account numbered 30-00038-1. Most of the aforementioned
checks were for amounts in excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check
No. 652282 issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of
P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation
was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May
10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her
actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check
No. 651862 dated August 9, 1984 in favor of Malinta Exchange
Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16
(Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor
of Grocer's International Food Corp. in the amount of P11,335.60
(Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1);
(7) in Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her obligation
was only P648.00 (Exh. G); (8) in Check No. 589028 dated March
10, 1984 for the amount of P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh.
H-2); (9) in Check No. 62033 dated May 23, 1984 in the amount of
P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her
obligation was only P504.00 (Exhs. I-1 and I-2).
2

Practically, all the checks issued and honored by the respondent drawee bank were
crossed checks.
3
Aside from the daily notice given to the petitioner by the respondent
drawee Bank, the latter also furnished her with a monthly statement of her
transactions, attaching thereto all the cancelled checks she had issued and which
were debited against her current account. It was only after the lapse of more two (2)
years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to
Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia branch,
who, without authority therefor, accepted them all for deposit at the Buendia branch to
the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L.
Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-
two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his
Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao branch
of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks
testified that they did not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover, check or
stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent
drawee Bank, only a Branch Manager and no other official of the respondent drawee
bank, may accept a second indorsement on a check for deposit. In the case at bar, all
the deposit slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee
Bank to credit her account with the money value of the eighty-two (82) checks
totalling P1,208.606.89 for having been wrongfully charged against her account.
Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985,
petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against
the drawee bank. The payees are not parties to the case. Rather, it is the drawer,
whose signature is genuine, who instituted this action to recover from the drawee
bank the money value of eighty-two (82) checks paid out by the drawee bank to
holders of those checks where the indorsements of the payees were forged. How and
by whom the forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments
Law
4
(heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the
party whose signature is forged. A party whose signature to an instrument
was forged was never a party and never gave his consent to the contract
which gave rise to the instrument. Since his signature does not appear in the
instrument, he cannot be held liable thereon by anyone, not even by a holder
in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the
promise to pay. Or where a person's signature as a drawer of a check is
forged, the drawee bank cannot charge the amount thereof against the
drawer's account because he never gave the bank the order to pay. And
said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is "wholly inoperative",
no one can gain title to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although
rights may exist between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against parties prior to the
forgery. Such forged indorsement cuts off the rights of all subsequent parties
as against parties prior to the forgery. However, the law makes an exception
to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of
checks may generally be broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the drawer for example a mail
robbery; and (2) where the indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the drawer's negligence with
respect to forged indorsements. While there is no duty resting on the depositor to look
for forged indorsements on his cancelled checks in contrast to a duty imposed upon
him to look for forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably calculated to prevent
or render difficult the forgery of indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns that a check drawn by him has been
paid under a forged indorsement, the drawer is under duty promptly to report such
fact to the drawee bank.
5
For his negligence or failure either to discover or to report
promptly the fact of such forgery to the drawee, the drawer loses his right against the
drawee who has debited his account under a forged indorsement.
6
In other words, he
is precluded from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by
her trusted employee, Alicia Galang, and were given to her for her signature. Her
signing the checks made the negotiable instrument complete. Prior to signing the
checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery
of the instrument to the payee for the purpose of giving effect thereto.
7
The first
delivery of the instrument, complete in form, to the payee who takes it as a holder, is
called issuance of the instrument.
8
Without the initial delivery of the instrument from
the drawer of the check to the payee, there can be no valid and binding contract and
no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized
her employee Alicia Galang to deliver the eighty-two (82) checks to their respective
payees. Instead of issuing the checks to the payees as named in the checks, Alicia
Galang delivered them to the Chief Accountant of the Buendia branch of the
respondent drawee Bank, a certain Ernest L. Boon. It was established that the
signatures of the payees as first indorsers were forged. The record fails to show the
identity of the party who made the forged signatures. The checks were then indorsed
for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second indorsements were all
genuine signatures of the alleged holders. All the eighty-two (82) checks bearing the
forged indorsements of the payees and the genuine second indorsements of Alfredo
Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts in the
Buendia, Ongpin and Elcao branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been
forged cannot charge the drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such negligence which causes
the bank to honor such a check or checks. If a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged indorsement by
mere examination of his cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his cancelled checks for forgery
of his own signature, he has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an employee or agent of the
drawer, or done with the active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's indorsement. The drawer and
the payee often time shave business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for
the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is discovered. This
is specially true when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman would
under the circumstances. In the case at bar, the petitioner relied implicitly upon the
honesty and loyalty of her bookkeeper, and did not even verify the accuracy of
amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently
did not carefully examine the same nor the check stubs and the returned checks, and
did not compare them with the same invoices. Otherwise, she could have easily
discovered the discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent forgeries would not have
been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were
wrongfully charged to her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been
made, petitioner would have been duty-bound, as far as the respondent drawee Bank
was concerned, to make an adequate investigation on the matter. Had this been
done, the discrepancies would have been discovered, sooner or later. Petitioner's
failure to make such adequate inquiry constituted negligence which resulted in the
bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility exists
that the checks in question covered inexistent sales. But even in such a case,
considering the length of a period of two (2) years, it is hard to believe that petitioner
did not know or realize that she was paying more than she should for the supplies she
was actually getting. A depositor may not sit idly by, after knowledge has come to her
that her funds seem to be disappearing or that there may be a leak in her business,
and refrain from taking the steps that a careful and prudent businessman would take
in such circumstances and if taken, would result in stopping the continuance of the
fraudulent scheme. If she fails to take steps, the facts may establish her negligence,
and in that event, she would be estopped from recovering from the bank.
9

One thing is clear from the records that the petitioner failed to examine her records
with reasonable diligence whether before she signed the checks or after receiving her
bank statements. Had the petitioner examined her records more carefully, particularly
the invoice receipts, cancelled checks, check book stubs, and had she compared the
sums written as amounts payable in the eighty-two (82) checks with the pertinent
sales invoices, she would have easily discovered that in some checks, the amounts
did not tally with those appearing in the sales invoices. Had she noticed these
discrepancies, she should not have signed those checks, and should have conducted
an inquiry as to the reason for the irregular entries. Likewise had petitioner been more
vigilant in going over her current account by taking careful note of the daily reports
made by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the close of
each month, she could have easily discovered the fraud being perpetrated by Alicia
Galang, and could have reported the matter to the respondent drawee Bank. The
respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of
her loss. And since it was her negligence which caused the respondent drawee Bank
to honor the forged checks or prevented it from recovering the amount it had already
paid on the checks, petitioner cannot now complain should the bank refuse to recredit
her account with the amount of such checks.
10
Under Section 23 of the NIL, she is
now precluded from using the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank
11
is not applicable to the case at bar because in said case, the check
was fraudulently taken and the signature of the payee was forged not by an agent or
employee of the drawer. The drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total stranger was not attributable
to negligence of the drawer; neither was the forging of the payee's indorsement due
to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-
bound to restore to the drawer's account the amount theretofore paid under the check
with a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks
because they were crossed checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is more of a warning to the
holder that the check cannot be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's bank which in turn must
present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but
it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having
checks with more than one indorsement. The banking rule banning acceptance of
checks for deposit or cash payment with more than one indorsement unless cleared
by some bank officials does not invalidate the instrument; neither does it invalidate
the negotiation or transfer of the said check. In effect, this rule destroys the
negotiability of bills/checks by limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be
written in express words at the back of the instrument, so that any subsequent party
may be forewarned that ceases to be negotiable. However, the restrictive indorsee
acquires the right to receive payment and bring any action thereon as any indorser,
but he can no longer transfer his rights as such indorsee where the form of the
indorsement does not authorize him to do so.
12

Although the holder of a check cannot compel a drawee bank to honor it because
there is no privity between them, as far as the drawer-depositor is concerned, such
bank may not legally refuse to honor a negotiable bill of exchange or a check drawn
against it with more than one indorsement if there is nothing irregular with the bill or
check and the drawer has sufficient funds. The drawee cannot be compelled to
accept or pay the check by the drawer or any holder because as a drawee, he incurs
no liability on the check unless he accepts it. But the drawee will make itself liable to a
suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of
forgery by reason of her gross negligence. But under Section 196 of the NIL, any
case not provided for in the Act shall be governed by the provisions of existing
legislation. Under the laws of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and supervision of its employees as being
the cause of the loss because negligence is the proximate cause thereof and under
Article 2179 of the Civil Code, she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee Bank may be held liable for
damages. The article provides
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as
depositor (obligee) and the respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound by its internal banking rules
and regulations which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same
upon the mere approval of Boon, a chief accountant, it contravened the tenor of its
obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second indorsement for
deposit even without the approval of the branch manager despite periodic inspection
conducted by a team of auditors from the main office constitutes negligence on the
part of the bank in carrying out its obligations to its depositors. Article 1173 provides

The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and
of the place. . . .
We hold that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such that the
appropriate standard of diligence must be a high degree of diligence, if not the utmost
diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of
diligence that is required of it. There is no way We can allow it now to escape liability
for such negligence. Its liability as obligor is not merely vicarious but primary wherein
the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss
with the petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every
kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made
clear that the decision to hold the drawee bank liable is based on law and substantial
justice and not on mere equity. And although the case was brought before the court
not on breach of contractual obligations, the courts are not precluded from applying to
the circumstances of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause of her loss does not
preclude her from recovering damages. The reason why the decision dealt on a
discussion on proximate cause is due to the error pointed out by petitioner as
allegedly committed by the respondent court. And in breaches of contract under
Article 1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court
for the reception of evidence to determine the exact amount of loss suffered by the
petitioner, considering that she partly benefited from the issuance of the questioned
checks since the obligation for which she issued them were apparently extinguished,
such that only the excess amount over and above the total of these actual obligations
must be considered as loss of which one half must be paid by respondent drawee
bank to herein petitioner.
SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the
name and style "Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.

CRUZ, J .:
The sole issue raised in this case is whether or not the private respondent has a
cause of action against the petitioners for their encashment and payment to another
person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under
the firm name "Melissa's RTW." She deals with, among other customers, Robinson's
Department Store, Payless Department Store, Rempson Department Store, and the
Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks
payable to Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid
accounts, she was informed of the issuance of the above-listed crossed checks.
Further inquiry revealed that the said checks had been deposited with the Associated
Bank (hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one
of its "trusted depositors," in the words of its branch manager and co-petitioner,
Conrado Cruz, Sayson had not been authorized by the private respondent to deposit
and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon
City for recovery of the total value of the checks plus damages. After trial, judgment
was rendered requiring them to pay the private respondent the total value of the
subject checks in the amount of P15,805.00 plus 12% interest, P50,000.00 actual
damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs
of the suit.
1

The petitioners appealed to the respondent court, reiterating their argument that the
private respondent had no cause of action against them and should have proceeded
instead against the companies that issued the checks. In disposing of this contention,
the Court of Appeals
2
said:
The cause of action of the appellee in the case at bar arose from
the illegal, anomalous and irregular acts of the appellants in
violating common banking practices to the damage and prejudice of
the appellees, in allowing to be deposited and encashed as well as
paying to improper parties without the knowledge, consent,
authority or endorsement of the appellee which totalled P15,805.00,
the six (6) checks in dispute which were "crossed checks" or "for
payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case
at bar, namely: (1) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created; (2) an obligation on
the part of the named defendant to respect or not to violate such
right; and (3) an act or omission on the part of such defendant
violative of the right of the plaintiff or constituting a breach thereof.
(Republic Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
And such cause of action has been proved by evidence of great
weight. The contents of the said checks issued by the customers of
the appellee had not been questioned. There is no dispute that the
same are crossed checks or for payee's account only, which is
Melissa's RTW. The appellee had clearly shown that she had never
authorized anyone to deposit the said checks nor to encash the
same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were for
payee's account only; and that the appellee maintained a savings
account with the Prudential Bank, Cubao Branch, Quezon City
which never cleared the said checks and the appellee had been
damaged by such encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel
lines diagonally on the left top portion of the checks. The crossing is special where
the name of a bank or a business institution is written between the two parallel lines,
which means that the drawee should pay only with the intervention of that
company.
3
The crossing is general where the words written between the two parallel
lines are "and Co." or "for payee's account only," as in the case at bar. This means
that the drawee bank should not encash the check but merely accept it for deposit.
4

In State Investment House vs. IAC,
5
this Court declared that "the effects of crossing
a check are: (1) that the check may not be encashed but only deposited in the bank;
(2) that the check may be negotiated only once to one who has an account with a
bank; and (3) that the act of crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for
payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or by some person authorized
to receive payment on his behalf. Who the holder or authorized person is depends on
the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account
only." This could only signify that the drawers had intended the same for deposit only
by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction
found on the face of the checks exclusively belongs to the issuers thereof and not to
the payee. Moreover, having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael
Sayson although they were crossed checks and the payee was not Sayson but
Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements
and/or lack of endorsements (were) guaranteed." By such deliberate and positive act,
the Bank had for all legal intents and purposes treated the said checks as negotiable
instruments and, accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or
unauthorized indorsement is wrongful, and when the money is collected on the check,
the bank can be held 'for moneys had and received."
6
The proceeds are held for the
rightful owner of the payment and may be recovered by him. The position of the bank
taking the check on the forged or unauthorized indorsement is the same as if it had
taken the check and collected without indorsement at all. The act of the bank
amounts to conversion of the check.
7

It is not disputed that the proceeds of the subject checks belonged to the private
respondent. As she had not at any time authorized Rafael Sayson to endorse or
encash them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed
to the endorser, it did so at its peril and became liable to the payee for the value of
the checks. This liability attached whether or not the Bank was aware of the
unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by
Sayson. The Bank should have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit 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 issued for deposit only to the private respondent's account. Its failure to
inquire into Sayson's authority was a breach of a duty it owed to the private
respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corp.,
9
"the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining their genuineness
and regularity. The collecting bank, being primarily engaged in banking, holds itself
out to the public as the expert on this field, and the law thus holds it to a high
standard of conduct."
The petitioners insist that the private respondent has no cause of action against them
because they have no privity of contract with her. They also argue that it was Eddie
Reyes, the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank
would still be liable to the private respondent because he was not authorized to make
the endorsements. And even if the endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not verifying the endorser's authority.
There is no substantial difference between an actual forging of a name to a check as
an endorsement by a person not authorized to make the signature and the affixing of
a name to a check as an endorsement by a person not authorized to endorse it.
10

The Bank does not deny collecting the money on the endorsement. It was its
responsibility to inquire as to the authority of Rafael Sayson to deposit crossed
checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The
failure of the Bank to make this inquiry was a breach of duty that made it liable to the
private respondent for the amount of the checks.
There being no evidence that the crossed checks were actually received by the
private respondent, she would have a right of action against the drawer companies,
which in turn could go against their respective drawee banks, which in turn could sue
the herein petitioner as collecting bank. In a similar situation, it was held that, to
simplify proceedings, the payee of the illegally encashed checks should be allowed to
recover directly from the bank responsible for such encashment regardless of
whether or not the checks were actually delivered to the payee.
11
We approve such
direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment,
the Bank had stamped on the back thereof the words: "All prior endorsements and/or
lack of endorsements guaranteed," and thus made the assurance that it had
ascertained the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in holding that the
private respondent had a valid cause of action against the petitioners and that the
latter are indeed liable to her for their unauthorized encashment of the subject
checks. We also agree with the reduction of the award of the exemplary damages for
lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so
ordered.