158 SCRA 582 Mercantile Law Negotiable Instruments Law Liabilities of Parties Forgery Liability of the

Drawee Bank
In June 1973, Francisco Gozon II went to the Philippine National Bank (Caloocan City) accompanied by his friend Ernesto
Santos. Gozon left Santos in his car and while Gozon was at the bank, Santos took a check from Gozons checkbook. Santos
forged Gozons signature and filled out the check with the amount of P5,000.00. Santos was able to encash the check that
day with PNB. Gozon learned of this when his statement arrived. Santos eventually admitted to forging Gozons signature.
Gozon then demanded the PNB to refund him the amount. PNB refused. Judge Romulo Quimpo ruled in favor of Gozon.
ISSUE: Whether or not PNB is liable.
HELD: Yes. 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 change the amount so paid to the account of the depositor
whose name was forged. PNB failed to meet its obligation to know the signature of its correspondent (Gozon). Further, it
was found by the court that there are glaring differences between Gozons authentic specimen signatures and that of the
forged check.

G.R. No. L-53194

March 14, 1988

PHILIPPINE NATIONAL BANK petitioner,

vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S.
GOZON II, respondents.

DECISION
GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank,
went to the bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business
in the bank. When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of
P5,000.00, forged the signature of Gozon, and thereafter he encashed the check in the bank on the same day. The account
of Gozon was debited the said amount. Upon receipt of the statement of account from the bank, Gozon asked that the said
amount of P5,000.00 should be returned to his account as his signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the police authorities and
upon investigation he admitted that he stole the check of Gozon, forged his signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorneys fees and costs
against the bank in the Court of First Instance of Rizal. After the issues were joined and the trial on the merits ensued, a
decision was rendered on February 4, 1980, the dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby condemned to return to
plaintiff the amount of P5,000.00 which it had unlawfully withheld from the latter, with interest at the legal rate from
September 22, 1972 until the amount is fully delivered. The defendant is further condemned to pay plaintiff the sum of
P2,000.00 as attorneys fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole legal issue that

THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK CONTAINING THE
CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF
THE LOSS, THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F
AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:

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 change the amount so paid to the account of the depositor whose name
was forged (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the
drawee in failing to meet its obligation to know the signature of its correspondent. There is nothing inequitable in such
a rule. If the paper comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its
character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect
of duty which the commercial law places upon him, and the result of his negligence must rest upon him (12 ALR 1901,
citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance with the accepted norms of banking
practice when it accepted and paid Exhibit A. It presented evidence that the check had to pass scrutiny by a signature
verifier as well as an officer of the bank.
A comparison of the signature (Exhibit A-l) on the forged check (Exhibit A) with plaintiffs exemplar signatures
(Exhibits 5-N and 5-B) found in the PNB Form 35-A would immediately show the negligence of the employees of the
defendant bank. Even a not too careful comparison would immediately arrest ones attention and direct it to the graceful
lines of plaintiffs exemplar signatures found in Exhibits 5-A and 5-B. The formation of the first letter F in the
exemplars, which could be regarded as artistic, is completely different from the way the same letter is formed in Exhibit
A-l. That alone should have alerted a more careful and prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being
encashed. 1 It is expected to use reasonable business prudence in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature
on the forged check and the sample signatures of private respondent show marked differences as the graceful lines in the
sample signature which is completely different from those of the signature on the forged check. Indeed the NBI handwriting
expert Estelita Santiago Agnes whom the trial court considered to be an unbiased scientific expert indicated the marked
differences between the signature of private respondent on the sample signatures and the questioned signature.
Notwithstanding the testimony of Col. Fernandez, witness for petitioner, advancing the opinion that the questioned signature
appears to be genuine, the trial court by merely examining the pictorial report presented by said witness, found a marked
difference in the second c in Francisco as written on the questioned signature as compared to the sample signatures, and
the separation between the s and the c in the questioned signature while they are connected in the sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows
marked variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that is the cause of the loss
which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went out for a short while cannot be considered negligence
sufficient to excuse the defendant bank from its own negligence. It should be home in mind that when defendant left his car,
Ernesto Santos, a long time classmate and friend remained in the same. Defendant could not have been expected to know
that the said Ernesto Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend.
He had no reason to suspect that the latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he
left his personal belongings in the car. Santos however removed and stole a check from his cheek book without the
knowledge and consent of private respondent. No doubt private respondent cannot be considered negligent under the
circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.
---_________________________________________________

Negotiable Instruments Case Digest: PNB V. National City Bank New York (1936)

FACTS:

April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company, Inc.(MSCI)
checks purporting to have been issued by the "Pangasinan Transportation Co., Inc. (Pantranco) by J. L. Klar, Manager

and Treasurer" against PNB and in favor of International Auto Repair Shop.
MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly credited with the

amounts thereof, or P144.50 and P215.75

April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank

PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and demanded from MSCI and
National City Bank New York

PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
Pantranco objected to have the proceeds of said check deducted from their deposit.

RTC: Favored PNB

MSCI appealed

ISSUES:
1. W/N acceptance = payment
2. W/N law or business practice prevents the presentation of checks for acceptance before they are paid.
3. W/N MSCI was negligent and therefore PNB should recover
4. W/N the drawee bank should be allowed recovery, as MSCI's position would not become worse than if the drawee
had refused the payment of these checks upon their presentation.
HELD: Affirmed
1. NO.
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
Acceptance is a step unnecessary for bills of exchange payable on demand (sec. 143)
Acceptance implies, subsequent negotiation of the instrument
From the moment a check is paid it is withdrawn from circulation.
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
Payment (in checks) - final act which extinguishes a bill.

Acceptance (in certified checks) - a promise to pay in the future and continues the life of the bill.
2. NO

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

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. YES.
Circumstances:

check number 637023-D was dated April 6, 1933, whereas check number 637020-D and is dated April 7, 1933. (later
check had prior number)

accepted the 2 checks from unknown persons

check 637023-D was indorsed by a subagent of the agent of the payee, International Auto Repair Shop and cross

generally
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, 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.

PNB did not warrant to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform
any act which would have induced MSCI to believe in the genuineness
PNB is NOT precluded from setting up the forgery
4. NO.
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 discover of
the forgery had been made on presentation.
MSCI 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

Court concluded:
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.

FACTS:
Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in payment of
automobile tires purchased from the latters store. It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor
company believing at that time that the signatures contained therein were genuine. The checks were later
deposited with the companys account in National City Bank of NY. The said checks were consequently cleared
and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures were
forged and it demanded the reimbursement of the amounts for which it credited the other bank.

HELD:
A check is a bill of exchange payable on demand and only the rules
governing bills of exchanges payable on demand are applicable to it. in view of the fact that acceptance is a step
necessary insofar as negotiable instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks.

Acceptance implies subsequent negotiation of the instrument,

which is not true in the case of checks because from the moment it is paid, it is withdrawn from circulation. When

the drawee banks 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 warrant
against the drawee.

Further, in determining the relative rights of a drawee who under a mistake of fact, has paid, 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 and negligence of the parties in respect
thereto. The responsibility of the drawee who pays a forged check, for the genuineness of the drawers 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.

According to the undisputed facts, National City Bank in purchasing the papers in question from unknown persons
without making any inquiry as to the identity and authority of said persons negotiating and indorsing them, acted
negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the circumstances of
the case, if the appellee bank is allowed to recover, there will be no change in position as to the injury or
prejudice of the appellant.

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 assignment pro tanto of the funds where the check is not drawn on a particular fund, or does not show on
its face that it is an assignment of a particular fund. The above rule as stated seems to have been the rule in the
majority of the states even before the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief
(pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin
(143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The
payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a
payment has all the efficacy of an acceptance, is founded upon the principle that the greater includes the less." We
are unable to agree with this statement as there is no similarity between acceptance and payment; payment
discharges the instrument, and no one else is expected to advance anything on the faith of it; acceptance,
contemplates further circulation, induced by the fact of acceptance. The rule that the acceptor made certain
admissions which will inure to the benefit of subsequent holders, has no applicability to payment of the
instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover
money paid upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery
and it must bear the consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in
misconception of the fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the
purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank money
paid under a mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This doctrine has
been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated
to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354),
elicited the following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the
case of Dedham National Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more academic reason; or perhaps we may say that Lord Mansfield took the
case out of the doctrine as to payments under a mistake of fact by the assumption that a holder who simply presents
negotiable paper for payment makes no representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in
the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg
(74 S. C., 180), it was held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation
that the signature of the drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank (15 N. D., 299), it was
also held that "the drawee of a forged check who has paid the same 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).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop is
crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning
that the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp.,
179, 180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check
in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated
the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every
month in payment of their account. The two checks in question seem to be exactly similar to the checks which we
received from the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may
be considered as an omission in good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service Co.,
Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)
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. 8285 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.

Negotiable Instruments Case Digest: San Carlos Milling Co. Ltd V. BPI (1993)

FACTS:
Wilson, a principal employee of petitioner, together with Wilson, a messenger-clerk, conspired to withdraw cash
from the petitioners account through forgery of a check, in the name of the agent authorized to sign the check.
While the authorized agent of petitioner was on vacation, Wilson and
Dolores sent a cablegram to China Banking for the transfer of $100,000. On the contract, the name of Baldwin
was forged and it was indicated therein that a certified check be issued. Thereafter, this was received and
deposited with the BPI. Upon deposit, an indorsement in the name of Baldwin was placed. The bank account was
credited. Later, a letter was sent to the bank, purporting to be signed by Baldwin asking that it be
withdrawn. This was done in supervision of Dolores. Dolores and Wilson then was able to get the money. This
eventually came to the knowledge of plaintiff who filed an action against China Banking and BPI. The trial court
dismissed the case.

HELD:
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.
There is no act of the plaintiff that led the bank astray. If it was in fact lulled into the false sense of security, it was by the
effrontery of Dolores, the messenger to whom it entrusted this large sum of money.
The proximate cause of the loss must therefore be due to the negligence of the bank in honoring and cashing the two
forged checks.

FACTS:
San Carlos Milling Co. Ltd. (San Carlos) 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 Joseph L. Wilson, to whom had been given a general power of
attorney but without power of substitution.

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 BPI

Wilson, conspiring together with Alfredo Dolores, a messenger-clerk in San Carlos' Manila office, sent a cable gram
in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation (China Bank)
of Manila of $100,00.

The money was transferred by cable, and upon its receipt China Bank sent an exchange contract to San Carlos
offering the sum of P201K, which was then the current rate of exchange.

September 28, 1927: A manager's check on the China Banking Corporation for P201K payable to San Carlos Milling
Company or order was receipted for by Dolores

deposited with the BPI having a fake endorsement (Baldwin forged as drawer)

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
San Carlos had frequently withdrawn currency for shipment to its mill but never in so large an amount, and never
under the sole supervision of Dolores

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

the crime was discovered and San Carlos filed against the BPI and China Bank (after ammendment complaint)

China Bank: as the prior endorsement had in law been guaranteed by the BPI, they are absolved even if the
endorsement of Newland Baldwin on the check was a forgery

BPI: guilty of no negligence, loss was due to the dishonesty of San Carlos employees and the negligence of San
Carlos general agent

RTC: BPI in GF and San Carlos could not recover

ISSUE: W/N BPI was bound to inspect the checks and shall therefore be liable in case of forgery

HELD: YES. judgment absolving the Bank of the Philippine Islands must therefore be reversed

duty was upon the BPI, 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

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.

under section 23 of the Negotiable Instruments Law they are not a charge against San Carlos nor are the checks of any
value to the BPI.

proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks

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.
______________________________________________________-Facts: Faustino Pangilinan, cashier of the Concepcion Emergency Hospital, forged the signature of Dr. Adena Canlas
who was the Chief of the said hospital and endorsed 30 checks amounting to P203,300 to himself. The money was drawn
from the account of the Province of Tarlac with PNB. Pangilinan deposited the checks to his personal savings account
with Associated Bank which was cleared and paid for by PNB. The checks have a stamp of Associated Bankwhich reads
All prior endorsements guaranteed by Associated Bank.
The Province of Tarlac, through the Provincial Treasurer, wrote PNB to restore the various amounts debited from
the current account of the Province. PNB on its part demanded reimbursement fromAssociated Bank. Both banks resisted
payment which led to the Province of Tarlac suing PNB. PNB in turn impleaded Associated Bank in the suit as a thirdparty defendant while Associated Bankimpleaded Canlas and Pangilinan as fourth-party defendants.
The trial court ruled that 1) PNB should pay the Province of Tarlac the P203,300 with legal interests, 2) Associated
Bank should be pay the same amount to PNB and 3) dismissed the complaints against Canlas and Pangilinan. On appeal,
the CA affirmed the ruling of the trial court
Issue: Who should bear the loss arising from the forgery, the Province of Tarlac, PNB, Associated Bank or Pangilinan?
Held: The SC held that the Province and Associated Bank should bear losses in the proportion of 50-50.
The Province can only recover 50% of the P203,300 from PNB because of the negligence they exhibited in releasing the
checks to the then already retired Pangilinan who is an unauthorized person to handle the said checks.
On the other hand, Associated Bank is liable to PNB only to 50% of the same amount because of its liability as indorser of
the checks that were deposited by Pangilinan, and guaranteed the genuineness of the said checks. They failed to exercise
due diligence in checking the veracity of indorsements.
G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the
collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in
"Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No.
17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the
provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned
by the Provincial Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said
government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then
discovered that the hospital did not receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which
were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the
Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the
Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement
on February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be
assisting or helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash
the first check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan
deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when
the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same
procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other
checks of various amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated
February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for
certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but
to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the
manager denied having given Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various
amounts debited from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated
Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto
Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank
(PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest thereon from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and
against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former
the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon
from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against
fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto
Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby
ordered dismissed for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto
on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from
liability when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto
Pangilinan who was then already retired as the hospital's cashier and administrative officer. PNB also maintains its
innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss, in this case the
Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from
Associated Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay
the adjudged liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank
(PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank
Circular No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The
PCHC Rules are merely contractual stipulations among and between member-banks. As such, they cannot prevail over the
aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements
against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a
mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no
clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now
estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has
the primary duty to verify the genuineness of payee's indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the
loss because it cleared and paid the forged checks.
xxx

xxx

xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were
properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned
checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their
indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of
the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without 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.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the
instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the
contract which allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged
signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded
from setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in
question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are
precluded from using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due
course. 21
The checks involved in this case are order instruments, hence, the following discussion is made with reference to the
effects of a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its
rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent
thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that
he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting." 23 He cannot interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is
such an indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is
bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of
the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply
with the terms of the check and violates its duty to charge its customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to
reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is
not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss
from the forgery can be apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank.
No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the
account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's
signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with
the drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through
the collection chain to the party who took from the forger and, of course, to the forger himself, if available. 28 In other
words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or
person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the check to it and so on. The
loss falls on the party who took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former
will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former
must necessarily return the money paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments
Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees
all prior indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and
subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of
this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part

of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank
because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty
to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the
endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the
genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and
not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank
knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger,
the former is deemed negligent and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of
Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was
negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both
drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and
indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to
recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should,
therefore, share the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from
government service, was no longer connected with the hospital. With the exception of the first check (dated January 17,
1978), all the checks were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years,
the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks
were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons
collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the
Treasurer's office of the fraud being committed. There is also evidence indicating that the provincial employees were
aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer,
testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one
went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency
Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as
also authorized to help in the release of these checks and we were apparently misled because they accepted the
representation of Pangilinan that he was helping them in the release of the checks and besides according to them
they were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts and
according to them since this is a government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside
from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to
negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape
liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's
account with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank
(Associated) to be negligent and held:
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. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with
the collecting bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan
who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements
guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is
not required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no banking
institution would consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited
with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks
deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after
the forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine
Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged
endorsement shall be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the
period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted
the requirement that items bearing a forged endorsement should be returned within twenty-four hours. Associated Bank
now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered negligent and not
entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative
regulation issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force
for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced
operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to go through
Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in
1982. The contending banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules
but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered
in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank
maybe prejudiced and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as
mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to
Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac
informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own investigation. Thereafter, it
requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it
notice of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it.37 Had
Associated Bank decided to debit Pangilinan's account, it could not have recovered the amounts paid on the questioned
checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present
evidence against Pangilinan and even presented him as its rebuttal witness. 38Hence, Associated Bank was not prejudiced
by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared
the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover
from Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also
a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the
genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of
Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong
with the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank.
There is no privity of contract between the drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial
demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the
Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central
Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or
credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract,
thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for
the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise
to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The interest rate shall be computed
from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal
interest from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence
of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real
cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty
(50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all
prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss
in its duty to ascertain the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is
hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby
DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of
P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated
Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from
March 20, 1981 until payment is made.
SO ORDERED.