NEGO MIDTERM (FORGERY) 1
[G.R. No. 107382. January 31, 1996]
ASSOCIATED BANK, petitioner, vs. HON. COURT OF
APPEALS, PROVINCE OF TARLAC and PHiLIPPINE
NATIONAL BANK, respondents.
[G.R. No. 107612. January 31, 1996]
PHILIPPINE NATIONAL BANK, petitioner,
vs. HONORABLE COURT OF APPEALS, PROVINCE
OF TARLAC, and ASSOCIATED BANK, respondents.
SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE
INSTRUMENTS; A FORGED SIGNATURE IS
WHOLLY INOPERATIVE AND NO ONE CAN
GAIN TITLE TO THE INSTRUMENT THROUGH
IT. - 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 aparty and never consented to
the contract which allegedly gave rise to such
instrument. Section 23 does not avoid the
instrument but only the forged signature. Thus, a
forged indorsement does not operate as the
payees indorsement.
2. ID.; ID.; ID.; EXCEPTION. - 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.
3. ID.; ID.; BEARER INSTRUMENT; SIGNATURE OF
PAYEE OR HOLDER, NOT NECESSARY TO
PASS TITLE TO THE INSTRUMENT. - 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.
4. ID.; ID.; ORDER INSTRUMENT; SIGNATURE OF
HOLDER, ESSENTIAL TO TRANSFER TITLE
TO THE INSTRUMENT; EFFECT OF FORGED
INDORSEMENT OF HOLDER. - 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 holders indorsement is
forged, all parties prior to the forgery may raise
the real defense of forgery against all parties
subsequent thereto.
5. ID.; ID.; ID.; LIABILITY OF GENERAL ENDORSER.
- 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. He cannot interpose the
defense that signatures prior to him are forged.
6. ID.; ID.; ID.; ID.; COLLECTING BANK WHERE
CHECK IS DEPOSITED AND INDORSES
CHECK, AN INDORSER. - 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
bankss 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.
7. ID.; ID.; ID.; PAYMENT UNDER A FORGED
INDORSEMENT IS NOT TO THE DRAWERS
ORDER; REASON. - 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 drawers instructions are reflected on
the face and by the terms of the check. Payment
under a forged indorsement is not to the drawers
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 customers (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. The general rule then is that the
drawee bank may not debit the drawers account
and is not entitled to indemnification from the
drawer. The risk of loss must perforce fall on the
drawee bank.
8. ID.; ID.; ID.; ID.; EXCEPTIONS. - 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.
9. ID.; ID.; ID.; WHERE THE DRAWERS SIGNATURE
IS FORGED, THE DRAWER CAN RECOVER
FROM THE DRAWEE BANK. - In cases involving
a forged check, where the drawers 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 drawers
signature since the latter is its customer.
10. ID.; ID.; ID.; IN CASES OF FORGED
INDORSEMENTS, THE LOSS FALLS ON THE
PARTY WHO TOOK THE CHECK FROM THE
FORGER OR THE FORGER HIMSELF. 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. In other
words, the drawee bank can seek reimbursement
or a return of the amount it paid from the
presentor bank or person. 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. 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.
11. ID.; ID.; ID.; ID.; CASE AT BAR. - 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 payees or holders
indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against
the forger.
12. ID.; ID.; ID.; GENERAL INDORSER; COLLECTING
BANK OR LAST ENDORSER SUFFERS LOSS
ON FORGED IN-DORSEMENT; REASON.
- 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. 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.
13. ID.; ID.; ID.; DRAWEE BANK NOT LIABLE FOR
LOSS ON FORGED INDORSEMENT; REASON.
- The drawee bank is not similarly situated as the
collecting bank because the former makes no
warranty as to the genuineness of any
indorsement. The drawee banks duty is but to
verify the genuineness of the drawers signature
and not of the indorsement because the drawer is
its client.
14. ID.; ID.; ID.; ID.; DUTY OF DRAWEE BANK TO
PROMPTLY INFORM PRESENTOR OF THE
FORGERY UPON DISCOVERY; EFFECT OF
FAILURE TO PROMPTLY INFORM. 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.
15. ID.; ID.; ID.; ID.; ID.; ID.; EFFECT OF
CON-TRIBUTORY NEGLIGENCE IN CASE AT
BAR. - 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
TarJac 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 Pangilinans retirement
on February 28, 1978. After nearly three years,
the Treasurers 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 Treasurers
office of the fraud being committed. There is also
evidence indicating that the provincial employees
were aware of Pangilinans retirement and
consequent dissociation from the hospital. 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. 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 hospitals
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 payees indorsement.
16. ID.; ID.; ID.; FORGERY; DELAY IN INFORMING
COLLECTING BANK OF FORGERY BY THE
DRAWEE BANK SIGNIFIES NEGLIGENCE. - 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.
17. ID.; ID.; ID.; RETURN OF FORGED
INDORSEMENT; 24-HOUR PERIOD BUT NOT
BEYOND PERIOD FOR FILING LEGAL ACTION
FOR BANKS OUTSIDE METRO MANILA; CASE
AT BAR. - Under Section 4(c) of CB Circular No.
580, items bearing a forged endorsement shall be
returned within twenty-four (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 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.
18. ID.; ID.; ID.; ID.; RATIONALE. - 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.
19. ID.; ID.; ID.; ID.; FAILURE TO RETURN FORGED
INDORSEMENT WITHIN 24 HOURS FROM
DISCOVERY DOES NOT PREJUDICE
COLLECTING BANK WHICH PRESENTED
FORGER AS ITS REBUTTAL WITNESS. 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 Treasurers
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.
Associated Bank was also furnished a copy of the
Provinces letter of demand to PNB dated March
20, 1981, thus giving it notice of the forgeries. At
this time, however, Pangilinans account with
Associated had only P24.63 in it. Had Associated
Bank decided to debit Pangilinans 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. Hence, Associated Bank was not
prejudiced by PNBs failure to comply with the
twenty-four-hour return rule.
20. REMEDIAL LAW; ACTIONS; ESTOPPEL; WILL
NOT APPLY TO DRAWEE BANK WHO FAID
AND CLEARED CHECKS WITH FORGED
INDORSEMENT. - 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 payees
Chief Officer who was supposed to have indorsed
the checks is also a customer of the drawee bank.
PNBs duty was to verify the genuineness of the
drawers signature and not the genuineness of
payees indorsement. Associated Bank, as the
collecting bank, is the entity with the duty to verify
the genuineness of the payees indorsement.
21. CIVIL LAW; OBLIGATIONS AND CON-TRACTS;
THERE IS NO PRIVITY OF CONTRACT
BETWEEN THE DRAWER AND COLLECTING
BANK; DRAWER CAN RECOVER FROM
DRAWEE BANK AND DRAWEE BANK CAN
SEEK REIMBURSEMENT FROM COLLECTING
BANK. - 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 client or
customer of the PNB, not of Associated Bank.
There is no privity of contract between the drawer
and the collecting bank.
22. COMMERCIAL LAW; BANKS; BANK DEPOSITS
ARE LOANS; RECOVERY OF AMOUNT
DEPOSITED IN CURRENT ACCOUNT GIVEN
6% INTEREST PER ANNUM. - 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
NEGO MIDTERM (FORGERY) 2
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.
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 courts 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. The trial court did not err in granting
legal interest from March 20, 1981, the date of
extrajudicial demand.
APPEARANCES OF COUNSEL
Jose A. Soluta, Jr. & Associates for Associated
Bank.
Santiago, Jr., Vidad, Corpus & Associates for
PNB.
The Solicitor General for public respondent.
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.3 Pangilinan sought to encash the first
check4 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 P8,000.00 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 Pangilinans 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 courts
decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a
reversal of respondent appellate courts 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 hospitals 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 payees
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 payees
(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
NEGO MIDTERM (FORGERY) 3
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 payees 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 instIument.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 holders 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 bankss 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 drawers instructions are
reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the
drawers 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 customers
(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.24The general rule then
is that the drawee bank may not debit the drawers
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
drawers 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 drawers 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 can seek 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 payees or holders 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
banks duty is but to verify the genuineness of the
drawers 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 Pangilinans retirement
on February 28, 1978. After nearly three years, the
Treasurers 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 Treasurers office of the
fraud being committed. There is also evidence indicating
that the provincial employees were aware of Pangilinans
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
NEGO MIDTERM (FORGERY) 4
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 forgers 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 respondents
account. xxx
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 EmergencyHospital 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
bahks 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 Banks 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-four (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 Banks 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 Treasurers 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
Provinces letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time,
however, Pangilinans account with Associated had only
P24.63 in it.37 Had Associated Bank decided to debit
Pangilinans 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.38 Hence, Associated Bank was not
prejudiced by PNBs 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 payees Chief Officer who was
supposed to have indorsed the checks is also a
customer of the drawee bank.39 PNBs duty was to verify
the genuineness of the drawers signature and not the
genuineness of payees indorsement. Associated Bank,
as the collecting bank, is the entity with the duty to verify
the genuineness of the payees 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 client or 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 courts 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 hospitals 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 payees 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.
FactsL The Province of Tarlac was disbursing
funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National
Bank (PNB). These checks were drawn payable to the
order of Concepcion Emergency Hospital. Fausto
Pangilinan was the cashier of Concepcion Emergency
Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of
Tarlac to the said hospital. However, after his retirement,
the provincial government still delivered checks to him
until its discovery of this irregularity in 1981. By forging
the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30
checks amounting to P203k to his account with the
Associated Bank.
When the province of Tarlac discovered this
irregularity, it demanded PNB to reimburse the said
amount. PNB in turn demanded Associated Bank to
reimburse said amount. PNB averred that Associated
NEGO MIDTERM (FORGERY) 5
Bank is liable to reimburse because of its indorsement
borne on the face of the checks:
“All prior endorsements guaranteed
ASSOCIATED BANK.”
ISSUE: What are the liabilities of each party?
HELD: The checks involved in this case are order
instruments.
Liability of Associated Bank
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.
A collecting bank (in this case Associated Bank)
where a check is deposited and which indorses the
check upon presentment with the drawee bank (PNB), is
such an indorser. So even if the indorsement on the
check deposited by the banks’s client is forged,
Associated Bank is bound by its warranties as an
indorser and cannot set up the defense of forgery as
against the PNB.
EXCEPTION: If it can be shown that the drawee
bank (PNB) unreasonably delayed in notifying the
collecting bank (Associated Bank) of the fact of the
forgery so much so that the latter can no longer collect
reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as
the drawee bank (PNB), is under strict liability to pay the
check to the order of the payee (Provincial Government
of Tarlac). 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. 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. The risk of loss must perforce fall on the
drawee bank.
EXCEPTION: If the drawee bank (PNB) can
prove a failure by the customer/drawer (Tarlac Province)
to exercise ordinary care that substantially contributed to
the making of the forged signature, the drawer is
precluded from asserting the forgery.
In sum, by reason of Associated Bank’s
indorsement and warranties of prior indorsements as a
party after the forgery, it is liable to refund the amount to
 NEGO MIDTERM (FORGERY) 6
PNB. The Province of Tarlac can ask reimbursement
from PNB because the Province is a party prior to the
forgery. Hence, the instrument is inoperative.
HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the
checks especially when it continued to deliver the checks
to Pangilinan even when he already retired. Due to this
contributory negligence, PNB is only ordered to pay 50%
of the amount or half of P203 K.

BUT THEN AGAIN, since PNB can pass its loss

to Associated Bank (by reason of Associated Bank’s
warranties), PNB can ask the 50% reimbursement from
Associated Bank. Associated Bank can ask
reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him
 NEGO MIDTERM (FORGERY) 7
[10]
ALLIED BANKING G.R. No. 133179 Metropolitan Bank and Trust Co. (Metrobank), with the market placement. Sometime in February 1984, she withdrew
CORPORATION, forged signature of Lim Sio Wan as indorser.[11] her second placement from Allied.
Petitioner, Present:
QUISUMBING, J., Chairperson, Earlier, on September 21, 1983, FCC had deposited a money Allied filed a third party complaint[27] against Metrobank The Decision of the Court of Appeals
- versus - CARPIO MORALES, market placement for PhP 2 million with respondent and Santos. In turn, Metrobank filed a fourth party
TINGA, Producers Bank. Santos was the money market trader assigned complaint[28] against FCC. FCC for its part filed a fifth party Allied appealed to the CA, which in turn issued the assailed
VELASCO, JR., and to handle FCCs account.[12] Such deposit is evidenced by complaint[29] against Producers Bank. Summonses were duly Decision on March 18, 1998, modifying the RTC Decision, as
CHICO-NAZARIO,  JJ. Official Receipt No. 317568[13] and a Letter dated September served upon all the parties except for Santos, who was no follows:
LIM SIO WAN, METROPOLITAN 21, 1983 of Santos addressed to Angie Lazo of FCC, longer connected with Producers Bank.[30]
BANK AND TRUST CO., and Promulgated: acknowledging receipt of the placement.[14] The placement WHEREFORE, premises considered,
PRODUCERS BANK, matured on October 25, 1983 and was rolled-over On May 15, 1984, or more than six (6) months after funding the decision appealed from is
Respondents. March 27, 2008 until December 5, 1983 as evidenced by a Letter the check, Allied informed Metrobank that the signature on MODIFIED. Judgment is rendered
x------------------------------------------------------------------------- dated October 25, 1983.[15] When the placement matured, FCC the check was forged.[31] Thus, Metrobank withheld the ordering and sentencing
----------------x demanded the payment of the proceeds of the amount represented by the check from FCC. Later on, defendant-appellant Allied Banking
placement.[16] On December 5, 1983, the same date that So Metrobank agreed to release the amount to FCC after the latter Corporation to pay sixty (60%)
DECISION received the phone call instructing her to pre-terminate Lim executed an Undertaking, promising to indemnify Metrobank percent and defendant-appellee
Sio Wans placement, the managers check in the name of Lim in case it was made to reimburse the amount. [32] Metropolitan Bank and Trust
VELASCO, JR., J.: Sio Wan was deposited in the account of FCC, purportedly Company forty (40%) of the amount
representing the proceeds of FCCs money market placement Lim Sio Wan thereafter filed an amended of P1,158,648.49 plus 12% interest
To ingratiate themselves to their valued with Producers Bank.[17] In other words, the Allied check was complaint to include Metrobank as a party-defendant, along per annum from March 16, 1984
depositors, some banks at times bend over backwards that deposited with Metrobank in the account of FCC as Producers with Allied.[33] The RTC admitted the amended complaint until fully paid. The moral damages,
they unwittingly expose themselves to great risks. Banks payment of its obligation to FCC. despite the opposition of Metrobank.[34] Consequently, Allieds attorneys fees and costs of suit
The Case third party complaint against Metrobank was converted into a adjudged shall likewise be paid by
To clear the check and in compliance with the requirements of cross-claim and the latters fourth party complaint against FCC defendant-appellant Allied Banking
This Petition for Review on Certiorari under Rule the Philippine Clearing House Corporation (PCHC) Rules and was converted into a third party complaint.[35] Corporation and defendant-appellee
45 seeks to reverse the Court of Appeals (CAs) Decision Regulations, Metrobank stamped a guaranty on the check, Metropolitan Bank and Trust
promulgated on March 18, 1998[1] in CA-G.R. CV No. 46290 which reads: All prior endorsements and/or lack of After trial, the RTC issued its Decision, holding as follows: Company in the same proportion of
entitled Lim Sio Wan v. Allied Banking Corporation, et al. endorsement guaranteed.[18] 60-40. Except as thus modified, the
The CA Decision modified the Decision dated November 15, WHEREFORE, judgment is hereby decision appealed from is
1993[2] of the Regional Trial Court (RTC), Branch 63 The check was sent to Allied through the PCHC. Upon the rendered as follows: AFFIRMED.
in Makati City rendered in Civil Case No. 6757. presentment of the check, Allied funded the check even
The Facts without checking the authenticity of Lim Sio Wans purported 1. Ordering defendant Allied SO ORDERED.[37]
indorsement. Thus, the amount on the face of the check was Banking Corporation to pay plaintiff
The facts as found by the RTC and affirmed by the CA are as credited to the account of FCC.[19] the amount of P1,158,648.49 plus
follows: 12% interest per annum from March Hence, Allied filed the instant petition.
On December 9, 1983, Lim Sio Wan deposited with Allied a 16, 1984 until fully paid;
On November 14, 1983, respondent Lim Sio Wan deposited second money market placement to mature on January 9, 2. Ordering defendant Allied Bank The Issues
with petitioner Allied Banking Corporation (Allied) at its 1984.[20] to pay plaintiff the amount of
Quintin Paredes Branch in Manila a money market placement P100,000.00 by way of moral Allied raises the following issues for our consideration:
of PhP 1,152,597.35 for a term of 31 days to mature On December 14, 1983, upon the maturity date of the first damages;
on December 15, 1983,[3] as evidenced by Provisional Receipt money market placement, Lim Sio Wan went to Allied to 3. Ordering defendant Allied Bank
No. 1356 dated November 14, 1983.[4] withdraw it.[21] She was then informed that the placement had to pay plaintiff the amount of The Honorable Court of
been pre-terminated upon her instructions. She denied giving P173,792.20 by way of attorneys Appeals erred in holding that Lim
On December 5, 1983, a person claiming to be Lim Sio Wan any instructions and receiving the proceeds thereof. She fees; and, Sio Wan did not authorize [Allied]
called up Cristina So, an officer of Allied, and instructed the desisted from further complaints when she was assured by the 4. Ordering defendant Allied Bank to pre-terminate the initial
latter to pre-terminate Lim Sio Wans money market placement, banks manager that her money would be recovered.[22] to pay the costs of suit. placement and to deliver the check
to issue a managers check representing the proceeds of the to Deborah Santos.
placement, and to give the check to one Deborah Dee Santos When Lim Sio Wans second placement matured on January 9, Defendant Allied Banks cross-claim
who would pick up the check.[5] Lim Sio Wan described the 1984, So called Lim Sio Wan to ask for the latters instructions against defendant Metrobank is The Honorable Court of
appearance of Santos so that So could easily identify her.[6] on the second placement. Lim Sio Wan instructed So to DISMISSED. Appeals erred in absolving
roll-over the placement for another 30 days.[23] On January 24, Producers Bank of any liability for
Later, Santos arrived at the bank and signed the application 1984, Lim Sio Wan, realizing that the promise that her money Likewise defendant Metrobanks the reimbursement of amount
form for a managers check to be issued.[7] The bank issued would be recovered would not materialize, sent a demand third-party complaint as against adjudged demandable.
Managers Check No. 035669 for PhP 1,158,648.49, letter to Allied asking for the payment of the first Filipinas Cement Corporation is
representing the proceeds of Lim Sio Wans money market placement.[24] Allied refused to pay Lim Sio Wan, claiming DISMISSED. The Honorable Court of
placement in the name of Lim Sio Wan, as payee.[8] The check that the latter had authorized the pre-termination of the Appeals erred in holding [Allied]
was cross-checked For Payees Account Only and given placement and its subsequent release to Santos.[25] Filipinas Cement Corporations liable to the extent of 60% of
to Santos.[9] fourth-party complaint against amount adjudged demandable in
Consequently, Lim Sio Wan filed with the RTC a Complaint Producers Bank is also clear disregard to the ultimate
Thereafter, the managers check was deposited in the account dated February 13, 1984[26] docketed as Civil Case No. 6757 DISMISSED. liability of Metrobank as guarantor
of Filipinas Cement Corporation (FCC) at respondent against Allied to recover the proceeds of her first money of all endorsement on the check, it
SO ORDERED.[36] being the collecting bank.[38]
 NEGO MIDTERM (FORGERY) 8
borrowers do not deal directly with Payment made by the still be lost because of Metrobanks negligence in indorsing the
each other but through a middle man debtor to a wrong party does not check without verifying the genuineness of the indorsement
The petition is partly meritorious. or dealer in open market. In a money extinguish the obligation as to the thereon.
market transaction, the investor is a creditor, if there is no fault or
A Question of Fact lender who loans his money to a negligence which can be imputed to Section 66 in relation to Sec. 65 of the
borrower through a middleman or the latter. Even when the debtor Negotiable Instruments Law provides:
Allied questions the finding of both the trial and appellate dealer. acted in utmost good faith and by
courts that Allied was not authorized to release the proceeds mistake as to the person of his Section 66. Liability of general
of Lim Sio Wans money market placement to Santos. Allied In the case at bar, the creditor, or through error induced by indorser.Every indorser who
clearly raises a question of fact. When the CA affirms the money market transaction between the fraud of a third person, the indorses without qualification,
findings of fact of the RTC, the factual findings of both courts the petitioner and the private payment to one who is not in fact his warrants to all subsequent holders in
are binding on this Court.[39] respondent is in the nature of a creditor, or authorized to receive due course;
loan.[44] such payment, is void, except as
We also agree with the CA when it said that it could not provided in Article 1241. Such a) The
disturb the trial courts findings on the credibility of witness So payment does not prejudice the matters
inasmuch as it was the trial court that heard the witness and Lim Sio Wan, as creditor of the bank for her creditor, and accrual of interest is and things
had the opportunity to observe closely her deportment and money market placement, is entitled to payment upon her not suspended by it.[45] (Emphasis mentioned
manner of testifying. Unless the trial court had plainly request, or upon maturity of the placement, or until the bank is supplied.) in
overlooked facts of substance or value, which, if considered, released from its obligation as debtor. Until any such event, subdivisio
might affect the result of the case,[40] we find it best to defer to the obligation of Allied to Lim Sio Wan remains Since there was no effective payment of Lim Sio Wans money ns (a), (b)
the trial court on matters pertaining to credibility of witnesses. unextinguished. market placement, the bank still has an obligation to pay her at and (c) of
Additionally, this Court has held that the matter of negligence six percent (6%) interest from March 16, 1984 until the the next
is also a factual question.[41] Thus, the finding of the RTC, Art. 1231 of the Civil Code enumerates the payment thereof. preceding
affirmed by the CA, that the respective parties were negligent instances when obligations are considered extinguished, thus: section;
in the exercise of their obligations is also conclusive upon this We cannot, however, say outright that Allied is solely liable to and
Court. Lim Sio Wan.
Art. 1231. Obligations are b) That the
The Liability of the Parties extinguished: Allied claims that Metrobank is the proximate cause of the instrument
loss of Lim Sio Wans money. It points out that Metrobank is at the
As to the liability of the parties, we find that Allied is liable to (1) By guaranteed all prior indorsements inscribed on the managers time of his
Lim Sio Wan. Fundamental and familiar is the doctrine that payment or performance; check, and without Metrobanks guarantee, the present indorseme
the relationship between a bank and a client is one of (2) By the loss controversy would never have occurred. According to Allied: nt valid
debtor-creditor. of the thing due; and
(3) By the Failure on the part of the collecting subsisting;
Articles 1953 and 1980 of the Civil Code provide: condonation or remission of the bank to ensure that the proceeds of
debt; the check is paid to the proper party And in addition, he
Art. 1953. A person who receives a (4) By the is, aside from being an efficient engages that on due presentment, it
loan of money or any other fungible confusion or merger of the rights of intervening cause, also the last shall be accepted or paid, or both, as
thing acquires the ownership thereof, creditor and debtor; negligent act, x x x contributory to the case may be according to its
and is bound to pay to the creditor (5) By the injury caused in the present case, tenor, and that if it be dishonored,
an equal amount of the same kind compensation; which thereby leads to the and the necessary proceedings on
and quality. (6) By conclusion that it is the collecting dishonor be duly taken, he will pay
novation. bank, Metrobank that is the the amount thereof to the holder, or
Art. 1980. Fixed, savings, and proximate cause of the alleged loss to any subsequent indorser who may
current deposits of money in banks Other causes of of the plaintiff in the instant case. [46] be compelled to pay it.
and similar institutions shall be extinguishment of obligations, such
governed by the provisions as annulment, rescission, fulfillment Section 65. Warranty
concerning simple loan. of a resolutory condition, and We are not persuaded. where negotiation by delivery, so
prescription, are governed elsewhere forth.Every person negotiating an
in this Code. (Emphasis supplied.) Proximate cause is that cause, which, in natural and instrument by delivery or by a
Thus, we have ruled in a line of cases that a bank continuous sequence, unbroken by any efficient intervening qualified indorsement, warrants:
deposit is in the nature of a simple loan or mutuum.[42] More cause, produces the injury and without which the result would
succinctly, in Citibank, N.A. (Formerly First National City From the factual findings of the trial and not have occurred. [47]Thus, there is an efficient supervening a) That the
Bank) v. Sabeniano, this Court ruled that a money market appellate courts that Lim Sio Wan did not authorize the event if the event breaks the sequence leading from the cause instrumen
placement is a simple loan or mutuum. [43] Further, we defined release of her money market placement to Santos and the bank to the ultimate result. To determine the proximate cause of a t is
a money market in Cebu International Finance Corporation v. had been negligent in so doing, there is no question that the controversy, the question that needs to be asked is: If the event genuine
Court of Appeals, as follows: obligation of Allied to pay Lim Sio Wan had not been did not happen, would the injury have resulted? If the answer and in all
extinguished. Art. 1240 of the Code states that payment shall is NO, then the event is the proximate cause. respects
[A] money market is a market be made to the person in whose favor the obligation has been what it
dealing in standardized short-term constituted, or his successor in interest, or any person purports
credit instruments (involving large authorized to receive it. As commented by Arturo Tolentino: In the instant case, Allied avers that even if it had not issued to be;
amounts) where lenders and the check payment, the money represented by the check would

b) That he has
a good title
of it;
c) That all
prior
parties had
capacity to
contract;
d) That he has
no
knowledge
of any fact
which
would
impair the
validity of
the
instrument
or render it
valueless.
But when the
negotiation is by delivery only, the
warranty extends in favor of no
holder other than the immediate
transferee.
The provisions of
subdivision (c) of this section do not
apply to persons negotiating public
or corporation securities, other than
bills and notes. (Emphasis supplied.)
The warranty that the instrument is genuine and in all respects
what it purports to be covers all the defects in the instrument
affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the
amount indicated in the negotiable instrument even if a
previous indorsement was forged. We held in a line of cases
that a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement itself,
and ultimately should be held liable therefor.[48]
However, this general rule is subject to exceptions. One such
exception is when the issuance of the check itself was
attended with negligence. Thus, in the cases cited above
where the collecting bank is generally held liable, in two of
the cases where the checks were negligently issued, this Court
held the institution issuing the check just as liable as or more
liable than the collecting bank.
In isolated cases where the checks were deposited in an
account other than that of the payees on the strength of forged
indorsements, we held the collecting bank solely liable for the
whole amount of the checks involved for having indorsed the
same. In Republic Bank v. Ebrada,[49] the check was properly
issued by the Bureau of Treasury. While in Banco de Oro
Savings and Mortgage Bank (Banco de Oro) v. Equitable
Banking Corporation,[50] Banco de Oro admittedly issued the
checks in the name of the correct payees. And in Traders
[51]
Royal Bank v. Radio Philippines Network, Inc., the checks
were issued at the request of Radio Philippines Network, Inc.
from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of
Appeals, we said that the drawee bank is liable for 60% of the
amount on the face of the negotiable instrument and the
collecting bank is liable for 40%. We also noted the relative
negligence exhibited by two banks, to wit:
Both banks were
negligent in the selection and
supervision of their employees
resulting in the encashment of the
forged checks by an impostor. Both
banks were not able to overcome the
presumption of negligence in the
selection and supervision of their
employees. It was the gross
negligence of the employees of both
banks which resulted in the fraud
and the subsequent loss. While it is
true that petitioner BPIs negligence
may have been the proximate cause
of the loss, respondent CBCs
negligence contributed equally to
the success of the impostor in
encashing the proceeds of the forged
checks. Under these circumstances,
we apply Article 2179 of the Civil
Code to the effect that while
respondent CBC may recover its
losses, such losses are subject to
mitigation by the courts.
(See Phoenix Construction Inc. v.
Intermediate Appellate Courts, 148
SCRA 353 [1987]).
Considering the
comparative negligence of the two
(2) banks, we rule that the demands
of substantial justice are satisfied by
allocating the loss of P2,413,215.16
and the costs of the arbitration
proceeding in the amount of
P7,250.00 and the cost of litigation
on a 60-40 ratio.[52]
Similarly, we ruled in Associated Bank v. Court of
Appeals that the issuing institution and the collecting bank
should equally share the liability for the loss of amount
represented by the checks concerned due to the negligence of
both parties:
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 hospitals 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 Tarlaccan 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 payees
indorsement.[53]
A reading of the facts of the two immediately preceding cases
would reveal that the reason why the bank or institution which
issued the check was held partially liable for the amount of the
check was because of the negligence of these parties which
resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied
negligent in issuing the managers check and in transmitting it
to Santos without even a written authorization. [54] In fact,
Allied did not even ask for the certificate evidencing the
money market placement or call up Lim Sio Wan at her
residence or office to confirm her instructions. Both actions
could have prevented the whole fraudulent transaction from
unfolding. Allieds negligence must be considered as the
proximate cause of the resulting loss.
To reiterate, had Allied exercised the diligence due from a
financial institution, the check would not have been issued and
no loss of funds would have resulted. In fact, there would
have been no issuance of indorsement had there been no check
in the first place.
The liability of Allied, however, is concurrent with that of
Metrobank as the last indorser of the check. When Metrobank
indorsed the check in compliance with the PCHC Rules and
Regulations[55]without verifying the authenticity of Lim Sio
Wans indorsement and when it accepted the check despite the
fact that it was cross-checked payable to payees account
only,[56] its negligent and cavalier indorsement contributed to
the easier release of Lim Sio Wans money and perpetuation of
the fraud. Given the relative participation of Allied and
Metrobank to the instant case, both banks cannot be adjudged
NEGO MIDTERM (FORGERY) 9
as equally liable. Hence, the 60:40 ratio of the liabilities of
Allied and Metrobank, as ruled by the CA, must be upheld.
FCC, having no participation in the negotiation of the check
and in the forgery of Lim Sio Wans indorsement, can raise the
real defense of forgery as against both banks. [57]
As to Producers Bank, Allied Banks argument
that Producers Bank must be held liable as employer
of Santos under Art. 2180 of the Civil Code is erroneous. Art.
2180 pertains to the vicarious liability of an employer for
quasi-delicts that an employee has committed. Such provision
of law does not apply to civil liability arising from delict.
One also cannot apply the principle of subsidiary
liability in Art. 103 of the Revised Penal Code in the instant
case. Such liability on the part of the employer for the civil
aspect of the criminal act of the employee is based on the
conviction of the employee for a crime. Here, there has been
no conviction for any crime.
As to the claim that there was unjust enrichment
on the part of Producers Bank, the same is correct. Allied
correctly claims in its petition that Producers Bank should
reimburse Allied for whatever judgment that may be rendered
against it pursuant to Art. 22 of the Civil Code, which
provides: Every person who through an act of performance by
another, or any other means, acquires or comes into
possession of something at the expense of the latter without
just cause or legal ground, shall return the same to him.
The above provision of law was clarified
in Reyes v. Lim, where we ruled that [t]here is unjust
enrichment when a person unjustly retains a benefit to the loss
of another, or when a person retains money or property of
another against the fundamental principles of justice, equity
and good conscience.[58]
In Tamio v. Ticson, we further clarified the
principle of unjust enrichment, thus: Under Article 22 of the
Civil Code, there is unjust enrichment when (1) a person is
unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another.[59]
In the instant case, Lim Sio Wans money market
placement in Allied Bank was pre-terminated and withdrawn
without her consent. Moreover, the proceeds of the placement
were deposited in Producers Banks account in Metrobank
without any justification. In other words, there is no reason
that the proceeds of Lim Sio Wans placement should be
deposited in FCCs account purportedly as payment for FCCs
money market placement and interest in Producers Bank.
With such payment, Producers Banks indebtedness to FCC
was extinguished, thereby benefitting the former. Clearly,
Producers Bank was unjustly enriched at the expense of Lim
Sio Wan. Based on the facts and circumstances of the case,
Producers Bank should reimburse Allied and Metrobank for
the amounts the two latter banks are ordered to pay Lim Sio
Wan.
 NEGO MIDTERM (FORGERY) 10
It cannot be validly claimed that FCC, and not
Producers Bank, should be considered as having been unjustly SO ORDERED.
enriched. It must be remembered that FCCs money market
placement with Producers Bank was already due and
demandable; thus, Producers Banks payment thereof was
justified. FCC was entitled to such payment. As earlier stated,
the fact that the indorsement on the check was forged cannot
be raised against FCC which was not a part in any stage of the
negotiation of the check. FCC was not unjustly enriched.

From the facts of the instant case, we see

that Santos could be the architect of the entire controversy.
Unfortunately, since summons had not been served on Santos,
the courts have not acquired jurisdiction over her. [60] We,
therefore, cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to

Allied and Metrobank for the amount of the check plus 12%
interest per annum, moral damages, attorneys fees, and costs
of suit which Allied and Metrobank are adjudged to pay Lim
Sio Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY

GRANTED. The March 18, 1998 CA Decision in CA-G.R.
CV No. 46290 and the November 15, 1993 RTC Decision in
Civil Case No. 6757
are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED,

the fallo of which is reproduced, as follows:

WHEREFORE, premises considered,

the decision appealed from is
MODIFIED. Judgment is rendered
ordering and sentencing
defendant-appellant Allied Banking
Corporation to pay sixty (60%)
percent and defendant-appellee
Metropolitan Bank and Trust
Company forty (40%) of the amount
of P1,158,648.49 plus 12% interest
per annum from March 16, 1984
until fully paid. The moral damages,
attorneys fees and costs of suit
adjudged shall likewise be paid by
defendant-appellant Allied Banking
Corporation and defendant-appellee
Metropolitan Bank and Trust
Company in the same proportion of
60-40. Except as thus modified, the
decision appealed from is
AFFIRMED.

SO ORDERED.

Additionally and by way

of MODIFICATION, Producers Bank is hereby ordered to
pay Allied and Metrobank the aforementioned amounts. The
liabilities of the parties are concurrent and independent of
each other.

[G.R. No. 139130. November 27, 2002]
RAMON K. ILUSORIO, petitioner, vs. HON. COURT
OF APPEALS, and THE MANILA
BANKING CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the
decision[1] promulgated on January 28, 1999 by the
Court of Appeals in CA-G.R. CV No. 47942, affirming the
decision of the then Court of First Instance of Rizal,
Branch XV (now the Regional Trial Court of Makati,
Branch 138) dismissing Civil Case No. 43907, for
damages.
The facts as summarized by the Court of Appeals
are as follows:
Petitioner is a prominent businessman who, at the
time material to this case, was the Managing Director of
Multinational Investment Bancorporation and the
Chairman and/or President of several other
corporations. He was a depositor in good standing of
respondent bank, the Manila Banking Corporation, under
current Checking Account No. 06-09037-0. As he was
then running about 20 corporations, and was going out of
the country a number of times, petitioner entrusted to his
secretary, Katherine[2] E. Eugenio, his credit cards and
his checkbook with blank checks. It was also Eugenio
who verified and reconciled the statements of said
checking account.[3]
Between the dates September 5, 1980 and
January 23, 1981, Eugenio was able to encash and
deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the
respondent bank, with an aggregate amount
of P119,634.34. Petitioner did not bother to check his
statement of account until a business partner apprised
him that he saw Eugenio use his credit cards.Petitioner
fired Eugenio immediately, and instituted a criminal
action against her for estafa thru falsification before the
Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its
employee, Mr. Dante Razon, also lodged a complaint
for estafa thru falsification of commercial documents
against Eugenio on the basis of petitioners statement
that his signatures in the checks were forged.[4] Mr.
Razons affidavit states:
That I have examined and scrutinized the following
checks in accordance with prescribed verification
procedures with utmost care and diligence by comparing
the signatures affixed thereat against the specimen
signatures of Mr. Ramon K. Ilusorio which we have on
file at our said office on such dates,
xxx
That the aforementioned checks were among those
issued by Manilabank in favor of its client MR. RAMON K.
ILUSORIO,
That the same were personally encashed by
KATHERINE E. ESTEBAN, an executive secretary of
MR. RAMON K. ILUSORIO in said Investment
Corporation;
That I have met and known her as KATHERINE E.
ESTEBAN the attending verifier when she personally
encashed the above-mentioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit
expressly disowning his signature appearing on the
checks further alleged to have not authorized the
issuance and encashment of the same.[5]
Petitioner then requested the respondent bank to
credit back and restore to its account the value of the
checks which were wrongfully encashed but respondent
bank refused. Hence, petitioner filed the instant case.[6]
At the trial, petitioner testified on his own behalf,
attesting to the truth of the circumstances as narrated
above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also
called to the witness stand as hostile witnesses. They
testified that it is the banks standard operating procedure
that whenever a check is presented for encashment or
clearing, the signature on the check is first verified
against the specimen signature cards on file with the
bank.
Manila Bank also sought the expertise of the
National Bureau of Investigation (NBI) in determining the
genuineness of the signatures appearing on the
checks. However, in a letter dated March 25, 1987, the
NBI informed the trial court that they could not conduct
the desired examination for the reason that the standard
specimens submitted were not sufficient for purposes of
rendering a definitive opinion. The NBI then suggested
that petitioner be asked to submit seven (7) or more
additional standard signatures executed before or about,
and immediately after the dates of the questioned
checks. Petitioner, however, failed to comply with this
request.
After evaluating the evidence on both sides, the
court a quo rendered judgment on May 12, 1994 with the
following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's
cause herein against defendant bank, in the light of the
foregoing considerations and established facts, this case
would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack
of sufficient basis.
SO ORDERED.[7]
NEGO MIDTERM (FORGERY) 11
Aggrieved, petitioner elevated the case to the Petitioner contends that Manila Bank is liable for
Court of Appeals by way of a petition for review but damages for its negligence in failing to detect the
without success. The appellate court held that petitioners discrepant checks. He adds that as a general rule a bank
own negligence was the proximate cause of his loss. The which has obtained possession of a check upon an
appellate court disposed as follows: unauthorized or forged endorsement of the payees
signature and which collects the amount of the check
WHEREFORE, the judgment appealed from is from the drawee is liable for the proceeds thereof to the
AFFIRMED. Costs against the appellant. payee. Petitioner invokes the doctrine of estoppel,
SO ORDERED.[8] saying that having itself instituted a forgery case against
Eugenio, Manila Bank is now estopped from asserting
Before us, petitioner ascribes the following errors that the fact of forgery was never proven.
to the Court of Appeals:
For its part, Manila Bank contends that
A. THE COURT OF APPEALS ERRED IN respondent appellate court did not depart from the
NOT HOLDING THAT THE accepted and usual course of judicial proceedings,
RESPONDENT BANK IS ESTOPPED hence there is no reason for the reversal of its
FROM RAISING THE DEFENSE ruling. Manila Bank additionally points out that Section
THAT THERE WAS NO FORGERY 23[13] of the Negotiable Instruments Law is inapplicable,
OF THE SIGNATURES OF THE considering that the fact of forgery was never proven.
PETITIONER IN THE CHECK Lastly, the bank negates petitioners claim of estoppel.[14]
BECAUSE THE RESPONDENT
FILED A CRIMINAL COMPLAINT On the first issue, we find that petitioner has no
FOR ESTAFA THRU cause of action against Manila Bank. To be entitled to
FALSIFICATION OF COMMERCIAL damages, petitioner has the burden of proving
DOCUMENTS AGAINST negligence on the part of the bank for failure to detect the
KATHERINE EUGENIO USING THE discrepancy in the signatures on the checks. It is
AFFIDAVIT OF PETITIONER incumbent upon petitioner to establish the fact of
STATING THAT HIS SIGNATURES forgery, i.e., by submitting his specimen signatures and
WERE FORGED AS PART OF THE comparing them with those on the questioned
AFFIDAVIT-COMPLAINT.[9] checks. Curiously though, petitioner failed to submit
additional specimen signatures as requested by the
B. THE COURT OF APPEALS ERRED IN National Bureau of Investigation from which to draw a
NOT APPLYING SEC. 23, conclusive finding regarding forgery. The Court of
NEGOTIABLE INSTRUMENTS Appeals found that petitioner, by his own inaction, was
LAW.[10]
precluded from setting up forgery. Said the appellate
court:
C. THE COURT OF APPEALS ERRED IN
NOT HOLDING THE BURDEN OF We cannot fault the court a quo for such declaration,
PROOF IS WITH THE considering that the plaintiffs evidence on the alleged
RESPONDENT BANK TO PROVE forgery is not convincing enough. The burden to prove
THE DUE DILIGENCE TO PREVENT forgery was upon the plaintiff, which burden he failed to
DAMAGE, TO THE PETITIONER, discharge. Aside from his own testimony, the appellant
AND THAT IT WAS NOT presented no other evidence to prove the fact of
NEGLIGENT IN THE SELECTION forgery. He did not even submit his own specimen
AND SUPERVISION OF ITS signatures, taken on or about the date of the questioned
EMPLOYEES.[11] checks, for examination and comparison with those of
the subject checks. On the other hand, the appellee
D. THE COURT OF APPEALS ERRED IN presented specimen signature cards of the appellant,
NOT HOLDING THAT taken at various years, namely, in 1976, 1979 and 1981
RESPONDENT BANK SHOULD (Exhibits 1, 2, 3 and 7), showing variances in the
BEAR THE LOSS, AND SHOULD BE appellants unquestioned signatures. The evidence
MADE TO PAY PETITIONER, WITH further shows that the appellee, as soon as it was
RECOURSE AGAINST KATHERINE informed by the appellant about his questioned
EUGENIO ESTEBAN.[12] signatures, sought to borrow the questioned checks from
the appellant for purposes of analysis and examination
Essentially the issues in this case are: (1) whether
(Exhibit 9), but the same was denied by the appellant. It
or not petitioner has a cause of action against private was also the former which sought the assistance of the
respondent; and (2) whether or not private respondent, in
NBI for an expert analysis of the signatures on the
filing an estafa case against petitioners secretary, is
questioned checks, but the same was unsuccessful for
barred from raising the defense that the fact of forgery lack of sufficient specimen signatures.[15]
was not established.

Moreover, petitioners contention that Manila Bank
was remiss in the exercise of its duty as drawee lacks
factual basis. Consistently, the CA and the RTC found
that Manila Bank employees exercised due diligence in
cashing the checks. The banks employees in the present
case did not have a hint as to Eugenios modus
operandi because she was a regular customer of the
bank, having been designated by petitioner himself to
transact in his behalf. According to the appellate court,
the employees of the bank exercised due diligence in the
performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs
employees exercised due diligence before encashing the
checks. Its verifiers first verified the drawers signatures
thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by
referring to a more experienced verifier for further
verification. In some instances the verifier made a
confirmation by calling the depositor by phone.It is only
after taking such precautionary measures that the
subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might
have made a mistake in failing to detect any forgery -- if
indeed there was. However, a mistake is not equivalent
to negligence if they were honest mistakes. In the instant
case, we believe and so hold that if there were mistakes,
the same were not deliberate, since the bank took all the
precautions.[16]
As borne by the records, it was petitioner, not the
bank, who was negligent. Negligence is the omission to
do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which
a prudent and reasonable man would do.[17] In the
present case, it appears that petitioner accorded his
secretary unusual degree of trust and unrestricted
access to his credit cards, passbooks, check books,
bank statements, including custody and possession of
cancelled checks and reconciliation of accounts. Said
the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to
the bank for purposes of reconciliation of his account,
through a letter dated July 14, 1980 (Exhibit 8). Thus, the
said secretary became a familiar figure in the bank. What
is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and
confirms the checks.
The trouble is, the appellant had put so much trust and
confidence in the said secretary, by entrusting not only
his credit cards with her but also his checkbook with
blank checks. He also entrusted to her the verification
and reconciliation of his account. Further adding to his
injury was the fact that while the bank was sending him
the monthly Statements of Accounts, he was not
personally checking the same. His testimony did not
indicate that he was out of the country during the period
covered by the checks. Thus, he had all the opportunities
to verify his account as well as the cancelled checks
issued thereunder -- month after month. But he did not,
until his partner asked him whether he had entrusted his
credit card to his secretary because the said partner had
seen her use the same. It was only then that he was
minded to verify the records of his account. [18]
The abovecited findings are binding upon the
reviewing court. We stress the rule that the factual
findings of a trial court, especially when affirmed by the
appellate court, are binding upon us[19] and entitled to
utmost respect[20] and even finality. We find no palpable
error that would warrant a reversal of the appellate courts
assessment of facts anchored upon the evidence on
record.
Petitioners failure to examine his bank statements
appears as the proximate cause of his own
damage. Proximate cause is that cause, which, in natural
and continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without
which the result would not have occurred.[21] In the
instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner so
that any error or discrepancy in the entries therein could
be brought to the banks attention at the earliest
opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some
cause in not doing so, but because he did not pay
sufficient attention to the matter. Had he done so, he
could have been alerted to any anomaly committed
against him. In other words, petitioner had sufficient
opportunity to prevent or detect any misappropriation by
his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him
regularly. In view of Article 2179 of the New Civil
Code,[22] when the plaintiffs own negligence was the
immediate and proximate cause of his injury, no recovery
could be had for damages.
Petitioner further contends that under Section 23
of the Negotiable Instruments Law a forged check is
inoperative, and that Manila Bank had no authority to pay
the forged checks. True, it is a rule that when a signature
is forged or made without the authority of the person
whose signature it purports to be, the check is wholly
inoperative. No right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against
any party, can be acquired through or under such
signature. However, the rule does provide for an
exception, namely: unless the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority. In the
instant case, it is the exception that applies. In our view,
petitioner is precluded from setting up the forgery,
assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and
checkbook including the verification of his statements of
account.
Petitioners reliance on Associated Bank vs. Court
of Appeals[23] and Philippine Bank of Commerce vs.
[24]
CA to buttress his contention that respondent Manila
Bank as the collecting or last endorser generally suffers
NEGO MIDTERM (FORGERY) 12
the loss because it has the duty to ascertain the
genuineness of all prior endorsements is misplaced. In
the cited cases, the fact of forgery was not in issue. In
the present case, the fact of forgery was not established
with certainty. In those cited cases, the collecting banks
were held to be negligent for failing to observe
precautionary measures to detect the forgery. In the
case before us, both courts below uniformly found that
Manila Banks personnel diligently performed their duties,
having compared the signature in the checks from the
specimen signatures on record and satisfied themselves
that it was petitioners.
On the second issue, the fact that Manila Bank
had filed a case for estafa against Eugenio would not
estop it from asserting the fact that forgery has not been
clearly established. Petitioner cannot hold private
respondent in estoppel for the latter is not the actual
party to the criminal action. In a criminal action, the State
is the plaintiff, for the commission of a felony is an
offense against the State.[25] Thus, under Section 2, Rule
110 of the Rules of Court the complaint or information
filed in court is required to be brought in the name of the
People of the Philippines. [26]
Further, as petitioner himself stated in his petition,
respondent bank filed the estafa case against Eugenio
on the basis of petitioners own affidavit,[27] but without
admitting that he had any personal knowledge of the
alleged forgery. It is, therefore, easy to understand that
the filing of the estafa case by respondent bank was a
last ditch effort to salvage its ties with the petitioner as a
valuable client, by bolstering the estafa case which he
filed against his secretary.
All told, we find no reversible error that can be
ascribed to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for
lack of merit. The assailed decision of the Court of
Appeals dated January 28, 1999 in CA-G.R. CV No.
47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
 NEGO MIDTERM (FORGERY) 13
EQUITABLE PCI BANK (the G.R. No. 156207 Check No. 10983 inasmuch as the return of Check No. D PESOS (P20,000.00) 3. WHETHER OR NOT THE
Banking Entity into which Present: 0249188 on the ground that the account from which it was as exemplary damages; COURT OF APPEALS
Philippine Commercial PANGANIBAN, C.J.drawn had already been closed resulted in a failure or want of COMMITTED REVERSIBLE
International Bank was merged), Chairperson, consideration for the issuance of PCI Bank Managers Check 3. To pay the plaintiff ERRORS WHEN IT AFFIRMED
Petitioner, YNARES-SANTIAGO, No. 10983.[3] the sum of THE COURT A QUOS DECISIION
AUSTRIA-MARTINEZ, THREE THOUSAND DATED 3 MAY 1999 AWARDING
CALLEJO, SR. and After the pre-trial conference, Ong filed a motion for FIVE HUNDRED DAMAGES TO RESPONDENT
CHICO-NAZARIO, JJ. summary judgment.[4] Though they were duly furnished with a PESOS (P3,500.00) ONG AND HOLDING THAT
- versus - copy of the motion for summary judgment, PCI Bank and its representing actual RESPONDENT ONG HAD
counsel failed to appear at the scheduled hearing. [5] Neither expenses; PREPONDERANTLY
Promulgated: did they file any written comment or opposition thereto. The ESTABLISHED BY COMPETENT
trial court thereafter ordered Ong to formally offer her 4. To pay the plaintiff EVIDENCE HER CLAIMS IN THE
September 15, 2006 exhibits in writing, furnishing copies of the same to PCI Bank the sum of COMPLAINT INSPITE OF THE
ROWENA ONG, which was directed to file its comment or objection. [6] TWENTY THOUSAN FACT THAT THE EVIDENCE ON
Respondent. D PESOS (P20,000.00) RECORD DOES NOT JUSTIFY
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Ong complied with the Order of the trial court, but PCI Bank as and for attorneys THE AWARD OF DAMAGES.
-------x failed to file any comment or objection within the period fees; and
given to it despite receipt of the same order.[7] The trial court 4. WHETHER OR NOT THE
then granted the motion for summary judgment and in its 5. To pay the costs.[11] COURT OF APPEALS
DECISION Order dated 2 March 1995, it held: COMMITTED A REVERSIBLE
ERROR WHEN IT AFFIRMED
IN THE LIGHT OF THE From this decision, PCI Bank sought recourse before the THE LOWER COURTS FACTUAL
CHICO-NAZARIO, J.: FOREGOING, the motion for Court of Appeals. In a Decision[12] dated 29 October 2002, the FINDING IN ITS DECISION
summary judgment is GRANTED, appellate court denied the appeal of PCI Bank and affirmed DATED 3 MAY 1999 HOLDING
On 29 November 1991, Warliza Sarande deposited in her ordering defendant Philippine the orders and decision of the trial court. RESPONDENT ONG A HOLDER
account at Philippine Commercial International (PCI) Commercial International Bank to IN DUE COURSE INSPITE OF
Bank Magsaysay Avenue, Santa Ana District, Davao City pay the plaintiff the amount of ONE Unperturbed, PCI Bank then filed the present petition for THE FACT THAT THE
Branch, under Account No. 8502-00347-6, a PCI Bank HUNDRED THIRTY-TWO review before this Court and raised the following issues: REQUISITE OF GOOD FAITH
General Santos City Branch, TCBT[1] Check No. 0249188 in THOUSAND PESOS (P132,000.00) AND FOR VALUE IS LACKING
the amount of P225,000.00. Upon inquiry by Serande at PCI equivalent to the amount of PCIB 1. WHETHER OR NOT THE AND DESPITE THE ABSENCE
Bank on 5 December 1991 on whether TCBT Check No. Managers Check No. 10983. COURT OF APPEALS OF A PROPER TRIAL TO
0249188 had been cleared, she received an affirmative COMMITTED A GRAVE AND DETERMINE SUCH FACTUAL
answer. Relying on this assurance, she issued two checks Set the reception of the plaintiffs REVERSIBLE ERROR WHEN IT ISSUE.
drawn against the proceeds of TCBT Check No. evidence with respect to the SUSTAINED THE LOWER
0249188. One of these was PCI Bank Check No. 073661 damages claimed in the complaint.[8] COURTS ORDER DATED 2 5. WHETHER OR NOT THE
dated 5 December 1991 for P132,000.00 MARCH 1999 GRANTING COURT OF APPEALS
which Sarande issued to respondent Rowena Ong Owing to a RESPONDENTS MOTION FOR COMMITTED A REVERSIBLE
business transaction. On the same day, Ong presented to PCI PCI Bank filed a Motion for Reconsideration which the trial SUMMARY JUDGMENT ERROR WHEN IT UPHELD
Bank Magsaysay Avenue Branch said Check No. 073661, and court denied in its Order dated 11 April 1996.[9] After the NOTWITHSTANDING THE THE LOWER COURTS
instead of encashing it, requested PCI Bank to convert the reception of Ongs evidence in support of her claim for GLARING FACT THAT THERE DECISION DATED 3 MAY
proceeds thereof into a managers check, which the PCI Bank damages, the trial court rendered its Decision[10] dated 3 May ARE GENUINE, MATERIAL AND 1999 DENYING PETITIONER
obliged.Whereupon, Ong was issued PCI Bank Managers 1999 wherein it ruled: FACTUAL ISSUES WHICH EPCI BANKS COUNTERCLAIM
Check No. 10983 dated 5 December 1991 for the sum REQUIRE THE PRESENTATION INSPITE OF THE FACT THAT IT
of P132,000.00, the value of Check No. 073661. IN LIGHT OF THE FOREGOIN OF EVIDENCE. WAS SHOWN THAT
CONSIDERATION, and as plaintiff RESPONDENT ONGS
The next day, 6 December 1991, Ong deposited PCI Bank has preponderantly established by 2. WHETHER OR NOT THE COMPLAINT LACKS MERIT.[13]
Managers Check No. 10983 in her account with Equitable competent evidence her claims in COURT OF APPEALS WAS IN
Banking Corporation Davao City Branch. On 9 December the Complaint, judgment in hereby ERROR WHEN IT SUSTAINED
1991, she received a check return-slip informing her that PCI rendered for the plaintiff against the THE LOWER COURTS We affirm the Decision of the trial court and the Court of
Bank had stopped the payment of the said check on the defendant-bank ordering the latter: DECISION DATED 3 MAY Appeals.
ground of irregular issuance. Despite several demands made 1999 GRANTING THE RELIEFS
by her to PCI Bank for the payment of the amount in PCI 1. To pay the plaintiff PRAYED FOR IN RESPONDENT The provision on summary judgment is found in Section 1,
Bank Managers Check No. 10983, the same was met with the sum of ONGS COMPLAINT INSPITE OF Rule 35 of the 1997 Rules of Court:
refusal; thus, Ong was constrained to file a Complaint for sum FIFTY THOUSAND P THE FACT THAT RESPONDENT
of money, damages and attorneys fees against PCI Bank. [2] ESOS (P50,000.00) in ONG WOULD BE UNJUSTLY SECTION 1. Summary judgment for
the concept of ENRICHED AT THE EXPENSE claimant. A party seeking to recover
From PCI Banks version, TCBT-General Santos City Check moral damages; OF PETITIONER BANK, IF upon a claim, counterclaim, or
No. 0249188 was returned on 5 December 1991 at 5:00 pm on PETITIONER BANK WOULD BE cross-claim or to obtain a
the ground that the account against which it was drawn was 2. To pay the plaintiff REQUIRED TO PAY AN declaratory relief may, at any time
already closed. According to PCI Bank, it immediately gave the sum of UNFUNDED CHECK. after the pleading in answer thereto
notice to Sarande and Ong about the return of Check No. TWENTY THOUSAN has been served, move with
0249188 and requested Ong to return PCI Bank Managers supporting affidavits, depositions or

admissions for a summary judgment
in his favor upon all or any part
thereof.
Thus, it has been held that a summary judgment is proper
where, upon a motion filed after the issues had been joined
and on the basis of the pleadings and papers filed, the court
finds that there is no genuine issue as to any material fact to
except as to the amount of damages. A genuine issue has been
defined as an issue of fact which calls for the presentation of
evidence, as distinguished from an issue which is sham,
fictitious, contrived and patently unsubstantial so as not to
constitute a genuine issue for trial.[14]
A court may grant summary judgment to settle expeditiously a
case if, on motion of either party, there appears from the
pleadings, depositions, admissions, and affidavits that no
important issues of fact are involved, except the amount of
damages.[15] Rule 35, Section 3, of the Rules of Court provides
two requisites for summary judgment to be proper: (1) there
must be no genuine issue as to any material fact, except for
the amount of damages; and (2) the party presenting the
motion for summary judgment must be entitled to a judgment
as a matter of law.[16]
Certainly, when the facts as pleaded appear uncontested or
undisputed, then theres no real or genuine issue or question as
to the facts, and summary judgment is called for. [17]
By admitting it committed an error, clearing the check
of Sarande and issuing in favor of Ong not just any check but
a managers check for that matter, PCI Banks liability is
fixed. Under the circumstances, we find that summary
judgment was proper and a hearing would serve no
purpose. That summary judgment is appropriate was
incisively expounded by the trial court when it made the
following observation:
[D]efendant-bank had certified
plaintiffs PCIB Check No. 073661
and since certification is equivalent
to acceptance, defendant-bank
as drawee bank is bound on the
instrument upon certification and it
is immaterial to such liability in
favor of the plaintiff who is a holder
in due course whether the drawer
(Warliza Sarande) had funds or not
with the defendant-bank (Security vs.
State Bank, 154 N.W. 282) or the
drawer was indebted to the bank for
more than the amount of the check
(Nat. Bank vs. Schmelz, Nat. Bank,
116 S.E. 880) as the certifying bank
as all the liabilities under Sec. 62 of
the Negotiable Instruments Law
which refers to liability of acceptor
(Title Guarantee vs. Emadee Realty
Corp., 240 N.Y. 36).
It may be true that plaintiffs PCIB
Check No. 073661 for P132,000.00
which was paid to her
by Warliza Sarande was actually not
funded but since plaintiff became a
holder in due course,
defendant-bank cannot interpose a
defense of want or lack of
consideration because that defense is
equitable or personal and cannot
prosper against a holder in
due course pursuant to Section 28 of
the Negotiable Instruments
Law.Therefore, when the
aforementioned check was endorsed
and presented by the plaintiff and
certified to and accepted by
defendant-bank in the purchase of
PCIB Managers Check No. 1983 in
the amount of P132,000.00, there
was a valid consideration.[18]
The property of summary judgment was further explained by
this Court when it pronounced that:
The theory of summary judgment is
that although an answer may on its
face appear to tender issues
requiring trial yet if it is
demonstrated by affidavits,
depositions, or admissions that those
issues are not genuine, but sham or
fictitious, the Court is unjustified in
dispensing with the trial and
rendering summary judgment for
plaintiff. The court is expected to act
chiefly on the basis of the affidavits,
depositions, admissions submitted
by the movant, and those of the
other party in opposition
thereto. The hearing contemplated
(with 10-day notice) is for the
purpose of determining whether the
issues are genuine or not, not to
receive evidence on the issues set up
in the pleadings. A hearing is not
thus de riguer. The matter may be
resolved, and usually is, on the basis
of affidavits, depositions,
admissions. This is not to say that a
hearing may be regarded as a
superfluity. It is not, and the Court
has plenary discretion to determine
the necessity therefore.[19]
The second and fourth issues are inter-related and so they
shall be resolved together. The second issue has reference to
PCI Banks claim of unjust enrichment on the part of Ong if it
would be compelled to make good the managers check it had
issued. As asserted by PCI Bank under the fourth issue, Ong is
not a holder in due course because the managers check was
NEGO MIDTERM (FORGERY) 14
drawn against a closed account; therefore, the same was have become a party thereto for
issued without consideration. value.
On the matter of unjust enrichment, the fundamental doctrine
of unjust enrichment is the transfer of value without just cause Sec. 26. What constitutes holder for
or consideration. The elements of this doctrine are: value. Where value has at any time
enrichment on the part of the defendant; impoverishment on been given for the instrument, the
the part of the plaintiff; and lack of cause. The main objective holder is deemed a holder for value
is to prevent one to enrich himself at the expense of in respect to all parties who become
another.[20] It is based on the equitable postulate that it is such prior to that time.
unjust for a person to retain benefit without paying for it. [21] It
is well to stress that the check of Sarande had been cleared by
the PCI Bank for which reason the former issued the check Sec. 28. Effect of want of
to Ong. A check which has been cleared and credited to the consideration. Absence or failure of
account of the creditor shall be equivalent to a delivery to the consideration is a matter of defense
creditor of cash in an amount equal to the amount credited to as against any person not a holder in
his account.[22] due course; and partial failure of
consideration is a
Having cleared the check earlier, PCI Bank, therefore, became defense pro tanto, whether the
liable to Ong and it cannot allege want or failure of failure is an ascertained and
consideration between it and Sarande. Under settled liquidated amount or otherwise.
jurisprudence, Ong is a stranger as regards the transaction
between PCI Bank and Sarande.[23]
PCI Bank next insists that since there was no consideration for Easily discernible is that what Ong obtained from PCI Bank
the issuance of the managers check, ergo, Ong is not a holder was not just any ordinary check but a managers check. A
in due course. This claim is equally without basis. Pertinent managers check is an order of the bank to pay, drawn upon
provisions of the Negotiable Instruments Law are hereunder itself, committing in effect its total resources, integrity and
quoted: honor behind its issuance. By its peculiar character and
general use in commerce, a managers check is regarded
SECTION 52. What constitutes a substantially to be as good as the money it represents. [24]
holder in due course. A holder in
due course is a holder who has taken A managers check stands on the same footing as a certified
the instrument under the following check.[25] The effect of certification is found in Section 187,
conditions: Negotiable Instruments Law.
(a) That it is complete and regular Sec. 187. Certification of check;
upon its face; effect of. Where a check is certified
by the bank on which it is drawn, the
(b) That he became the holder of it certification is equivalent to an
before it was overdue, and without acceptance.[26]
notice it had been previously
dishonored, if such was the fact;
The effect of issuing a managers check was incontrovertibly
(c) That he took it in good faith and elucidated when we declared that:
for value;
A managers check is one drawn by
(d) That at the time it was negotiated the banks manager upon the bank
to him, he had no notice of any itself. It is similar to a cashiers
infirmity in the instrument or defect check both as to effect and use. A
in the title of the person negotiating cashiers check is a check of the
it. banks cashier on his own or another
check. In effect, it is a bill of
exchange drawn by the cashier of a
The same law provides further: bank upon the bank itself, and
accepted in advance by the act of its
Sec. 24. Presumption of issuance. It is really the banks own
consideration. Every negotiable check and may be treated as a
instrument is deemed prima facie to promissory note with the bank as a
have been issued for a valuable maker. The check becomes the
consideration; and every person primary obligation of the bank
whose signature appears thereon to which issues it and constitutes its

written promise to pay upon
demand. The mere issuance of it is
considered an acceptance thereof.
x x x.[27]
In the case of New Pacific Timber & Supply Co.,
Inc. v. Seneris[28]:
[S]ince the said check had been
certified by the drawee bank, by the
certification, the funds represented
by the check are transferred from the
credit of the maker to that of the
payee or holder, and for all intents
and purposes, the latter becomes the
depositor of the drawee bank, with
rights and duties of one in such
situation. Where a check is certified
by the bank on which it is drawn, the
certification is equivalent to
acceptance.Said certification 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 understanding that
the check is good then, and shall
continue good, and this agreement is
as binding on the bank as its notes
circulation, a certificate of deposit
payable to the order of 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. When the holder procures
the check to be certified, the check
operates as an assignment of a part
of the funds to the creditors. Hence,
the exception to the rule enunciated
under Section 63 of the Central
Bank Act to the effect that a check
which has been cleared and credited
to the account of the creditor shall
be equivalent to a delivery to the
creditor in cash in an amount equal
to the amount credited to his account
shall apply in this case x x x.
By accepting PCI Bank Check No. 073661 issued
by Sarande to Ong and issuing in turn a managers check in
exchange thereof, PCI Bank assumed the liabilities of an
acceptor under Section 62 of the Negotiable Instruments Law
which states:
Sec. 62. Liability of acceptor. The
acceptor by accepting the
instruments 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.
With the above jurisprudential basis, the issues on Ong being
not a holder in due course and failure or want of consideration
for PCI Banks issuance of the managers check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking
Law of 2000 decrees:
SEC. 2. Declaration of Policy. The
State recognizes the vital role of
banks in providing an environment
conducive to the sustained
development of the national
economy and the fiduciary nature of
banking that requires high standards
of integrity and performance. In
furtherance thereof, the State shall
promote and maintain a stable and
efficient banking and financial
system that is globally competitive,
dynamic and responsive to the
demands of a developing economy.
In Associated Bank v. Tan,[29] it was
reiterated:
x x x the degree of diligence
required of banks is more than that
of a good father of a family where
the fiduciary nature of their
relationship with their depositors is
concerned. Indeed, the banking
business is vested with the trust and
confidence of the public; hence the
appropriate standard of diligence
must be very high, if not the highest
degree of diligence.
Measured against these standards, the next question that needs
to be addressed is: Did PCI Bank exercise the requisite degree
of diligence required of it? From all indications, it did
not. PCI Bank distinctly made the following uncontested
admission:
1. On 29 November 1991,
one Warliza Sarande deposited to
her savings account with PCI
Banks Magsaysay Avenue Branch,
TCBT-General Santos Branch
Check No. 0249188
for P225,000.00. Said check,
however, was inadvertently sent
by PCI Bank through local
clearing when it should have been
sent through inter-regional
clearing since the check was
drawn
at TCBT-General Santos City.
2. On 5 December
1991, Warliza Sarande inquired
whether TCBT Check No. 0249188
had been cleared. Not having
received any advice from
the drawee bank within the regular
clearing period for the return of
locally cleared checks, and unaware
then of the error of not having sent
the check through inter-regional
clearing, PCI Bank advised her
that Check No. 024188 is treated
as cleared. x x x.[30] (Emphasis
supplied.)
From the foregoing, it is palpable and readily apparent that
PCI Bank failed to exercise the highest degree of
care[31] required of it under the law.
In the case of Philippine National Bank v. Court of
Appeals,[32] we declared:
The banking system has become an
indispensable institution in the
modern world and plays a vital role
in the economic life of every
civilized society. Whether as mere
passive entities for the safe-keeping
and saving of money or as active
instruments of business and
commerce, banks have attained an
ubiquitous presence among the
people, who have come to regard
them with respect and even gratitude
and, most of all, confidence.
Having settled the other issues, we now resolve the question
on the award of moral and exemplary damages by the trial
court to the respondent.
Moral damages include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar
injury. Though incapable of pecuniary computation, moral
damages may be recovered if they are the proximate result of
NEGO MIDTERM (FORGERY) 15
[33]
the defendants wrongful act or omission. The requisites for
an award of moral damages are well-defined, thus, firstly,
evidence of besmirched reputation or physical, mental or
psychological suffering sustained by the claimant; secondly, a
culpable act or omission factually established; thirdly, proof
that the wrongful act or omission of the defendant is the
proximate cause of the damages sustained by the claimant;
and fourthly, that the case is predicated on any of the instances
expressed or envisioned by Article 2219[34] and Article
2220[35] of the Civil Code. All these elements are present in
the instant case.[36]
In the first place, by refusing to make good the managers
check it has issued, Ong suffered embarrassment and
humiliation arising from the dishonor of the said
check.[37] Secondly, the culpable act of PCI Bank in having
cleared the check of Serande and issuing the managers check
to Ong is undeniable. Thirdly, the proximate cause of the loss
is attributable to PCI Bank. Proximate cause is defined as that
cause which, in natural and continuous sequence, unbroken by
any efficient intervening cause, produces the injury, and
without which the result would not have occurred. [38] In this
case, the proximate cause of the loss is the act of PCI Bank in
having cleared the check of Sarande and its failure to exercise
that degree of diligence required of it under the law which
resulted in the loss to Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective
damages are imposed, by way of
example or correction for the public
good, in addition to the moral,
temperate, liquidated or
compensatory damages.
The law allows the grant of exemplary damages to set an
example for the public good. The banking system has become
an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized society.
Whether as mere passive entities for the safe-keeping and
saving of money or as active instruments of business and
commerce, banks have attained an ubiquitous presence among
the people, who have come to regard them with respect and
even gratitude and most of all, confidence. For this reason,
banks should guard against injury attributable to negligence or
bad faith on its part.[39] Without a doubt, it has been repeatedly
emphasized that since the banking business is impressed with
public interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently, the
highest degree of diligence is expected, and high standards of
integrity and performance are even required of it. [40] Having
failed in this respect, the award of exemplary damages is
warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary
loss is necessary in order that moral,
nominal, temperate, liquidated or
exemplary damages may be
 NEGO MIDTERM (FORGERY) 16
adjudicated. The assessment of such
damages, except liquidated ones, is
left to the discretion of the court,
according to the circumstances of
each case.

Based on the above provision, the determination of the

amount to be awarded (except liquidated damages) is left to
the sound discretion of the court according to the
circumstances of each case.[41]In the case before us, we find
that the award of moral damages in the amount of P50,000.00
and exemplary damages in the amount of P20,000.00 is
reasonable and justified.

With the above disquisition, there is no necessity of further

discussing the last issue on the PCI Banks counterclaim based
on the supposed lack of merit of Ongs complaint.

WHEREFORE, premises considered, the Petition

is DENIED and the Decision of the Court of Appeals
dated 29 October 2002 in CA-G.R. CV No. 65000 affirming
the Decision dated 3 may 1999, of
the Regional Trial Court of Davao City, Branch 14, in Civil
Case No. 21458-92, are AFFIRMED.

SO ORDERED.

[G.R. No. 149454. May 28, 2004]
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs. CASA MONTESSORI
INTERNATIONALE and LEONARDO T.
YABUT, respondents.
[G.R. No. 149507. May 28, 2004]
CASA MONTESSORI INTERNATIONALE, petitioner,
vs. BANK OF THE PHILIPPINE
ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to
take meticulous care of the deposits of its clients, who
have the right to expect high standards of integrity
and performance from it. Among its obligations in
furtherance thereof is knowing the signatures of its
clients. Depositors are not estopped from questioning
wrongful withdrawals, even if they have failed to question
those errors in the statements sent by the bank to them
for verification.
The Case
Before us are two Petitions for Review[1] under
Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision[2] and the August 17, 2001 Resolution[3] of
the Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as
follows:
WHEREFORE, upon the premises, the decision appealed
from is AFFIRMED with the modification that defendant
bank [Bank of the Philippine Islands (BPI)] is held liable only
for one-half of the value of the forged checks in the amount
of P547,115.00 after deductions subject to
REIMBURSEMENT from third party defendant Yabut who is
likewise ORDERED to pay the other half to plaintiff
corporation [Casa Montessori Internationale (CASA)]. [4]
The assailed Resolution denied all the parties
Motions for Reconsideration.
The Facts
The facts of the case are narrated by the CA as
follows:
On November 8, 1982, plaintiff CASA Montessori
International[5] opened Current Account No. 0291-0081-01
with defendant BPI[,] with CASAs President Ms. Ma. Carina
C. Lebron as one of its authorized signatories.
In 1991, after conducting an investigation, plaintiff discovered
that nine (9) of its checks had been encashed by a certain
Sonny D. Santos since 1990 in the total amount
of P782,000.00, on the following dates and amounts:
Check No. Date Amount
1. 839700 April 24, 1990 P 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Total -- P
782,600.00
[6]
It turned out that Sonny D. Santos with account at BPIs
Greenbelt Branch [was] a fictitious name used by third
party defendant Leonardo T. Yabut who worked as
external auditor of CASA. Third party defendant
voluntarily admitted that he forged the signature of Ms.
Lebron and encashed the checks.
The PNP Crime Laboratory conducted an
examination of the nine (9) checks and concluded that
the handwritings thereon compared to the standard
signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein
Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to
reinstate the amount of P782,500.00[7] in the current and
savings accounts of the plaintiff with interest at 6% per
annum.
On February 16, 1999, the RTC rendered the
appealed decision in favor of the plaintiff.[8]
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court
(RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASAs
contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse
BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorneys fees and moral and
exemplary damages.
Hence, these Petitions.[9]
Issues
In GR No. 149454, Petitioner BPI submits the
following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this
case NOT in accord with the applicable decisions of this
Honorable Court to the effect that forgery cannot be
presumed; that it must be proved by clear, positive and
convincing evidence; and that the burden of proof lies on the
party alleging the forgery.
II. The Honorable Court of Appeals erred in deciding this
case not in accord with applicable laws, in particular the
NEGO MIDTERM (FORGERY) 17
Negotiable Instruments Law (NIL) which precludes CASA,
on account of its own negligence, from asserting its forgery
claim against BPI, specially taking into account the absence of
any negligence on the part of BPI.[10]
In GR No. 149507, Petitioner CASA submits the
following issues:
1. The Honorable Court of Appeals erred when it ruled that
there is no showing that [BPI], although negligent, acted in
bad faith x x x thus denying the prayer for the award of
attorneys fees, moral damages and exemplary damages to
[CASA]. The Honorable Court also erred when it did not
order [BPI] to pay interest on the amounts due to [CASA].
2. The Honorable Court of Appeals erred when it declared that
[CASA] was likewise negligent in the case at bar, thus
warranting its conclusion that the loss in the amount
of P547,115.00 be apportioned between [CASA] and [BPI] x
x x.[11]
These issues can be narrowed down to
three. First, was there forgery under the Negotiable
Instruments Law (NIL)? Second, were any of the parties
negligent and therefore precluded from setting up forgery
as a defense? Third, should moral and exemplary
damages, attorneys fees, and interest be awarded?
The Courts Ruling
The Petition in GR No. 149454 has no merit, while
that in GR No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
Section 23. Forged signature; effect of. -- 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 x x x 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.[12]

Under this provision, a forged signature is a
real[13] or absolute defense,[14] and a person whose
signature on a negotiable instrument is forged is deemed
to have never become a party thereto and to have never
consented to the contract that allegedly gave rise to it.[15]
The counterfeiting of any writing, consisting in the
signing of anothers name with intent to defraud, is
forgery.[16]
In the present case, we hold that there was
forgery of the drawers signature on the check.
First, both the CA[17] and the RTC[18] found that
Respondent Yabut himself had voluntarily admitted,
through an Affidavit, that he had forged the drawers
signature and encashed the checks.[19] He never refuted
these findings.[20] That he had been coerced into
admission was not corroborated by any evidence on
record.[21]
Second, the appellate and the trial courts also
ruled that the PNP Crime Laboratory, after its
examination of the said checks,[22] had concluded that
the handwritings thereon -- compared to the standard
signature of the drawer -- were not hers.[23] This
conclusion was the same as that in the Report[24] that the
PNP Crime Laboratory had earlier issued to BPI -- the
drawee bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual
findings, especially when affirmed by the CA, since these
are supported by substantial evidence on record.[25]
Voluntary Admission Not
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate
his constitutional rights (1) on custodial investigation, and
(2) against self-incrimination.
In the first place, he was not under custodial
investigation.[26] His Affidavit was executed in private and
before private individuals.[27] The mantle of protection
under Section 12 of Article III of the 1987
Constitution[28] covers only the period from the time a
person is taken into custody for investigation of his
possible participation in the commission of a crime or
from the time he is singled out as a suspect in the
commission of a crime although not yet in custody.[29]
Therefore, to fall within the ambit of Section 12,
quoted above, there must be an arrest or a deprivation of
freedom, with questions propounded on him by the
police authorities for the purpose of eliciting admissions,
[30]
confessions, or any information. The said
constitutional provision does not apply to spontaneous
statements made in a voluntary manner[31] whereby an
individual orally admits to authorship of a crime.[32] What
the Constitution proscribes is the compulsory or coercive
disclosure of incriminating facts.[33]
Moreover, the right against
self-incrimination[34] under Section 17 of Article III[35] of
the Constitution, which is ordinarily available only in
criminal prosecutions, extends to all other government
proceedings -- including civil actions, legislative
investigations,[36] and administrative proceedings that
possess a criminal or penal aspect[37] -- but not to private
investigations done by private individuals. Even in such
government proceedings, this right may be
waived,[38] provided the waiver is certain; unequivocal;
and intelligently, understandingly and willingly made.[39]
If in these government proceedings waiver is
allowed, all the more is it so in private investigations. It is
of no moment that no criminal case has yet been filed
against Yabut. The filing thereof is entirely up to the
appropriate authorities or to the private individuals upon
whom damage has been caused. As we shall also
explain later, it is not mandatory for CASA -- the plaintiff
below -- to implead Yabut in the civil case before the
lower court.
Under these two constitutional provisions, [t]he
Bill of Rights[40] does not concern itself with the relation
between a private individual and another individual. It
governs the relationship between the individual and the
State.[41] Moreover, the Bill of Rights is a charter of
liberties for the individual and a limitation upon the power
of the [S]tate.[42] These rights[43] are guaranteed to
preclude the slightest coercion by the State that may
lead the accused to admit something false, not prevent
him from freely and voluntarily telling the truth.[44]
Yabut is not an accused here. Besides, his mere
invocation of the aforesaid rights does not automatically
entitle him to the constitutional protection.[45] When he
freely and voluntarily executed[46] his Affidavit, the State
was not even involved. Such Affidavit may therefore be
admitted without violating his constitutional rights while
under custodial investigation and against
self-incrimination.
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive,
was nevertheless clear, positive and convincing.
[47]
Forgery cannot be presumed. It must be
established by clear, positive and convincing
evidence.[48] Under the best evidence rule as applied to
documentary evidence like the checks in question, no
secondary or substitutionary evidence may inceptively
be introduced, as the original writing itself must be
produced in court.[49] But when, without bad faith on the
part of the offeror, the original checks have already been
destroyed or cannot be produced in court, secondary
evidence may be produced.[50] Without bad faith on its
part, CASA proved the loss or destruction of the original
checks through the Affidavit of the one person who knew
of that fact[51] -- Yabut. He clearly admitted to discarding
the paid checks to cover up his misdeed.[52] In such a
situation, secondary evidence like microfilm copies may
be introduced in court.
The drawers signatures on the microfilm copies
were compared with the standard signature. PNP
Document Examiner II Josefina de la Cruz testified on
cross-examination that two different persons had written
them.[53] Although no conclusive report could be issued
in the absence of the original checks,[54] she affirmed that
her findings were 90 percent conclusive.[55] According to
her, even if the microfilm copies were the only basis of
comparison, the differences were evident.[56] Besides,
the RTC explained that although the Report was
inconclusive, no conclusive report could have been given
by the PNP, anyway, in the absence of the original
checks.[57] This explanation is valid; otherwise, no such
report can ever be relied upon in court.
Even with respect to documentary evidence, the
best evidence rule applies only when the contents of a
document -- such as the drawers signature on a check --
is the subject of inquiry.[58] As to whether the document
has been actually executed, this rule does not apply; and
testimonial as well as any other secondary evidence is
admissible.[59] Carina Lebron herself, the drawers
authorized signatory, testified many times that she had
never signed those checks. Her testimonial evidence is
admissible; the checks have not been actually
executed. The genuineness of her handwriting is proved,
not only through the courts comparison of the questioned
handwritings and admittedly genuine specimens
thereof,[60] but above all by her.
The failure of CASA to produce the original
checks neither gives rise to the presumption of
suppression of evidence[61] nor creates an unfavorable
inference against it.[62] Such failure merely authorizes the
introduction of secondary evidence[63] in the form of
microfilm copies. Of no consequence is the fact that
CASA did not present the signature card containing the
signatures with which those on the checks were
compared.[64] Specimens of standard signatures are not
limited to such a card. Considering that it was not
produced in evidence, other documents that bear the
NEGO MIDTERM (FORGERY) 18
drawers authentic signature may be resorted
to.[65] Besides, that card was in the possession of BPI --
the adverse party.
We have held that without the original document
containing the allegedly forged signature, one cannot
make a definitive comparison that would establish
forgery;[66] and that a comparison based on a mere
reproduction of the document under controversy cannot
produce reliable results.[67] We have also said, however,
that a judge cannot merely rely on a handwriting experts
testimony,[68] but should also exercise independent
judgment in evaluating the authenticity of a signature
under scrutiny.[69] In the present case, both the RTC and
the CA conducted independent examinations of the
evidence presented and arrived at reasonable and
similar conclusions. Not only did they admit secondary
evidence; they also appositely considered testimonial
and other documentary evidence in the form of the
Affidavit.
The best evidence rule admits of exceptions and,
as we have discussed earlier, the first of these has been
met.[70] The result of examining a questioned handwriting,
even with the aid of experts and scientific instruments,
may be inconclusive;[71] but it is a non sequitur to say that
such result is not clear, positive and convincing. The
preponderance of evidence required in this case has
been satisfied.[72]
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers
signature, BPI -- the drawee -- erred in making payments
by virtue thereof. The forged signatures are wholly
inoperative, and CASA -- the drawer whose authorized
signatures do not appear on the negotiable instruments
-- cannot be held liable thereon. Neither is the latter
precluded from setting up forgery as a real defense.
Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the
banking business is impressed with public interest, of
paramount importance thereto is the trust and
confidence of the public in general. Consequently, the
highest degree of diligence[73] is expected,[74] and high

standards of integrity and performance are even required,
of it.[75] By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with
meticulous care,[76] always having in mind the fiduciary
nature of their relationship.[77]
BPI contends that it has a signature verification
procedure, in which checks are honored only when the
signatures therein are verified to be the same with or
similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the
omission of that degree of diligence required[78] of a
bank. It cannot now feign ignorance, for very early on we
have already ruled 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.[79] In fact, BPI was the same bank involved when
we issued this ruling seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its
clients contain a notice worded as follows: If no error is
reported in ten (10) days, account will be correct.[80] Such
notice cannot be considered a waiver, even if CASA
failed to report the error. Neither is it estopped from
questioning the mistake after the lapse of the ten-day
period.
This notice is a simple confirmation[81] or
circularization -- in accounting parlance -- that requests
client-depositors to affirm the accuracy of items recorded
by the banks.[82] Its purpose is to obtain from the
depositors a direct corroboration of the correctness of
their account balances with their respective
banks.[83] Internal or external auditors of a bank use it as
a basic audit procedure[84] -- the results of which its
client-depositors are neither interested in nor privy to -- to
test the details of transactions and balances in the banks
records.[85] Evidential matter obtained from independent
sources outside a bank only serves to provide greater
assurance of reliability[86] than that obtained solely within
it for purposes of an audit of its own financial statements,
not those of its client-depositors.
Furthermore, there is always the audit risk that
errors would not be detected[87] for various reasons. One,
materiality is a consideration in audit
planning;[88] and two, the information obtained from such
a substantive test is merely presumptive and cannot be
the basis of a valid waiver.[89] BPI has no right to impose
a condition unilaterally and thereafter consider failure to
meet such condition a waiver. Neither may CASA
renounce a right[90] it has never possessed.[91]
Every right has subjects -- active and
passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer
such enforcement.[92]
On the one hand, BPI could not have been an
active subject, because it could not have demanded from
CASA a response to its notice. Besides, the notice was a
measly request worded as follows: Please examine x x x
and report x x x.[93] CASA, on the other hand, could not
have been a passive subject, either, because it had no
obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or
asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal
contemplation.[94] Our rules on evidence even make
a juris et de jure presumption[95] that whenever one has,
by ones own act or omission, intentionally and
deliberately led another to believe a particular thing to be
true and to act upon that belief, one cannot -- in any
litigation arising from such act or omission -- be permitted
to falsify that supposed truth.[96]
In the instant case, CASA never made any deed
or representation that misled BPI. The formers omission,
if any, may only be deemed an innocent mistake
oblivious to the procedures and consequences of
periodic audits. Since its conduct was due to such
ignorance founded upon an innocent mistake, estoppel
will not arise.[97] A person who has no knowledge of or
consent to a transaction may not be estopped by
it.[98] Estoppel cannot be sustained by mere argument or
doubtful inference x x x.[99] CASA is not barred from
questioning BPIs error even after the lapse of the period
given in the notice.
Loss Borne by
Proximate Source
of Negligence
For allowing payment[100] on the checks to a
wrongful and fictitious payee, BPI -- the drawee bank --
becomes liable to its depositor-drawer. Since the
encashing bank is one of its branches,[101] BPI can easily
go after it and hold it liable for reimbursement.[102] It may
not debit the drawers account[103] and is not entitled to
[104]
indemnification from the drawer. In both law and
equity, when one of two innocent persons must suffer by
the wrongful act of a third person, the loss must be borne
by the one whose negligence was the proximate cause
of the loss or who put it into the power of the third person
to perpetrate the wrong.[105]
Proximate cause is determined by the facts of the
case.[106] It is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would
not have occurred.[107]
Pursuant to its prime duty to ascertain well the
genuineness of the signatures of its client-depositors on
checks being encashed, BPI is expected to use
reasonable business prudence.[108] In the performance of
that obligation, it is bound by its internal banking rules
and regulations that form part of the contract it enters
into with its depositors.[109]
Unfortunately, it failed in that regard. First, Yabut
was able to open a bank account in one of its branches
without privity;[110] that is, without the proper verification
of his corresponding identification papers.Second, BPI
was unable to discover early on not only this irregularity,
but also the marked differences in the signatures on the
checks and those on the signature card. Third, despite
the examination procedures it conducted, the Central
Verification Unit[111] of the bank even passed off these
evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI
accepted and encashed the eight checks presented to
it. As a result, it proximately contributed to the fraud and
should be held primarily liable[112] for the negligence of its
officers or agents when acting within the course and
scope of their employment.[113] It must bear the loss.
CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party
invoking forgery is recognized as an exception[114] to the
general rule that a forged signature is wholly
inoperative.[115] Contrary to BPIs claim, however, we do
not find CASA negligent in handling its financial
affairs. CASA, we stress, is not precluded from setting up
forgery as a real defense.
Role of Independent Auditor
NEGO MIDTERM (FORGERY) 19
The major purpose of an independent audit is to
investigate and determine objectively if the financial
statements submitted for audit by a corporation have
been prepared in accordance with the appropriate
financial reporting practices[116] of private entities. The
relationship that arises therefrom is both legal and
moral.[117] It begins with the execution of the engagement
letter[118] that embodies the terms and conditions of the
audit and ends with the fulfilled expectation of the
auditors ethical[119] and competent performance in all
aspects of the audit.[120]
The financial statements are representations of
the client; but it is the auditor who has the responsibility
for the accuracy in the recording of data that underlies
their preparation, their form of presentation, and the
opinion[121] expressed therein.[122] The auditor does not
assume the role of employee or of management in the
clients conduct of operations[123] and is never under the
control or supervision[124] of the client.
Yabut was an independent auditor[125] hired by
CASA. He handled its monthly bank reconciliations and
had access to all relevant documents and
checkbooks.[126] In him was reposed the clients[127] trust
and confidence[128] that he would perform precisely those
functions and apply the appropriate procedures in
accordance with generally accepted auditing
standards.[129] Yet he did not meet these
expectations.Nothing could be more horrible to a client
than to discover later on that the person tasked to detect
fraud was the same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who
receives the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda,
shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is
not equipollent with discernment.
Besides, in the internal accounting control system
prudently installed by CASA,[130] it was Yabut who should
examine those documents in order to prepare the bank
reconciliations.[131] He owned his working papers,[132] and
his output consisted of his opinion as well as the clients
financial statements and accompanying notes
thereto. CASA had every right to rely solely upon his
output -- based on the terms of the audit engagement --
and could thus be unwittingly duped into believing that
everything was in order. Besides, [g]ood faith is always
presumed and it is the burden of the party claiming

otherwise to adduce clear and convincing evidence to
the contrary.[133]
Moreover, there was a time gap between the
period covered by the bank statement and the date of its
actual receipt. Lebron personally received the December
1990 bank statement only in January 1991[134] -- when
she was also informed of the forgery for the first time,
after which she immediately requested a stop payment
order. She cannot be faulted for the late detection of the
forged December check.After all, the bank account with
BPI was not personal but corporate, and she could not
be expected to monitor closely all its finances. A
preschool teacher charged with molding the minds of the
youth cannot be burdened with the intricacies or
complexities of corporate existence.
There is also a cutoff period such that checks
issued during a given month, but not presented for
payment within that period, will not be reflected
therein.[135] An experienced auditor with intent to defraud
can easily conceal any devious scheme from a client
unwary of the accounting processes involved by
manipulating the cash balances on record -- especially
when bank transactions are numerous, large and
frequent. CASA could only be blamed, if at all, for its
unintelligent choice in the selection and appointment of
an auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by
whoever alleges it.[136] Its mere existence is not sufficient
without proof that it, and no other cause,[137] has given
rise to damages.[138] In addition, this fault is common to, if
not prevalent among, small and medium-sized business
entities, thus leading the Professional Regulation
Commission (PRC), through the Board of Accountancy
(BOA), to require today not only accreditation for the
practice of public accountancy,[139] but also the
registration of firms in the practice thereof. In fact, among
the attachments now required upon registration are the
code of good governance[140] and a sworn statement on
adequate and effective training.[141]
The missing checks were certainly reported by
the bookkeeper[142] to the accountant[143] -- her
immediate supervisor -- and by the latter to the
auditor. However, both the accountant and the auditor,
for reasons known only to them, assured the bookkeeper
that there were no irregularities.
The bookkeeper[144] who had exclusive custody of
the checkbooks[145] did not have to go directly to CASAs
president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a
resolution of it was arrived at, precisely because the
person at the top of the helm was the culprit. The
vouchers, invoices and check stubs in support of all
check disbursements could be concealed or fabricated --
even in collusion -- and management would still have no
way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the
wrongful act through no fault of CASA. If auditors may be
held liable for breach of contract and negligence,[146] with
all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA
had the discretion to pursue BPI alone under the NIL, by
reason of expediency or munificence or both. Money
paid under a mistake may rightfully be recovered,[147] and
under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASAs claim for moral damages.
In the absence of a wrongful act or
omission,[148] or of fraud or bad faith,[149] moral damages
cannot be awarded.[150] The adverse result of an action
does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground
for granting such damages.[151] While no proof of
pecuniary loss is necessary therefor -- with the amount to
be awarded left to the courts discretion[152] -- the claimant
must nonetheless satisfactorily prove the existence of its
factual basis[153] and causal relation[154] to the claimants
act or omission.[155]
Regrettably, in this case CASA was unable to
identify the particular instance -- enumerated in the Civil
Code -- upon which its claim for moral damages is
predicated.[156] Neither bad faith nor negligence so gross
that it amounts to malice[157] can be imputed to BPI. Bad
faith, under the law, does not simply connote bad
judgment or negligence;[158] it imports a dishonest
purpose or some moral obliquity and conscious doing of
a wrong, a breach of a known duty through some motive
or interest or ill will that partakes of the nature of
fraud.[159]
As a general rule, a corporation -- being an
artificial person without feelings, emotions and senses,
and having existence only in legal contemplation -- is not
entitled to moral damages,[160] because it cannot
experience physical suffering and mental
anguish.[161] However, for breach of the fiduciary duty
required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by
such breach, and social humiliation results
therefrom.[162] CASA was unable to prove that BPI had
debased the good reputation of,[163] and consequently
caused incalculable embarrassment to, the
former. CASAs mere allegation or supposition thereof,
without any sufficient evidence on record, [164]
is not
enough.
Exemplary Damages Also Denied
We also deny CASAs claim for exemplary
damages.
Imposed by way of correction[165] for the public
good,[166] exemplary damages cannot be recovered as a
matter of right.[167] As we have said earlier, there is no
bad faith on the part of BPI for paying the checks of
CASA upon forged signatures. Therefore, the former
cannot be said to have acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.[168] The latter,
having no right to moral damages, cannot demand
exemplary damages.[169]
Attorneys Fees Granted
Although it is a sound policy not to set a premium
on the right to litigate,[170] we find that CASA is entitled to
reasonable attorneys fees based on factual, legal, and
equitable justification.[171]
When the act or omission of the defendant has
compelled the plaintiff to incur expenses to protect the
latters interest,[172] or where the court deems it just and
equitable,[173] attorneys fees may be recovered.In the
present case, BPI persistently denied the claim of CASA
under the NIL to recredit the latters account for the value
of the forged checks. This denial constrained CASA to
incur expenses and exert effort for more than ten years
in order to protect its corporate interest in its bank
account. Besides, we have already cautioned BPI on a
similar act of negligence it had committed seventy years
ago, but it has remained unrelenting. Therefore, the
Court deems it just and equitable to grant ten percent
(10%)[174] of the total value adjudged to CASA as
attorneys fees.
Interest Allowed
NEGO MIDTERM (FORGERY) 20
For the failure of BPI to pay CASA upon demand
and for compelling the latter to resort to the courts to
obtain payment, legal interest may be adjudicated at the
discretion of the Court, the same to run from the
filing[175] of the Complaint.[176] Since a court judgment is
not a loan or a forbearance of recovery, the legal interest
shall be at six percent (6%) per annum.[177] If the
obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall
be the payment of x x x legal interest, which is six
percent per annum.[178] The actual base for its
computation shall be on the amount finally
adjudged,[179] compounded[180] annually to make up for
the cost of money[181] already lost to CASA.
Moreover, the failure of the CA to award interest
does not prevent us from granting it upon damages
awarded for breach of contract.[182] Because BPI
evidently breached its contract of deposit with CASA, we
award interest in addition to the total amount
adjudged. Under Section 196 of the NIL, any case not
provided for shall be governed by the provisions of
existing legislation or, in default thereof, by the rules of
the law merchant.[183] Damages are not provided for in
the NIL. Thus, we resort to the Code of Commerce and
the Civil Code. Under Article 2 of the Code of Commerce,
acts of commerce shall be governed by its provisions
and, in their absence, by the usages of commerce
generally observed in each place; and in the absence of
both rules, by those of the civil law.[184] This law being
silent, we look at Article 18 of the Civil Code, which
states: In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be
supplied by its provisions. A perusal of these three
statutes unmistakably shows that the award of interest
under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is
hereby DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of
Appeals is AFFIRMED with modification: BPI is held
liable for P547,115, the total value of the forged checks
less the amount already recovered by CASA from
Leonardo T. Yabut, plus interest at the legal rate of six
percent (6%) per annum -- compounded annually, from
the filing of the complaint until paid in full; and attorneys
fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire
amount, excepting attorneys fees. Let a copy of this
Decision be furnished the Board of Accountancy of the
Professional Regulation Commission for such action as it
may deem appropriate against Respondent Yabut. No
costs.
SO ORDERED.
 NEGO MIDTERM (FORGERY) 21
Is BPI liable as the drawee bank for allowing
payment on the checks to a wrongful and fictitious
FACTS: payee?

CASA Montessori International opened a current

account with BPI with CASAs President Ms. Ma. Carina
C. Lebron as one of its authorized signatories. In 1991,
after conducting an investigation, plaintiff discovered that
nine (9) of its checks had been encashed by a certain
Sonny D. Santos since 1990 in the total amount
of P782,000.00. It turned out that Sonny D. Santos with
account at BPIs Greenbelt Branch [was] a fictitious name
used by third party defendant Leonardo T. Yabut who
worked as external auditor of CASA. Third party
defendant voluntarily admitted that he forged the
signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an
examination of the nine (9) checks and concluded that
the handwritings thereon compared to the standard
signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein
Complaint for Collection with Damages against
defendant bank.
HELD:
YES. BPI -- the drawee bank -- becomes liable
to its depositor-drawer for allowing payment on the
checks to a wrongful and fictitious payee. Since the
encashing bank is one of its branches, BPI can easily go
after it and hold it liable for reimbursement. It may not
debit the drawers account and is not entitled to
indemnification from the drawer. In both law and equity,
when one of two innocent persons must suffer by the
wrongful act of a third person, the loss must be borne by
the one whose negligence was the proximate cause of
the loss or who put it into the power of the third person to
perpetrate the wrong.
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.

ISSUE 1:

Was there forgery under the Negotiable

Instruments Law (NIL)?

HELD:

YES. Forgery cannot be presumed. It must be

established by clear, positive and convincing evidence.
Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced,
as the original writing itself must be produced in court.
But when, without bad faith on the part of the offeror, the
original checks have already been destroyed or cannot
be produced in court, secondary evidence may be
produced. Without bad faith on its part, CASA proved the
loss or destruction of the original checks through the
Affidavit of the one person who knew of that fact-
Yabut. He clearly admitted to discarding the paid checks
to cover up his misdeed. In such a situation, secondary
evidence like microfilm copies may be introduced in
court.

Even with respect to documentary evidence, the

best evidence rule applies only when the contents of a
document -- such as the drawers signature on a check --
is the subject of inquiry.

ISSUE 2:

[G.R. No. 129015. August 13, 2004]
SAMSUNG CONSTRUCTION COMPANY
PHILIPPINES, INC., petitioner, vs. FAR
EAST BANK AND TRUST COMPANY AND
COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic
textbook question if a bank pays out on a forged check,
is it liable to reimburse the drawer from whose account
the funds were paid out? The Court of Appeals, in
reversing a trial court decision adverse to the bank,
invoked tenuous reasoning to acquit the bank of
liability. We reverse, applying time-honored principles of
law.
The salient facts follow.
Plaintiff Samsung Construction Company
Philippines, Inc. (Samsung Construction), while based in
Bian, Laguna, maintained a current account with
defendant Far East Bank and Trust Company[1] (FEBTC)
at the latters Bel-Air, Makati branch.[2] The sole signatory
to Samsung Constructions account was Jong Kyu Lee
(Jong), its Project Manager,[3] while the checks remained
in the custody of the companys accountant, Kyu Yong
Lee (Kyu).[4]
On 19 March 1992, a certain Roberto Gonzaga
presented for payment FEBTC Check No. 432100 to the
banks branch in Bel-Air, Makati. The check, payable to
cash and drawn against Samsung Constructions current
account, was in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00). The bank
teller, Cleofe Justiani, first checked the balance of
Samsung Constructions account. After ascertaining
there were enough funds to cover the check,[5] she
compared the signature appearing on the check with the
specimen signature of Jong as contained in the
specimen signature card with the bank. After comparing
the two signatures, Justiani was satisfied as to the
authenticity of the signature appearing on the check. She
then asked Gonzaga to submit proof of his identity, and
the latter presented three (3) identification cards.[6]
At the same time, Justiani forwarded the check to
the branch Senior Assistant Cashier Gemma Velez, as it
was bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked
the signature on the check as against that on the
signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check
and signature card to Shirley Syfu, another bank officer,
for approval. Syfu then noticed that Jose Sempio III
(Sempio), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was
well-known to Syfu and the other bank officers, he being
the assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who vouched for the
genuineness of Jongs signature. Confirming the identity
of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction.
Satisfied with the genuineness of the signature of Jong,
Syfu authorized the banks encashment of the check to
Gonzaga.
The following day, the accountant of Samsung
Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Aware that he
had not prepared such a check for Jongs signature, Kyu
perused the checkbook and found that the last blank
check was missing.[7] He reported the matter to Jong,
who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature
had been forged. The Bank Manager reputedly told Jong
that he would be reimbursed for the amount of the
check.[8] Jong proceeded to the police station and
consulted with his lawyers.[9] Subsequently, a criminal
case for qualified theft was filed against Sempio before
the Laguna court.[10]
In a letter dated 6 May 1992, Samsung
Construction, through counsel, demanded that FEBTC
credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with
interest.[11] In response, FEBTC said that it was still
conducting an investigation on the matter. Unsatisfied,
Samsung Construction filed a Complaint on 10 June
1992 for violation of Section 23 of the Negotiable
Instruments Law, and prayed for the payment of the
amount debited as a result of the questioned check plus
interest, and attorneys fees.[12] The case was docketed
as Civil Case No. 92-61506 before the Regional Trial
Court (RTC) of Manila, Branch 9.[13]
During the trial, both sides presented their
respective expert witnesses to testify on the claim that
Jongs signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B.
Flores. She testified that based on her examination, she
concluded that Jongs signature had been forged on the
check. On the other hand, FEBTC, which had sought the
assistance of the Philippine National Police
(PNP),[14] presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified
that her findings showed that Jongs signature on the
check was genuine.[15]
Confronted with conflicting expert testimony, the
RTC chose to believe the findings of the NBI expert. In
a Decision dated 25 April 1994, the RTC held that Jongs
signature on the check was forged and accordingly
directed the bank to pay or credit back to Samsung
Constructions account the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the time
the complaint was filed, and attorneys fees in the amount
of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals.
On 28 November 1996, the Special Fourteenth Division
of the Court of Appeals rendered a Decision,[16] reversing
the RTC Decision and absolving FEBTC from any
liability. The Court of Appeals held that the contradictory
findings of the NBI and the PNP created doubt as to
whether there was forgery.[17] Moreover, the appellate
court also held that assuming there was forgery, it
occurred due to the negligence of Samsung Construction,
imputing blame on the accountant Kyu for lack of care
and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access
thereto.[18] The Court of Appeals invoked the ruling
in PNB v. National City Bank of New York[19] that, if a loss,
which must be borne by one or two innocent persons,
can be traced to the neglect or fault of either, such loss
would be borne by the negligent party, even if innocent of
intentional fraud.[20]
Samsung Construction now argues that the Court
of Appeals had seriously misapprehended the facts
when it overturned the RTCs finding of forgery. It also
contends that the appellate court erred in finding that it
had been negligent in safekeeping the check, and in
applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals
arrived at contrary findings on questions of fact, the
Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and
based on the applicable laws and jurisprudence, we
reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law
states:
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. (Emphasis supplied)
NEGO MIDTERM (FORGERY) 22
The general rule is to the effect that a forged
signature is wholly inoperative, and payment made
through or under such signature is ineffectual or does not
discharge the instrument.[21] If payment is made, the
drawee cannot charge it to the drawers account. The
traditional justification for the result is that the drawee is
in a superior position to detect a forgery because he has
the makers signature and is expected to know and
compare it.[22] The rule has a healthy cautionary effect on
banks by encouraging care in the comparison of the
signatures against those on the signature cards they
have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its
customers who use checks makes the drawee an ideal
party to spread the risk to insurance.[23]
Brady, in his treatise The Law of Forged and
Altered Checks, elucidates:
When a person deposits money in a general account in a bank,
against which he has the privilege of drawing checks in the
ordinary course of business, the relationship between the bank
and the depositor is that of debtor and creditor. So far as the
legal relationship between the two is concerned, the situation
is the same as though the bank had borrowed money from the
depositor, agreeing to repay it on demand, or had bought
goods from the depositor, agreeing to pay for them on demand.
The bank owes the depositor money in the same sense that
any debtor owes money to his creditor. Added to this, in the
case of bank and depositor, there is, of course, the banks
obligation to pay checks drawn by the depositor in proper
form and presented in due course. When the bank receives the
deposit, it impliedly agrees to pay only upon the depositors
order. When the bank pays a check, on which the depositors
signature is a forgery, it has failed to comply with its contract
in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The
forged signature may so closely resemble the genuine as to
defy detection by the depositor himself. And yet, if a bank
pays the check, it is paying out its own money and not the
depositors.
The forgery may be committed by a trusted employee or
confidential agent. The bank still must bear the loss. Even in a
case where the forged check was drawn by the depositors
partner, the loss was placed upon the bank. The case referred
to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In
this case, the plaintiff brought suit against the defendant bank
for money which had been deposited to the plaintiffs credit
and which the bank had paid out on checks bearing forgeries
of the plaintiffs signature.
Xxx
It was held that the bank was liable. It

was further held that the fact that the plaintiff waited eight or
nine months after discovering the forgery, before notifying the
bank, did not, as a matter of law, constitute a ratification of
the payment, so as to preclude the plaintiff from holding the
bank liable. xxx
This rule of liability can be stated briefly in these words: A
bank is bound to know its depositors signature. The rule is
variously expressed in the many decisions in which the
question has been considered. But they all sum up to the
proposition that a bank must know the signatures of those
whose general deposits it carries.[24]
By no means is the principle rendered obsolete
with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments
and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer
determines who can draw against the customers account by
specifying whose signature is necessary on checks that are
chargeable against the customers account. Therefore, a check
drawn against the account of an individual customer that is
signed by someone other than the customer, and without
authority from her, is not properly payable and is not
chargeable to the customers account, inasmuch as any
unauthorized signature on an instrument is ineffective as the
signature of the person whose name is signed. [25]
Under Section 23 of the Negotiable Instruments
Law, forgery is a real or absolute defense by the party
whose signature is forged.[26] On the premise that Jongs
signature was indeed forged, FEBTC is liable for the loss
since it authorized the discharge of the forged
check. Such liability attaches even if the bank exerts due
diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most
cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being
deceived.[27] The forgery may be so near like the genuine
as to defy detection by the depositor himself, and yet the
bank is liable to the depositor if it pays the check.[28]
Thus, the first matter of inquiry is into whether the
check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to
be fraudulent. In a forgery trial, this presumption must be
overcome but this can only be done by convincing
testimony and effective illustrations.[29]
In ruling that forgery was not duly proven, the
Court of Appeals held:
[There] is ground to doubt the findings of the trial court
sustaining the alleged forgery in view of the conflicting
conclusions made by handwriting experts from the NBI and
the PNP, both agencies of the government.
Xxx
These contradictory findings create doubt on
whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the
Supreme Court held that forgery cannot be presumed; it must
be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator
worth his or her salt would never allow an opponents
expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not
unusual.The trier of fact will have to decide which version
to believe, and explain why or why not such version is
more credible than the other. Reliance therefore cannot
be placed merely on the fact that there are colliding
opinions of two experts, both clothed with the
presumption of official duty, in order to draw a conclusion,
especially one which is extremely crucial. Doing so is
tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it
occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it
has the appropriate skill and competence to plough
through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it, and
relying instead on presumptions haphazardly drawn, the
Court of Appeals was sadly remiss. Of course, courts,
like humans, are fallible, and not every error deserves a
stern rebuke. Yet, the appellate courts error in this case
warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted
as a governing standard by every court in the land,
barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a
contrary expert opinion.
On the other hand, the RTC did adjudge the
testimony of the NBI expert as more credible than that of
the PNP, and explained its reason behind the
conclusion:
After subjecting the evidence of both parties to a crucible of
analysis, the court arrived at the conclusion that the testimony
of the NBI document examiner
is more credible because the testimony of the PNP Crime
LaboratoryServices document examiner reveals that there are
a lot of differences in the questioned signature as compared to
the standard specimen signature. Furthermore, as testified to
by Ms. Rhoda Flores, NBI expert, the manner of execution of
the standard signatures used reveals that it is a free rapid
continuous execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the questioned
signature is a hesitating slow drawn execution stroke. Clearly,
the person who executed the questioned signature was hesitant
when the signature was made.[30]
During the testimony of PNP expert Rosario
Perez, the RTC bluntly noted that apparently, there [are]
differences on that questioned signature and the
standard signatures.[31] This Court, in examining the
signatures, makes a similar finding. The PNP expert
excused the noted differences by asserting that they
were mere variations, which are normal deviations found
in writing.[32] Yet the RTC, which had the opportunity to
examine the relevant documents and to personally
observe the expert witness, clearly disbelieved the PNP
expert. The Court similarly finds the testimony of the
PNP expert as unconvincing.During the trial, she was
confronted several times with apparent differences
between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly
assert that these differences were just variations,[33] as if
the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value
unless supported by sufficiently cogent reasons which
might amount almost to a demonstration.[34]
The most telling difference between the
questioned and genuine signatures examined by the
PNP is in the final upward stroke in the signature, or the
point to the short stroke of the terminal in the capital
letter L, as referred to by the PNP examiner who had
marked it in her comparison chart as point no. 6. To the
plain eye, such upward final stroke consists of a vertical
line which forms a ninety degree (90) angle with the
previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended
with an upward stroke.[35] However, unlike the
questioned signature, the upward strokes of eight (8) of
these signatures are looped, while the upward stroke of
the seventh[36] forms a severe forty-five degree (45) with
the previous stroke. The difference is glaring, and indeed,
the PNP examiner was confronted with the inconsistency
in point no. 6.
Q: Now, in this questioned document point
no. 6, the s stroke is directly
upwards.
A: Yes, sir.
Q: Now, can you look at all these standard
signature (sic) were (sic) point 6 is
repeated or the last stroke s is
pointing directly upwards?
NEGO MIDTERM (FORGERY) 23
A: There is none in the standard signature,
sir.[37]
Again, the PNP examiner downplayed the
uniqueness of the final stroke in the questioned signature
as a mere variation,[38] the same excuse she proffered for
the other marked differences noted by the Court and the
counsel for petitioner.[39]
There is no reason to doubt why the RTC gave
credence to the testimony of the NBI examiner, and not
the PNP experts. The NBI expert, Rhoda Flores, clearly
qualifies as an expert witness. A document examiner for
fifteen years, she had been promoted to the rank of
Senior Document Examiner with the NBI, and had held
that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive
Seminar in Question Document Examination, conducted
by the NBI Academy, which qualified her as a document
examiner.[40] She had trained with the Royal Hongkong
Police Laboratory and is a member of the International
Association for Identification.[41] As of the time she
testified, she had examined more than fifty to fifty-five
thousand questioned documents, on an average of
fifteen to twenty documents a day.[42] In comparison,
PNP document examiner Perez admitted to having
examined only around five hundred documents as of her
testimony.[43]
In analyzing the signatures, NBI Examiner Flores
utilized the scientific comparative examination method
consisting of analysis, recognition, comparison and
evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also
prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.[44] She
compared the questioned signature as against ten (10)
other sample signatures of Jong. Five of these
signatures were executed on checks previously issued
by Jong, while the other five contained in business letters
Jong had signed.[45] The NBI found that there were
significant differences in the handwriting characteristics
existing between the questioned and the sample
signatures, as to manner of execution, link/connecting
strokes, proportion characteristics, and other identifying
details.[46]
The RTC was sufficiently convinced by the NBI
examiners testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than
those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had
the opportunity to examine the specimen signature card
signed by Jong, which was relied upon by the employees
of FEBTC in authenticating Jongs signature. The

distinction is irrelevant in establishing forgery. Forgery
can be established comparing the contested signatures
as against those of any sample signature duly
established as that of the persons whose signature was
forged.
FEBTC lays undue emphasis on the fact that the
PNP examiner did compare the questioned signature
against the bank signature cards. The crucial fact in
question is whether or not the check was forged, not
whether the bank could have detected the forgery.
The latter issue becomes relevant only if there is
need to weigh the comparative negligence between
the bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to
assess the effect of Jongs testimony that the signature
on the check was not his.[47] The assertion may seem
self-serving at first blush, yet it cannot be ignored that
Jong was in the best position to know whether or not the
signature on the check was his. While his claim should
not be taken at face value, any averments he would have
on the matter, if adjudged as truthful, deserve primacy in
consideration. Jongs testimony is supported by the
findings of the NBI examiner. They are also backed by
factual circumstances that support the conclusion that
the assailed check was indeed forged. Judicial notice
can be taken that is highly unusual in practice for a
business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer, and
not to order. Jong immediately reported the forgery upon
its discovery. He filed the appropriate criminal charges
against Sempio, the putative forger.[48]
Now for determination is whether Samsung
Construction was precluded from setting up the defense
of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the
doctrines that where a loss must be borne by one of two
innocent person, can be traced to the neglect or fault of
either, it is reasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose
means it has succeeded[49] or who put into the power of
the third person to perpetuate the wrong.[50] Applying
these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed the
encashment of the forged check.
In the case at bar, the forgery appears to have been made
possible through the acts of one Jose Sempio III, an assistant
accountant employed by the plaintiff Samsung [Construction]
Co. Philippines, Inc. who supposedly stole the blank check
and who presumably is responsible for its encashment through
a forged signature of Jong Kyu Lee. Sempio was assistant to
the Korean accountant who was in possession of the blank
checks and who through negligence, enabled Sempio to have
access to the same. Had the Korean accountant been more
careful and prudent in keeping the blank checks Sempio
would not have had the chance to steal a page thereof and to
effect the forgery. Besides, Sempio was an employee who
appears to have had dealings with the defendant Bank in
behalf of the plaintiff corporation and on the date the check
was encashed, he was there to certify that it was a genuine
check issued to purchase equipment for the company. [51]
We recognize that Section 23 of the Negotiable
Instruments Law bars a party from setting up the defense
of forgery if it is guilty of negligence.[52] Yet, we are
unable to conclude that Samsung Construction was
guilty of negligence in this case. The appellate court
failed to explain precisely how the Korean accountant
was negligent or how more care and prudence on his
part would have prevented the forgery. We cannot
sustain this tar and feathering resorted to without any
basis.
The bare fact that the forgery was committed by
an employee of the party whose signature was forged
cannot necessarily imply that such partys negligence
was the cause for the forgery. Employers do not possess
the preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees. The
Courts pronouncement in PCI Bank v. Court of
Appeals[53] applies in this case, to wit:
[T]he mere fact that the forgery was committed by a
drawer-payors confidential employee or agent, who by virtue
of his position had unusual facilities for perpetrating the fraud
and imposing the forged paper upon the bank, does not entitle
the bank to shift the loss to the drawer-payor, in the absence
of some circumstance raising estoppel against the drawer. [54]
Admittedly, the record does not clearly establish
what measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a safety
box,[55] and no contrary version was presented by
FEBTC. However, such testimony cannot prove that the
checks were indeed kept in a safety box, as Jongs
testimony on that point is hearsay, since Kyu, and not
Jong, would have the personal knowledge as to how the
checks were kept.
Still, in the absence of evidence to the contrary,
we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains
that every person takes ordinary care of his
concerns,[56] and that the ordinary course of business
has been followed.[57] Negligence is not presumed, but
must be proven by him who alleges it.[58] While the
complaint was lodged at the instance of Samsung
Construction, the matter it had to prove was the claim it
had alleged - whether the check was forged. It cannot be
required as well to prove that it was not negligent,
because the legal presumption remains that ordinary
care was employed.
Thus, it was incumbent upon FEBTC, in defense,
to prove the negative fact that Samsung Construction
was negligent. While the payee, as in this case, may not
have the personal knowledge as to the standard
procedures observed by the drawer, it well has the
means of disputing the presumption of regularity. Proving
a negative fact may be a difficult office,[59] but necessarily
so, as it seeks to overcome a presumption in law.
FEBTC was unable to dispute the presumption of
ordinary care exercised by Samsung Construction,
hence we cannot agree with the Court of Appeals finding
of negligence.
The assailed Decision replicated the extensive
efforts which FEBTC devoted to establish that there was
no negligence on the part of the bank in its acceptance
and payment of the forged check. However, the degree
of diligence exercised by the bank would be irrelevant if
the drawer is not precluded from setting up the defense
of forgery under Section 23 by his own negligence. The
rule of equity enunciated in PNB v. National City Bank of
New York, [60] as relied upon by the Court of Appeals,
deserves careful examination.
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. [61] (Emphasis
supplied)
Quite palpably, the general rule remains that the
drawee who has paid upon the forged signature bears
the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to
weigh the comparative negligence between the drawer
and the drawee to determine who should bear the
burden of loss. The Court finds no basis to conclude that
Samsung Construction was negligent in the safekeeping
of its checks. For one, the settled rule is that the mere
fact that the depositor leaves his check book lying
around does not constitute such negligence as will free
the bank from liability to him, where a clerk of the
depositor or other persons, taking advantage of the
opportunity, abstract some of the check blanks, forges
NEGO MIDTERM (FORGERY) 24
the depositors signature and collect on the checks from
the bank.[62] And for another, in point of fact Samsung
Construction was not negligent at all since it reported the
forgery almost immediately upon discovery.[63]
It is also worth noting that the forged signatures
in PNB v. National City Bank of New York were not of the
drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals,[64] which was also cited
by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a forged
signature of the indorser.
The justification for the distinction between forgery of the
signature of the drawer and forgery of an indorsement is that
the drawee is in a position to verify the drawers signature by
comparison with one in his hands, but has ordinarily no
opportunity to verify an indorsement.[65]
Thus, a drawee bank is generally liable to its depositor in
paying a check which bears either a forgery of the drawers
signature or a forged indorsement. But the bank may, as a
general rule, recover back the money which it has paid on a
check bearing a forged indorsement, whereas it has not this
right to the same extent with reference to a check bearing a
forgery of the drawers signature.[66]
The general rule imputing liability on the drawee
who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it
exercised before paying out on the forged check, we
might as well comment on the banks performance of its
duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable
check. Yet, there are several troubling circumstances
that lead us to believe that the bank itself was remiss in
its duty.
The fact that the check was made out in the
amount of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the bank.
Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should
the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required.[67]
In this case, not only did the amount in the check
nearly total one million pesos, it was also payable to
cash. That latter circumstance should have aroused the
suspicion of the bank, as it is not ordinary business
practice for a check for such large amount to be made
payable to cash or to bearer, instead of to the order of a

[68]
specified person. Moreover, the check was presented
for payment by one Roberto Gonzaga, who was not
designated as the payee of the check, and who did not
carry with him any written proof that he was authorized
by Samsung Construction to encash the check. Gonzaga,
a stranger to FEBTC, was not even an employee of
Samsung Construction.[69] These circumstances are
already suspicious if taken independently, much more so
if they are evaluated in concurrence. Given the
shadiness attending Gonzagas presentment of the check,
it was not sufficient for FEBTC to have merely complied
with its internal procedures, but mandatory that all
earnest efforts be undertaken to ensure the validity of the
check, and of the authority of Gonzaga to collect
payment therefor.
According to FEBTC Senior Assistant Cashier
Gemma Velez, the bank tried, but failed, to contact Jong
over the phone to verify the check.[70] She added that
calling the issuer or drawer of the check to verify the
same was not part of the standard procedure of the bank,
but an extra effort.[71] Even assuming that such personal
verification is tantamount to extraordinary diligence, it
cannot be denied that FEBTC still paid out the check
despite the absence of any proof of verification from the
drawer. Instead, the bank seems to have relied heavily
on the say-so of Sempio, who was present at the bank at
the time the check was presented.
FEBTC alleges that Sempio was well-known to
the bank officers, as he had regularly transacted with the
bank in behalf of Samsung Construction. It was even
claimed that everytime FEBTC would contact Jong about
problems with his account, Jong would hand the phone
over to Sempio.[72] However, the only proof of such
allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally,[73] and
had met Sempio for the first time only on the day the
check was encashed.[74] In fact, Velez had to inquire with
the other officers of the bank as to whether Sempio was
actually known to the employees of the
bank.[75] Obviously, Velez had no personal knowledge as
to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not
present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted
with Sempio before.
Even assuming that FEBTC had a standing habit
of dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending the
presentment of the forged check should have put the
bank on the highest degree of alert. The Court recently
emphasized that the highest degree of care and
diligence is required of banks.
Banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many
clients and depositors who transact business with them. They
have the obligation to treat their clients account
meticulously and with the highest degree of care, considering
the fiduciary nature of their relationship. The diligence
required of banks, therefore, is more than that of a good father
of a family.[76]
Given the circumstances, extraordinary diligence
dictates that FEBTC should have ascertained from Jong
personally that the signature in the questionable check
was his.
Still, even if the bank performed with utmost
diligence, the drawer whose signature was forged may
still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery.After all,
Section 23 of the Negotiable Instruments Law plainly
states that no right to enforce the payment of a check
can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence
from setting up the forgery, the general rule should apply.
Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge
the amount so paid to the account of the depositor.[77] A
bank is liable, irrespective of its good faith, in paying a
forged check.[78]
WHEREFORE, the Petition is GRANTED.
The Decision of the Court of Appeals dated 28
November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April
1994 is REINSTATED. Costs against respondent.
SO ORDERED.
Samsung Construction Corporation, Inc. v. Far East Bank and
Trust Company
G.R. No. 129015; August 13, 2004; Tinga, J.
Digest prepared by Jackie Canlas
FACTS:
 Samsung Construction held an account with Far East
Bank.
 One day, a check worth P999,500 payable to case was
presented by a certain Roberto Gonzaga to the Makati
Branch of Far East Bank. The check was certified to be
true by Jose Sempio, the assistant accountant of
Samsung, who also happened to be present in the bank
during the time that the check was presented.
 Three bank personnel (teller, Assistant Cashier, and
another bank officer) examined the check and
compared the signature appearing on the check with
the specimen signatures of Samsung’s President Jong.
After ascertaining that the signature was genuine, and
that the account had sufficient funds, Gonzaga was
asked to submit 3 proof of his identity. Eventually,
Gonzaga was able to encash the check.
 When Samsung discovered the unauthorized
withdrawal, it filed a complaint against FEBTC for
violation of Sec 23 of the Negotiable Instruments Law.
 During the trial, both parties presented their respective
expert witnesses:
o Samsung presented NBI Document Examiner
Roda Flores.
o FEBTC presented PNP Crime Laboratory
document Examiner Rosario Perez.
 RTC rendered judgment in favor of Samsung, holding
FEBTC liable. It gave more credence to the testimony of
NBI Examiner Flores.
 CA reversed the RTC and absolved FEBTC from any
liability.
o The contradictory findings of NBI and PNP
created doubt as to the whether there was
forgery.
o Assuming there was forgery, it was due to the
negligence of Samsung.
o As held in PNB v. National City Bank of NY, as
between 2 innocent persons, loss would be
borne by the negligent party.
 Samsung – 45 to SC.
ISSUES/HELD: WON the check was forged – YES
WON Samsung could set up the defense of
forgery in Sec. 23 – YES
RULING: Petition granted.
WON the check was forged – YES
(The details of the forgery are not really important to the
lesson. The Court just needed to answer this issue before the
2nd issue can be resolved.)
 The testimony of the NBI Examiner was more credible
because even the testimony of the PNP Examiner
reveals that there are a lot of differences in the
questioned signature as compared to the standard
signature specimen. The PNP Examiner tried to excuse
the “differences” by asserting that there were mere
“variations”, but such conclusion was not supported by
sufficient cogent reasons.
o The most telling difference between the
question and genuine signatures examined by
the PNP is in the final upward stroke in the
signature, or “the point to the short stroke of
the terminal in the capital letter “L”. The
difference was glaring, yet the PNP Examiners
brushed this off as a mere variation.
 The NBI Examiner testified that there is a free rapid
continuous execution or stroke as shown by the
tampering terminal stroke of the signatures whereas
the questioned signature is a hesitating slow drawn
execution stroke.
 The Court also compared the qualifications of the NBI
Examiner to that the PNP Examiner. The NBI Examiner
was more experienced (15 years) and had examined
NEGO MIDTERM (FORGERY) 25
more than 50,000-55,000 questioned documents, as
opposed to the PNP Examiner who admitted to having
examined only around 500 documents.
WON Samsung could set up the defense of forgery in Sec. 23
– YES
 The general rule is to the effect that a forged signature
is wholly inoperative, and payment made through or
under such signature is ineffectual or does not
discharge the instrument. If payment is made, the
drawee cannot charge it to the drawer’s account. The
traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he
has the maker’s signature and is expected to know and
compare it.
 Under Sec 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party
whose signature is forged. Such liability attaches even
if the bank exerts due diligence and care in preventing
such faulty discharge.
 Although the Court recognized that Sec 23 bars a party
from setting up the defense of forgery if it is guilty of
negligence, it was unable to conclude that Samsung
was guilty of negligence.
o The bare fact that the forgery was committed by
an employee of the party whose signature was
forged cannot necessarily imply that such party’s
negligence was the cause for the forgery.
o Admittedly, the record does not establish what
measures Samsung employed to safeguard its
blank checks. Jong’s testimony regarding the use
of a safety box by Kyu was considered hearsay.
But when CA ruled that Samsung was negligent,
it did not really explain how and why.
o In the absence of evidence to the contrary, the
court concluded that there was no negligence,
the presumption being that every person takes
ordinary care of his concerns.
 The CA Decision extensively discussed the FEBTC’s
efforts in establishing that there no negligence on its
part in the acceptance and payment of the forged
check. However, the degree of diligence exercised by
the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under
Sec 23 by his own negligence.
WON FEBTC exercised extraordinary diligence required of it
by the situation – NO
(This is irrelevant but the Court nevertheless made a
comment since it was brought up by FEBTC.)

The fact that the check was made out in the amount of
nearly 1M is unusual enough ti require a higher degree
of caution on the part of the bank. FEBTC confirmed
this through its own internal procedures. As the
amount increases, the number of officers who need to
approve it also increases.
 Not only did the amount nearly total 1M, it was
payable to cash. This should have aroused suspicion of
 NEGO MIDTERM (FORGERY) 26
the banks, as it is not ordinary business practice for a
check for such large amount to be made payable to
case or to bearer, instead of to the order of a specified
person.
 Gonzaga did not carry any written proof that he was
authorized by Samsung to encash the check.
 FEBTC Senior Assistant Cashier admitted that the bank
tried, but failed, to contact Jong over the phone to
verify. The bank just heavily relied on the say-so of
Sempio. FEBTC Accountant Velez even admitted that
she did not personally know Sempio, and had met
Sempio for the 1st time only on the day the check was
enchased.
 NEGO MIDTERM (FORGERY) 27
G.R. No. L-15894 January 30, 1964 thereon of the drawing office and that of the
Brigida San Luis de Maria Antonio de los
representative of the Auditor General in that office are 2159692 9-15-52 13,900.00 11-2468978
3-52 7- 2-52 14,722.31 7-25-52
Santos Reyes
forged.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
EQUITABLE BANKING It is not disputed that from July to December 1952, the 2159673 Silva Sanches de Je Jastive de
10-14-52 14,810.00 11-11-52
2159659 8-16-52 14,820.00 8-27-52
Apolinario Fernandez
CORPORATION, defendant-appellee. Corporacion de los Padres Dominicos — hereinafter
referred to as the Corporacion — had acquired the
twenty-four (24) treasury warrants involved in case G.R.
----------------------------- Francisca Gomez de Gregoria Pascual de
No. L-15895 by accommodating its former trusted 2159667 Galvez
10-12-52 16,200.75 11-11-52
2159656
Lira
8-15-52 12,900.75 8-27-52
employee — one Jacinto Carranza — who asked the
G.R. No. L-15894 January 30, 1964 Corporacion to cash the warrants, alleging that it was
difficult to do so directly with the Government and that his Gaudencia Ruiz Luisa Dancel de
wife expected a sort of commission for the encashment; 2451448 Alvarez
7- 1-52 12,702.76 7-15-52
2159666
Mendoza
10-11-52 16,300.75 12- 2-52
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, that the Corporacion acceded to Carranza's request,
vs. provided that the warrants would first be deposited with
THE BANK OF THE PHILIPPINE PI Bank, and that actual payment of the value of the Anastacia Capili
ISLANDS, defendant-appellee, 2132653 6-25-52 8,794.21 7-15-52
warrants would be made only after the same had been Trinidad and that, accordingly, the PI Bank credited the proceeds
CORPORATION DE LOS P. DOMINICOS DE duly accepted and cleared by the Treasurer and the of said warrants to the Corporation, which, in turn,
FILIPINAS, third-party-defendant-appellee. proceeds thereof duly credited to the account of the withdrew said proceeds by means of its own checks and
Corporacion in the PI Bank; that the warrants were, 2468979 Monica Anselmo de
7- 1-52 13,870.24 9- 852 eventually paid the corresponding amounts to Jacinto
accordingly, deposited by the Corporacion with said bank, Pascua Carranza. On December 23, 1952, the Treasurer
Office of the Solicitor General for plaintiff-appellant.
which accepted them "subject to collection only"; that returned three (3) of said warrants (Nos. 2159659,
Claudio Teehankee and Aranda and Aviado for
when the warrants were deposited with the PI Bank, 2159656, and 2159666) to the Central Bank, and
defendant-appellee. Rosalia Manalo de
each bore the indorsement of the respective payees and 2468944 7-10-52 14,701.76 9- 8-52 demanded, on the ground that they had been forged, that
Ignacio B. Alcuaz for third-party-defendant-appellee. Nazario
that of the Corporation; that, subsequently, the PI Bank the value thereof be charged against the accounts of the
presented the warrants for payment to the drawee PI Bank in the Clearing Office and credited back to the
CONCEPCION, J.: thereof — the Government — thru the Clearing Office of Luisa Santos de demand deposit of the Bureau of the Treasury,
the Central Bank — hereinafter referred to as the 2159682 Arellano
11-18-52 16,400.50 12- 8-52 hereinafter referred to as the Treasury. Four (4) days
Clearing Office; that after being cleared, the warrants later, two (2) more warrants (Nos. 2468977 and
Appeal from a decision of the Court of First Instance of were paid by the Treasurer as follows: 2468978), and, finally, on January 16, 1953, the
Manila dismissing the complaints and the third-party
Leticia Moreno de remaining nineteen (19) warrants were returned by the
complaints in the above entitled cases, without special 2159669 11-16-52 15,880.75 12- 8-52
Ocampo Treasury to the Central Bank for the same reason and
pronouncement as to costs. The cases are before us, Date Date with the same demand. The Central Bank in turn referred
only questions of law being raised in the appeal, apart T/W No. Payee
ISSUED
Amount
Cleared said warrants, together with the letters of demand of the
from the fact that the amount involved in G.R. No. Juana Castro de
2159670 10-12-52 16,200.00 12-15-52 Treasurer, for appropriate action to the PI Bank, which
L-16895 exceeds P200,000, and that the evidence Jesus opposed the return of the warrants or to have the value
introduced therein is the same evidence in G.R. No. Marcela Antonio
2132655 6-18-52 P8,722.37 7- 1-52 thereof charged against its account in the Clearing Office
L-15894. Domingo and requested the Central Bank to return the warrants to
Antonia Sison de
2159671 9- 9-52 12,900.75 11-10-52 the Treasurer.
Mauricio
The Republic of the Philippines, hereinafter referred to Gregoria Santos
as the Government, seeks to recover: (1) from the 2132650 Castro
6-23-52 14,605.91 7- 8-52
The records of G.R. No. L-15894 show that the four (4)
Equitable Banking Corporation — hereinafter referred to Rosario Pilapil de
as the Equitable Bank — in case G.R. No. L-15894, the 2159660 9- 4-52 13,950.39 9-23-52 warrants involved therein were deposited with the
Rodrigo Equitable Bank by persons known thereto as its
sum of P17,100, representing the aggregate value of Josefa Castro de depositors or customers, namely, Robert Wong, Lu Chill
four (4) treasury warrants — hereinafter referred to as 2468943 Villanueva
10-34-52 14,250.15 11-14-52
Kau and Chung Ching; that, in due course, the Equitable
warrants — paid to said bank by the Treasurer of the Mauricia Sison de
2169658 9-12-52 15,200.76 9-23-52 Bank cleared said warrants, thru the Clearing Office,
Philippines — hereinafter referred to as the Treasurer — Angeles
then collected the corresponding amounts from the
thru the Clearing Office of the Central Bank of the 2159698 Anacleta Santos de
10-18-52 15,800.00 12- 5-52 Treasurer and thereafter credited said amounts to the
Philippines; and (2) from the Bank of the Philippine Angeles
Lucia Angeles de accounts of the respective depositors; that on January
Islands — hereinafter referred to as the PI Bank — in 2159686 9-12-52 12,890.74 10-27-52 15, 1958, the Treasurer notified the Equitable Bank of
G.R. No. L-15895, the total sum of P342,767.63, Natalio
Virginia Salem de the alleged defect of said warrants and demanded
representing the aggregate value of twenty-four (24) 2159668 11-13-52 16,900.00 12-10-52
Marcelino reimbursement of the amounts thereof; and that this
warrants similarly paid by the Treasurer to the PI Bank.
Nicolasa Alvares demand was rejected by the Equitable Bank. Hence, the
These claims for refund are based upon a common 2468977 7- 2-52 15,340.76 7-25-52
Jaranilla institution of G.R. No. L-15895 (Civil Case No. 19599 of
ground — although said twenty-eight (28) warrants were
the Court of First Instance of Manila), against the PI
executed on genuine government forms, the signature
Bank, for the recovery of P342,767.63, and of G.R. No.

L-15894 (Civil Case No. 19600 of the Court of First
Instance of Manila), against the Equitable Bank for, the
recovery of P17,100.00.
Upon leave of the lower court, the PI Bank filed a
third-party complaint against the Corporacion. In G.R. No.
L-15895, and the Equitable Bank filed a similar complaint
against, Robert Wong, Lu Chill Kau and Chung Ching in
G.R. No. L-15894, for whatever reimbursements the PI
Bank and the Equitable Bank may respectively be
sentenced to make to the Government. By agreement of
the parties, the two (2) cases were jointly heard, and
after appropriate proceedings, the lower court rendered
the decision adverted to above. 1äwphï1.ñët
The clearing of the aforementioned twenty-eight (28)
warrants thru the Clearing Office was made pursuant to
the "24-hour clearing house rule", which had been
adopted by the Central Bank in a conference with
representatives and officials of the different banking
institutions in the Philippines. The rule is embodied in
Section 4, subsection (c) of Circular No. 9 of the Central
Bank, dated February 17, 1949 (Exhibit B), as amended
by the letter of the Governor of the Central Bank, dated
June 4, 1949 (Exhibit D), reading:
Items which should be returned for any reason
whatsoever shall be returned directly to the bank,
institution or entity from which the item was received. For
this purpose, the Receipt for Returned Checks (Cash
Form No. 9) should be used. The original and duplicate
copies of said Receipt shall be given to the bank,
institution or entity which returned the items and the
triplicate copy should be retained by the bank, institution
or entity whose demand is being returned. At the
following clearing, the original of the Receipt for returned
Checks shall be presented through the Clearing Office
as a demand against the bank, institution or entity whose
item has been returned. Nothing in this section shall
prevent the resumed items from being settled by direct
reimbursement to the bank, institution or entity returning
the items. All items cleared at 11:00 o'clock a.m. shall be
returned not later than 2:00 o'clock p.m. on the same day
and all items cleared at 3:00 o'clock p.m. shall be
returned not later than 8:30 a.m. of the following
business day, except for items cleared on Saturday
which may be returned not later than 3:30 a.m. of the
following day. (Emphasis supplied.)
The Government maintains that it is not bound by this
rule because: (1) the Treasury is not a bank; and (2) the
Treasurer has objected to the application of said rule to
his office. This contention, however, untenable for,
admittedly, the Treasury is a member of the
aforementioned Clearing Office and Exh. A clearly shows
NEGO MIDTERM (FORGERY) 28
that the former "has agreed to clear its clearable items fault of either, it is reasonable that it would be borne by
through" the latter "subject to the rules and regulations of him, even if innocent of any intentional fraud, through
the Central Bank." Besides, the above quoted rule whose means it has succeeded, (Phil. National Bank v.
applies not only to banks, but, also, to National City Bank of New York, 63 Phil. 711, 723.)
the institutions and entities therein alluded to. Then too,
the opposition of the Treasurer to the "24-hour clearing
house rule" is not sufficient to exempt the Treasury from Generally, where a drawee bank otherwise would have a
the operation thereof. Upon the other hand, said right of recovery against a collecting or indorsing bank for
its payment of a forged check its action will be barred if it
opposition is predicated upon the allegation that it is
physically impossible for the Treasury to check and verify is guilty of an unreasonable delay in discovering the
the genuineness of treasury warrants within twenty-four forgery and in giving notice? thereof. (C.J.S. 769-700.).
(24) hours, because, during 1952 said office used to
receive daily from 3,000 to 4,000 warrants which,
Where defendant bank, on presentation to it on
considering its very limited personnel at that time, would September 2, of forged check drawn on another bank,
have required one (1) or two (2) months clear. This claim paid part of amount to presenter, drawee paying check
is belied, however, by the statements the Treasurer, through clearing house on said day, held that the latter,
Exhibits 38 and 38-A to 38-C, showing that on not giving notice of forgery until December 5, could not
September 15, 23 and 24 and November 25, 1952, his hold defendant for amount so paid. (First State Bank &
office had cleared 1,618, 2,851, 1,742 and 2,360 warrant Trust Co. v. First Nat. Bank, 145 N. E. 382, 314 Ill. 269,
respectively. Moreover, if the rule was unwise, the affirming 234 Ill. App. 39.)
Treasurer could have secured the proper remedy
through the President of the Philippines, since the
Treasury and Central Bank are both agencies of the WHEREFORE, the decision appealed from is hereby
Government. affirmed, without special pronouncement as to costs. It is
so ordered.
At any rate, the aforementioned twenty-eight (28)
warrants were cleared and paid by the Treasurer, in view
which the PI Bank and the Equitable Bank credited the
corresponding amounts to the respective depositors of
the warrants and then honored their checks for said
amounts. Thus, the Treasury had not only been
negligent in clearing its own warrants, but had, also,
thereby induced the PI Bank and the Equitable Bank to
pay the amounts thereof to said depositors. The gross
nature of the negligence of the Treasury becomes more
apparent when we consider that each one of the
twenty-four (24) warrants involve in G.R. No. L-15895
was for over P5,000, and, hence; beyond the authority of
the auditor of the Treasury — whose signature thereon
had been forged — to approve. In other words, the
irregularity of said warrants was apparent the face
thereof, from the viewpoint of the Treasury. Moreover,
the same had not advertised the loss of genuine forms of
its warrants. Neither had the PI Bank nor the Equitable
Bank been informed of any irregularity in connection with
any of the warrants involved in these two (2) cases, until
after December 23, 1952, — or after the warrants had
been cleared and honored — when the Treasury gave
notice of the forgeries adverted to above. As a
consequence, the loss of the amounts thereof is mainly
imputable to acts and omissions of the Treasury, for
which the PI Bank and the Equitable Bank should not
and cannot be penalized.
Where a loss, which must be borne by one of two parties
alike innocent of forgery, can be traced to the neglect or

[G.R. No. 138510. October 10, 2002] 30652 P4,155.835.00
30650 3,949,406.12
30796 1,685,475.75
Defendant TRB, through Aida Nuez, TRB Branch Manager at
TRADERS ROYAL BANK, petitioner, vs. RADIO
Broadcast City Branch, turned over the checks to Mrs. Vera
PHILIPPINES NETWORK, INC.,
who was supposed to deliver the same to the BIR in payment
INTERCONTINENTAL BROADCASTING
of plaintiffs taxes.
CORPORATION and BANAHAW
BROADCASTING CORPORATION,
through the BOARD OF Sometime in September, 1988, the BIR again assessed
ADMINISTRATORS, and SECURITY BANK plaintiffs for their tax liabilities for the years 1979-82. It was
AND TRUST COMPANY, respondents. then they discovered that the three (3) managers checks (Nos.
30652, 30650 and 30796) intended as payment for their taxes
were never delivered nor paid to the BIR by Mrs.
DECISION
Vera. Instead, the checks were presented for payment by
unknown persons to defendant Security Bank and Trust
CORONA, J.:
Company (SBTC), Taytay Branch as shown by the banks
routing symbol transit number (BRSTN 01140027) or clearing
Petitioner seeks the review and prays for the code stamped on the reverse sides of the checks.
reversal of the Decision[1] of April 30, 1999 of Court of
Appeals in CA-G.R. CV No. 54656, the dispositive
Meanwhile, for failure of the plaintiffs to settle their
portion of which reads:
obligations, the BIR issued warrants of levy, distraint and
garnishment against them. Thus, they were constrained to
enter into a compromise and paid BIR P18,962,225.25 in
WHEREFORE, the appealed decision is AFFIRMED with
settlement of their unpaid deficiency taxes.
modification in the sense that appellant SBTC is hereby
absolved from any liability. Appellant TRB is solely liable to
the appellees for the damages and costs of suit specified in the
Thereafter, plaintiffs sent letters to both defendants,
dispositive portion of the appealed decision. Costs against
demanding that the amounts covered by the checks be
appellant TRB.
reimbursed or credited to their account. The defendants
refused, hence, the instant suit.[3]
SO ORDERED.[2]
On February 17, 1985, the trial court rendered its
As found by the Court of Appeals, the antecedent decision, thus:
facts of the case are as follows:
WHEREFORE, in view of the foregoing considerations,
On April 15, 1985, the Bureau of Internal Revenue (BIR) judgment is hereby rendered in favor of the plaintiffs and
assessed plaintiffs Radio Philippines Network (RPN), against the defendants by :
Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of their tax
a) Condemning the defendant Traders Royal
obligations for the taxable years 1978 to 1983.
Bank to pay actual damages in the sum
of Nine Million Seven Hundred Ninety
Thousand and Seven Hundred Sixteen
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs
Pesos and Eighty-Seven Centavos
comptroller, sent a letter to the BIR requesting settlement of
plaintiffs tax obligations. (P9,790,716.87) broken down as
follows:
The BIR granted the request and accordingly, on June 26,
1986, plaintiffs purchased from defendant Traders Royal Bank 1) To plaintiff RPN-9 - P4,155,835.00
(TRB) three (3) managers checks to be used as payment for 2) To Plaintiff
their tax liabilities, to wit: IBC-13 - P3,949,406.12
3) To Plaintiff
BBC-2 - P1,685,475.72
Check Number Amount
plus interest at the legal rate from the filing of this
case in court.
b) Condemning the defendant Security Bank
and Trust Company, being collecting
bank, to reimburse the defendant
Traders Royal Bank, all the amounts
which the latter would pay to the
aforenamed plaintiffs;
c) Condemning both defendants to pay to each
of the plaintiffs the sum of Three
Hundred Thousand (P300,000.00)
Pesos as exemplary damages and
attorneys fees equivalent to twenty-five
percent of the total amount recovered;
and
d) Costs of suit.
SO ORDERED.[4]
Defendants Traders Royal Bank and Security
Bank and Trust Company, Inc. both appealed the trial
courts decision to the Court of Appeals. However, as
quoted in the beginning hereof, the appellate court
absolved defendant SBTC from any liability and held
TRB solely liable to respondent networks for damages
and costs of suit.
In the instant petition for review on certiorari of the
Court of Appeals decision, petitioner TRB assigns the
following errors: (a) the Honorable Court of Appeals
manifestly overlooked facts which would justify the
conclusion that negligence on the part of RPN, IBC and
BBC bars them from recovering anything from TRB, (b)
the Honorable Court of Appeals plainly erred and
misapprehended the facts in relieving SBTC of its liability
to TRB as collecting bank and indorser by overturning
the trial courts factual finding that SBTC did endorse the
three (3) managers checks subject of the instant case,
and (c) the Honorable Court of Appeals plainly
misapplied the law in affirming the award of exemplary
damages in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert
that TRBs petition raises questions of fact in violation of
Rule 45 of the 1997 Revised Rules on Civil Procedure
which restricts petitions for review on certiorari of the
decisions of the Court of Appeals on pure questions of
law. RPN, IBC and BBC maintain that the issue of
whether or not respondent networks had been negligent
were already passed upon both by the trial and appellate
NEGO MIDTERM (FORGERY) 29
courts, and that the factual findings of both courts are
binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the
ground that it had no participation in the negotiation of
the checks, emphasizing that the BRSTN imprints at the
back of the checks cannot be considered as proof that
respondent SBTC accepted the disputed checks and
presented them to Philippine Clearing House
Corporation for clearing.
Setting aside the factual ramifications of the
instant case, the threshold issue now is whether or not
TRB should be held solely liable when it paid the amount
of the checks in question to a person other than the
payee indicated on the face of the check, the Bureau of
Internal Revenue.
When a signature is forged or made without the
authority of the person whose signature it purports to be,
it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be
acquired through or under such
signature.[5] Consequently, if a bank pays a forged check,
it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the
depositor.
In the instant case, the 3 checks were payable to
the BIR. It was established, however, that said checks
were never delivered or paid to the payee BIR but were
in fact presented for payment by some unknown persons
who, in order to receive payment therefor, forged the
name of the payee. Despite this fraud, petitioner TRB
paid the 3 checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a
check is drawn payable to the order of one person and is
presented for payment by another and purports upon its
face to have been duly indorsed by the payee of the
check, it is the primary duty of petitioner to know that the
check was duly indorsed by the original payee and,
where it pays the amount of the check to a third person
who has forged the signature of the payee, the loss falls
upon petitioner who cashed the check. Its only remedy is
against the person to whom it paid the money.[6]
It should be noted further that one of the subject
checks was crossed. The crossing of one of the subject
checks should have put petitioner on guard; it was
duty-bound to ascertain the indorsers title to the check or
the nature of his possession. Petitioner should have
known the effects of a crossed check: (a) the check may
not be encashed but only deposited in the bank; (b) the
check may be negotiated only once to one who has an
account with a bank and (c) the act of crossing the check
serves as a warning to the holder that the check has

been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.[7]
By encashing in favor of unknown persons checks
which were on their face payable to the BIR, a
government agency which can only act only through its
agents, petitioner did so at its peril and must suffer the
consequences of the unauthorized or wrongful
endorsement.[8] In this light, petitioner TRB cannot
exculpate itself from liability by claiming that respondent
networks were themselves negligent.
A bank is engaged in a business impressed with
public interest and it is its duty to protect its many clients
and depositors who transact business with it. It is under
the obligation to treat the accounts of the depositors and
clients with meticulous care, whether such accounts
consist only of a few hundreds or millions of pesos.[9]
Petitioner argues that respondent SBTC, as the
collecting bank and indorser, should be held responsible
instead for the amount of the checks.
The Court of Appeals addressed exactly the same
issue and made the following findings and conclusions:
As to the alleged liability of appellant SBTC, a close
examination of the records constrains us to deviate from the
lower courts finding that SBTC, as a collecting bank, should
similarly bear the loss.
A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is
such an indorser. So even if the indorsement on the check
deposited by the banks client is forged, the collecting bank is
bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
To hold appellant SBTC liable, it is necessary to determine
whether it is a party to the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
SECTION 63. When person deemed indorser. - A person
placing his signature upon an instrument otherwise than as
maker, drawer, or acceptor, is deemed to be an indorser unless
he clearly indicates by appropriate words his intention to be
bound in some other capacity.
Upon the other hand, the Philippine Clearing House
Corporation (PCHC) rules provide:
Sec. 17.- BANK GUARANTEE. All checks cleared through
the PCHC shall bear the guarantee affixed thereto by the
Presenting Bank/Branch which shall read as follows:
Cleared thru the Philippine Clearing House Corporation. All
prior endorsements and/or lack of endorsement
guaranteed. NAME OF BANK/BRANCH BRSTN (Date of
clearing).
Here, not one of the disputed checks bears the requisite
endorsement of appellant SBTC. What appears to be a
guarantee stamped at the back of the checks is that of the
Philippine National Bank, Buendia Branch, thereby indicating
that it was the latter Bank which received the same.
It was likewise established during the trial that whenever
appellant SBTC receives a check for deposit, its practice is to
stamp on its face the words, non-negotiable. Lana Echevarrias
testimony is relevant:
ATTY. ROMANO: Could you tell us briefly the procedure
you follow in receiving checks?
A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things
are in order and verified in the data sheet I stamp my
non-negotiable stamp at the face of the check.
Unfortunately, the words non-negotiable do not appear on the
face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected
in the clearing documents of appellant SBTC. Section 19 of
the Rules of the PCHC states:
Section 19 Regular Item Procedure:
Each clearing participant, through its authorized
representatives, shall deliver to the PCHC fully qualified
MICR checks grouped in 200 or less items to a batch and
supported by an add-list, a batch control slip, and a delivery
statement.
It bears stressing that through the add-list, the PCHC can
countercheck and determine which checks have been
presented on a particular day by a particular bank for
processing and clearing. In this case, however, the add-list
submitted by appellant SBTC together with the checks it
presented for clearing on August 3, 1987 does not show that
Check No. 306502 in the sum of P3,949,406.12 was among
those that passed for clearing with the PCHC on that date. The
same is true with Check No. 30652 with a face amount of
P4,155,835.00 presented for clearing on August 11, 1987 and
Check No. 30796 with a face amount of P1,685,475.75.
The foregoing circumstances taken altogether create a serious
doubt on whether the disputed checks passed through the
hands of appellant SBTC.[10]
We subscribe to the foregoing findings and
conclusions of the Court of Appeals.
A collecting bank which indorses a check bearing
a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged
indorsement itself, and ultimately should be held liable
therefor. However, it is doubtful if the subject checks
were ever presented to and accepted by SBTC so as to
hold it liable as a collecting bank, as held by the Court of
Appeals.
Since TRB did not pay the rightful holder or other
person or entity entitled to receive payment, it has no
right to reimbursement. Petitioner TRB was remiss in its
duty and obligation, and must therefore suffer the
consequences of its own negligence and disregard of
established banking rules and procedures.
We agree with petitioner, however, that it should
not be made to pay exemplary damages to RPN, IBC
and BBC because its wrongful act was not done in bad
faith, and it did not act in a wanton, fraudulent, reckless
or malevolent manner.[11]
We find the award of attorneys fees, 25% of P10
million, to be manifestly exorbitant.[12] Considering the
nature and extent of the services rendered by
respondent networks counsel, however, the Court
deems it appropriate to award the amount of P100,000
as attorneys fees.
WHEREFORE, the appealed decision is
MODIFIED by deleting the award of exemplary
damages. Further, respondent networks are granted the
amount of P100,000 as attorneys fees. In all other
respects, the Court of Appeals decision is hereby
AFFIRMED.
SO ORDERED.
FACTS: Traders (sold 3 managers
check)> RPN,IBC,BBC (received by <Mrs. Vera)
--(not received) BIR-- > SBTC (deposited by
unknown persons)
NEGO MIDTERM (FORGERY) 30
 April 15, 1985: Bureau of Internal
Revenue (BIR) assessed Radio Philippines
Network (RPN), Intercontinental
Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of
their tax obligations for the taxable years
1978 to 1983.
 March 25, 1987: Mrs. Lourdes C. Vera,
RPN,IBC,BBC comptroller, sent a letter to the
BIR requesting settlement of their tax
obligations which was granted
 June 26, 1986: RPN, IBC and BBC
purchased from Traders 3 manager’s checks
to be used as payment for their tax liabilities

Traders, through Aida Nuñez, turned over the
checks to Mrs. Vera who was supposed to deliver
them to the BIR in payment

 September, 1988: BIR again assessed
plaintiffs for their tax liabilities for the years
1979-82. It was discovered the 3 managers
checks were never delivered nor paid to the
BIR by Mrs. Vera. The checks were
presented for payment by unknown persons
to Security Bank and Trust Company (SBTC).
 BIR issued warrants of levy, distraint
and garnishment against them.
 They were constrained to
enter into a compromise and paid BIR
P18,962,225.25 in settlement
 Traders sent letters to RPN and SBTC,
demanding that the amounts covered by the
checks be reimbursed or credited to their
account
 RTC: favored Traders against RPN and
SBTC
 NEGO MIDTERM (FORGERY) 31

 CA: absolved SBTC and held Traders
solely liable
 SBTC denies liability on the
ground that it had no participation in the
negotiation of the checks
 (c) the act of crossing the
check serves as a warning to the holder that
the check has been issued for a definite
purpose so that he must inquire if he has
received the check pursuant to that purpose,
otherwise, he is not a holder in due course

ISSUE: W/N Traders should solely bare the loss for
its negligence
HELD: YES. CA affirmed.
 if a bank pays a forged check, it must be
considered as paying out of its funds and
cannot charge the amount so paid to the
account of the depositor
 Despite the fraud, Traders paid the 3
checks in the total amount of P9,790,716.87
 A collecting bank which indorses a check
bearing a forged indorsement and presents it
to the drawee bank guarantees all prior
indorsements, including the forged
indorsement itself, and ultimately should be
held liable therefor. However, it is doubtful if
the subject checks were ever presented to
and accepted by SBTC so as to hold it liable
as a collecting bank, as held by the Court of
Appeals.

 primary duty of Traders to know that

the check was duly indorsed by the original
payee and, where it pays the amount of the
check to a third person who has forged the
signature of the payee, the loss falls upon it
who cashed the check.

 only remedy is against the

person to whom it paid the money

 It should be noted further that one of

the subject checks was crossed.

 The crossing of one of the

subject checks should have put petitioner on
guard

 it was duty-bound
to ascertain the indorser’s title to the check
or the nature of his possession.

 effects of a crossed check:

 (a) the check may not be

encashed but only deposited in the bank; (b)
the check may be negotiated only once to
one who has an account with a bank and

G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
(formerly INSULAR BANK OF ASIA AND
AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC.
and CITIBANK, N.A., respondents.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
COURT OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF
APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently
negotiated checks.
The original actions a quo were instituted by Ford
Philippines to recover from the drawee bank, CITIBANK,
N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly
Insular Bank of Asia and America], the value of several
checks payable to the Commissioner of Internal
Revenue, which were embezzled allegedly by an
organized syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for
review of the March 27, 1995 Decision1 of the Court of
Appeals in CA-G.R. CV No. 25017, entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of
Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of
Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails
the October 15, 1996 Decision3 of the Court of Appeals
and its March 5, 1997 Resolution4 in CA-G.R. No. 28430
entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank," affirming in
toto the judgment of the trial court holding the defendant
drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the
misapplied proceeds of the plaintiff's Citibanl Check
Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted
by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued
its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant
IBAA (now PCIBank) and was subsequently cleared at
the Central Bank. Upon presentment with the defendant
Citibank, the proceeds of the check was paid to IBAA as
collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff
was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers' sales
taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during
the time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank;
that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of
Internal Revenue was a crossed check in that, on its face
were two parallel lines and written in between said lines
was the phrase "Payee's Account Only"; and that
defendant Citibank paid the full face value of the check in
the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of
plaintiff's percentage tax for the last quarter of 1977, the
Bureau of Internal Revenue issued Revenue Tax Receipt
No. 18747002, dated October 20, 1977, designating
therein in Muntinlupa, Metro Manila, as the authorized
agent bank of Metrobanl, Alabang branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No.
SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through
its Ermita Branch. The latter accepted the check and
sent it to the Central Clearing House for clearing on the
samd day, with the indorsement at the back "all prior
indorsements and/or lack of indorsements guaranteed."
Thereafter, defendant IBAA presented the check for
payment to defendant Citibank on same date, December
19, 1977, and the latter paid the face value of the check
in the amount of P4,746,114.41. Consequently, the
amount of P4,746,114.41 was debited in plaintiff's
account with the defendant Citibank and the check was
returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank
Check No. SN-04867 in the amount of P4,746,114.41
was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the
latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then
plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the
plaintiff - supposed to be Exhibit "D", the latter was
officially informed, among others, that its check in the
amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead
encashed by unauthorized persons, hence, plaintiff has
to pay the said amount within fifteen days from receipt of
the letter. Upon advice of the plaintiff's lawyers, plaintiff
on March 11, 1982, paid to the Bureau of Internal
NEGO MIDTERM (FORGERY) 32
Revenue, the amount of P4,746,114.41, representing
payment of plaintiff's percentage tax for the third quarter
of 1977.
As a consequence of defendant's refusal to reimburse
plaintiff of the payment it had made for the second time
to the BIR of its percentage taxes, plaintiff filed on
January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged
with the Philippine Commercial International Bank (PCI
Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made
of plaintiff's Citibank Check No. SN-04867 in the amount
of P4,746,114.41 "was in due course"; it merely relied on
the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack
of indorsements guaranteed"; and the proximate cause
of plaintiff's injury is the gross negligence of defendant
IBAA in indorsing the plaintiff's Citibank check in
question.
It is admitted that on December 19, 1977 when the
proceeds of plaintiff's Citibank Check No. SN-048867
was paid to defendant IBAA as collecting bank, plaintiff
was maintaining a checking account with defendant
Citibank."5
Although it was not among the stipulated facts, an
investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled
by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check
because there was an error in the computation of the tax
due to the Bureau of Internal Revenue (BIR). With
Rivera's instruction, PCIBank replaced the check with
two of its own Manager's Checks (MCs). Alleged
members of a syndicate later deposited the two MCs with
the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint
before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from
justice".
On June 15, 1989, the trial court rendered its decision,
as follows:

"Premises considered, judgment is hereby rendered as
follows:
"1. Ordering the defendants Citibank and IBAA (now PCI
Bank), jointly and severally, to pay the plaintiff the
amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20, 1983, the
date when the original complaint was filed until the
amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the
cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter has
paid or may pay to the plaintiff in accordance with next
preceding paragraph;
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants,
Citibank and PCIBank, elevated their respective petitions
for review on certiorari to the Courts of Appeals. On
March 27, 1995, the appellate court issued its judgment
as follows:
"WHEREFORE, in view of the foregoing, the court
AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay
the plaintiff the amount of P4,746,114.41 representing
the face value of plaintiff's Citibank Check No. SN-04867,
with interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed until
the amount is fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that asserted
by the cross-defendant against the cross-claimant, for
lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted
decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were
denied for lack of merit.
Separately, PCIBank and Ford filed before this Court,
petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the
decision and resolution of the Twelfth Division of the
Court of Appeals contending that it merely acted on the
instruction of Ford and such casue of action had already
prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford
on the said respondent's instructions, it nevertheless
found the petitioner liable to the said respondent for the
full amount of the said check.
II. Did the respondent court err when it did not find
prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R.
No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court
which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the
following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford
considering that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check and a
depositor of respondent Citibank, an absolute and
contractual duty to pay the proceeds of the subject check
only to the payee thereof, the Commissioner of Internal
Revenue.
2. Respondent Citibank failed to observe its duty as
banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time
on appeal; thus the same should not be considered by
the Honorable Court.
4. As correctly held by the trial court, there is no evidence
of gross negligence on the part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a person
other than the payee named therein, the Commissioner
of the Bureau of Internal Revenue; thus, PCIBank's only
obligation is to deliver the proceeds to the Commissioner
of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject
check ("All prior indorsement and/or lack of indorsement
guaranteed"), is liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the
instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the
proceeds of checks intended, this time, to settle Ford's
percentage taxes appertaining to the second quarter of
1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as
follows:
Ford drew Citibank Check No. SN-10597 on July 19,
1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR
Revenue Tax Receipt No. 28645385 was issued for the
said purpose.
NEGO MIDTERM (FORGERY) 33
On April 20, 1979, Ford drew another Citibank Check No.
SN-16508 in the amount of P6,311,591.73, representing
the payment of percentage tax for the first quarter of
1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No.
A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two
diagonal lines on its upper corner between, which were
written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a
letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding
periods above-mentioned.
As far as the BIR is concernced, the said two BIR
Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon
the initiative of the BIR. The findings forced Ford to pay
the BIR a new, while an action was filed against Citibank
and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which
tried the case, made its findings on the modus
operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the
plaintiff FORD as its General Ledger Accountant. As
such, he prepared the plaintiff's check marked Ex. 'A'
[Citibank Check No. Sn-10597] for payment to the BIR.
Instead, however, fo delivering the same of the payee,
he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San
Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person
denominated as 'Reynaldo reyes' in the Meralco Branch
of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account,
Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh.
"A", P5,851,706.37) while this worthless check was
coursed through PCIB's main office enroute to the
Central Bank for clearing, replaced this worthless check
with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As
a result, Exhibit 'A' was cleared by defendant CITIBANK,
and the fictitious deposit account of 'Reynaldo Reyes'
was credited at the PCIB Meralco Branch with the total
amount of the FORD check Exhibit 'A'. The same method
was again utilized by the syndicate in profiting from Exh.

'B' [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Rivera's
Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew
various checks distributing the sahres of the other
participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the method
for the embezzlement; (2) RODOLFO R. DE LEON a
customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and
PCIB's Remberto Castro; (3) JUAN VASTILLO who
assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who
passed on the first check (Exhibit "A") to Castro; (5)
REMERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo
Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIB's Assistant Manager at its
Meralco Branch, who assisted Castro in switching the
checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account;
(7) ALEXIS MARINDO, Rivera's Assistant at FORD, who
gave the second check (Exh. "B") to Castro; (8)
ELEUTERIO JIMENEZ, BIR Collection Agent who
provided the fake and spurious revenue tax receipts to
make it appear that the BIR had received FORD's tax
payments.
Several other persons and entities were utilized by the
syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been impleaded
in the present case. The manner by which the said funds
were distributed among them are traceable from the
record of checks drawn against the original "Reynaldo
Reyes" account and indubitably identify the parties who
illegally benefited therefrom and readily indicate in what
amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati,
Branch 57, held drawee-bank, Citibank, liable for the
value of the two checks while adsolving PCIBank from
any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered
sentencing defendant CITIBANK to reimburse plaintiff
FORD the total amount of P12,163,298.10 prayed for in
its complaint, with 6% interest thereon from date of first
written demand until full payment, plus P300,000.00
attorney's fees and expenses litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the
sum of P300,000.00 as attorney's fees and costs of
litigation, and pay the costs.
15
SO ORDERED."
Both Ford and Citibank appealed to the Court of Appeals
which affirmed, in toto, the decision of the trial court.
Hence, this petition.
Petitioner Ford prays that judgment be rendered setting
aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank
Check Numbers SN-10597 and 16508 for P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing
the complaint against defendant PCIBank considering
that:
I. Defendant PCIBank was clearly negligent when it
failed to exercise the diligence required to be exercised
by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the
diligence required in the selection and supervision of its
officers and employees.
III. Defendant PCIBank was, due to its negligence,
clearly liable for the loss or damage resulting to the
plaintiff Ford as a consequence of the substitution of the
check consistent with Section 5 of Central Bank Circular
No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not
accept, endorse or negotiate in due course the subject
checks, it is liable, under Article 2154 of the Civil Code,
to return the money which it admits having received, and
which was credited to it its Central bank account.16
The main issue presented for our consideration by these
petitions could be simplified as follows: Has petitioner
Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of
the checks intended as payment to the Commissioner of
Internal Revenue? Or has Ford's cause of action already
prescribed?
Note that in these cases, the checks were drawn against
the drawee bank, but the title of the person negotiating
the same was allegedly defective because the
instrument was obtained by fraud and unlawful means,
and the proceeds of the checks were not remitted to the
payee. It was established that instead of paying the
checks to the CIR, for the settlement of the approprite
quarterly percentage taxes of Ford, the checks were
diverted and encashed for the eventual distribution
among the mmbers of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55
of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who
negotiates an instrument is defective within the meaning
of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or fore and fear, or
other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith or under such
circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetator in breach of faith
amounting to fraud. The person negotiating the checks
must have gone beyond the authority given by his
principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set
up the personal defense to escape liability and recover
from other parties who. Though their own negligence,
alowed the commission of the crime.
In this case, we note that the direct perpetrators of the
offense, namely the embezzlers belonging to a syndicate,
are now fugitives from justice. They have, even if
temporarily, escaped liability for the embezzlement of
millions of pesos. We are thus left only with the task of
determining who of the present parties before us must
bear the burden of loss of these millions. It all boils down
to thequestion of liability based on the degree of
negligence among the parties concerned.
Foremost, we must resolve whether the injured party,
Ford, is guilty of the "imputed contributory negligence"
that would defeat its claim for reimbursement, bearing
ing mind that its employees, Godofredo Rivera and
Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own
employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the
designated authorized collecting bank
(Metrobank-Alabang) of the payee, CIR. Citibank bewails
the fact that Ford was remiss in the supervision and
control of its own employees, inasmuch as it only
discovered the syndicate's activities through the
information given by the payee of the checks after an
unreasonable period of time.
NEGO MIDTERM (FORGERY) 34
PCIBank also blames Ford of negligence when it
allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of
using it to pay the BIR. As to the subsequent run-around
of unds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damge
to Ford lies in its own officers and employees who
carried out the fradulent schemes and the transactions.
These circumstances were not checked by other officers
of the company including its comptroller or internal
auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent
persons, one of whom must suffer the consequences of
a breach of trust, the one who made it possible, by his
act of negligence, must bear the loss.
For its part, Ford denies any negligence in the
performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of
diligence on the part of Ford. And, citing the case
of Gempesaw vs. Court of Appeals,17 Ford argues that
even if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends the Godofredo rivera was
not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds
that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should
not be considered by this Court.
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his
servant's wrongful act, the law imputes to the master the
act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or
wrongful conduct of the master, for which he is
liable.18 The general rule is that if the master is injured by
the negligence of a third person and by the concuring
contributory negligence of his own servant or agent, the
latter's negligence is imputed to his superior and will
defeat the superior's action against the third person,
asuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is
made.19
Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Ford's General Ledger
Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. AS defined,
proximate cause is that which, in the natural and

continuous sequence, unbroken by any efficient,
intervening cause produces the injury and without the
result would not have occurred.20
It appears that although the employees of Ford initiated
the transactions attributable to an organized syndicate, in
our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as
the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm
the request of Godofredo Rivera to recall Citibank Check
No. SN-04867. Rivera's instruction to replace the said
check with PCIBank's Manager's Check was not in
theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597
and 16508, it was established that these checks were
made payable to the CIR. Both were crossed checks.
These checks were apparently turned around by Ford's
emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the
forgery was committed by a drawer-payor's confidential
employee or agent, who by virtue of his position had
unusual facilities for perpertrating the fraud and imposing
the forged paper upon the bank, does notentitle the bank
toshift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.
With respect to the negligence of PCIBank in the
payment of the three checks involved, separately, the
trial courts found variations between the negotiation of
Citibank Check No. SN-04867 and the misapplication of
total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's
share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these
checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at
PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central
Clearing with the indorsement at the back "all prior
indorsements and/or lack of indorsements guaranteed,"
and was presented to Citibank for payment. Thereafter
PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the
syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr.
Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was
duly authorized, showed lack of care and prudence
required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized
to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIBank is duty bound to consult its
principal regarding the unwarranted instructions given by
the payor or its agent. As aptly stated by the trial court, to
wit:
"xxx. Since the questioned crossed check was deposited
with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility
to make sure that the check in question is deposited in
Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant
IBAA should receive instructions only from its principal
BIR and not from any other person especially so when
that person is not known to the defendant. It is very
imprudent on the part of the defendant IBAA to just rely
on the alleged telephone call of the one Godofredo
Rivera and in his signature considering that the plaintiff is
not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an
argreement to the contrary, that of principal and
agent.22 A bank which receives such paper for collection
is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by
proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp
appearing at the back of the questioned checks stating
that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GURANTEED should render
PCIBank liable because it made it pass through the
clearing house and therefore Citibank had no other
option but to pay it. Thus, Citibank had no other option
but to pay it. Thus, Citibank assets that the proximate
cause of Ford's injury is the gross negligence of PCIBank.
Since the questione dcrossed check was deposited with
PCIBank, which claimed to be a depository/collecting
bank of the BIR, it had the responsibility to make sure
that the check in questions is deposited in Payee's
account only.
Indeed, the crossing of the check with the phrase
"Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR. Thus,
it is the duty of the collecting bank PCIBank to ascertain
that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is
bound to scruninize the check and to know its depositors
before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs.
Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court
is in full accord with the ruling of the PCHC's Board of
Directors that:
'In presenting the checks for clearing and for payment,
the defendant made an express guarantee on the validity
of "all prior endorsements." Thus, stamped at the back of
the checks are the defedant's clear warranty: ALL
PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning
of defendant's warranty. As the warranty has proven to
be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation."25
Lastly, banking business requires that the one who first
cashes and negotiates the check must take some
percautions to learn whether or not it is genuine. And if
the one cashing the check through indifference or othe
circumstance assists the forger in committing the fraud,
he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did
not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the
NEGO MIDTERM (FORGERY) 35
check. For this reason, a bank which cashes a check
drawn upon another bank, without requiring proof as to
the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against
the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of
the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter
may recover from the holder the money paid on the
check.26
Having established that the collecting bank's negligence
is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the
proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that
PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597
and 16508, because PCIBank did not actually receive
nor hold the two Ford checks at all. The trial court held,
thus:
"Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced
that the switching operation (involving the checks while
in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in
their own personl, covert and private capacity and done
without the knowledge of the defendant PCIBank…"27
In this case, there was no evidence presented confirming
the conscious particiapation of PCIBank in the
embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course
and scope of their employment.28 A bank will be held
liable for the negligence of its officers or agents when
acting within the course and scope of their employment.
It may be liable for the tortuous acts of its officers even
as regards that species of tort of which malice is an
essential element. In this case, we find a situation where
the PCIBank appears also to be the victim of the scheme

hatched by a syndicate in which its own management
employees had particiapted.
The pro-manager of San Andres Branch of PCIBank,
Remberto Castro, received Citibank Check Numbers
SN-10597 and 16508. He passed the checks to a
co-conspirator, an Assistant Manager of PCIBank's
Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes."
Castro deposited a worthless Bank of America Check in
exactly the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing
the worthless checks and the eventual encashment of
Citibank Check Nos. SN 10597 and 16508. The PCIBank
Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using
facilities in their official capacity or authority but for their
personal and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds
these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will t be
permitted to shirk its responsibility for such frauds, even
though no benefit may accrue to the bank therefrom. For
the general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting
within the course and apparent scope of his employment
or authority.29 And if an officer or employee of a bank, in
his official capacity, receives money to satisfy an
evidence of indebetedness lodged with his bank for
collection, the bank is liable for his misappropriation of
such sum.30
Moreover, as correctly pointed out by Ford, Section
531 of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for
clearing, shall be for the account of sending bank, which
in this case is PCIBank.
But in this case, responsibility for negligence does not lie
on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee
bank was likewise negligent in the performance of its
duties. Citibank failed to establish that its payment of
Ford's checjs were made in due course and legally in
order. In its defense, Citibank claims the genuineness
and due execution of said checks, considering that
Citibank (1) has no knowledge of any informity in the
issuance of the checks in question (2) coupled by the
fact that said checks were sufficiently funded and (3) the
endorsement of the Payee or lack thereof was
guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee
bank owes to Ford an absolute and contractual duty to
pay the proceeds of the subject check only to the payee
thereof, the CIR. Citing Section 6232 of the Negotiable
Instruments Law, Ford argues that by accepting the
instrument, the acceptro which is Citibank engages that it
will pay according to the tenor of its acceptance, and that
it will pay only to the payee, (the CIR), considering the
fact that here the check was crossed with annotation
"Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise
answer for the damages incurred by Ford on Citibank
Checks Numbers SN 10597 and 16508, because of the
contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual
obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this
score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check
Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of
the BIR. One thing is clear from the record: the clearing
stamps at the back of Citibank Check Nos. SN 10597
and 16508 do not bear any initials. Citibank failed to
notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this
reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of
the checks should be paid only to its designated payee.
The fact that the drawee bank did not discover the
irregularity seasonably, in our view, consitutes
negligence in carrying out the bank's duty to its
depositors. The point is that as a business affected with
public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence,
we are of the view that both PCIBank and Citibank failed
in their respective obligations and both were negligent in
the selection and supervision of their employees
resulting in the encashment of Citibank Check Nos. SN
10597 AND 16508. Thus, we are constrained to hold
them equally liable for the loss of the proceeds of said
checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business
is so impressed with public interest where the trust and
confidence of the public in general is of paramount
umportance such that the appropriate standard of
diligence must be very high, if not the highest, degree of
diligence.34 A bank's liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its
employees is of no moment.35
Banks handle daily transactions involving millions of
pesos.36 By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of
ordinary clerks and employees.37 Banks are expected to
exercise the highest degree of diligence in the selection
and supervision of their employees.38
On the issue of prescription, PCIBank claims that the
action of Ford had prescribed because of its inability to
seek judicial relief seasonably, considering that the
alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven
years thereafter.
The statute of limitations begins to run when the bank
gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged
drawer as a voucher with a statement of his
account,39 and an action upon a check is ordinarily
governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a
written contract must be brought within ten year from the
time the right of action accrues.41 hence, the reckoning
time for the prescriptive period begins when the
instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month
thereafter). Applying the same rule, the cause of action
for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19,
1977, when Citibank paid the face value of the check in
the amount of P4,746,114.41. Since the original
complaint for the cause of action was filed on January 20,
1984, barely six years had lapsed. Thus, we conclude
that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
Finally, we also find thet Ford is not completely
blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook,
statements of account, and cancelled checks and to give
NEGO MIDTERM (FORGERY) 36
notice within a reasonable time (or as required by statute)
of any discrepancy which it may in the exercise of due
care and diligence find therein, serves to mitigate the
banks' liability by reducing the award of interest from
twelve percent (12%) to six percent (6%) per annum. As
provided in Article 1172 of the Civil Code of the
Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be regulated by the
courts, according to the circumstances. In quasi-delicts,
the contributory negligence of the plaintiff shall reduce
the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 25017
are AFFIRMED. PCIBank, know formerly as Insular
Bank of Asia and America, id declared solely responsible
for the loss of the proceeds of Citibank Check No SN
04867 in the amount P4,746,114.41, which shall be paid
together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint
was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of
Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must
share the loss, (concerning the proceeds of Citibank
Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank
is ORDERED to pay Ford Philippines Inc. P6,081,649.05,
with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said
amount.1âwphi1.nêt
Costs against Philippine Commercial International Bank
and Citibank N.A.
SO ORDERED.
Facts: There are three cases consolidated here: G.R.
No. 121413 (PCIB vs CA and Ford and Citibank), G.R.
No. 121479 (Ford vs CA and Citibank and PCIB), and
G.R. No. 128604 (Ford vs Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check
in the amount of P4,746,114.41 in favor of the
Commissioner of the Internal Revenue (CIR). The check
represents Ford’s tax payment for the third quarter of
1977. On the face of the check was written “Payee’s
account only” which means that the check cannot be
encashed and can only be deposited with the CIR’s
savings account (which is with Metrobank). The said
check was however presented to PCIB and PCIB

accepted the same. PCIB then indorsed the check for
clearing to Citibank. Citibank cleared the check and paid
PCIB P4,746,114.41. CIR later informed Ford that it
never received the tax payment.
An investigation ensued and it was discovered that
Ford’s accountant Godofredo Rivera, when the check
was deposited with PCIB, recalled the check since there
was allegedly an error in the computation of the tax to be
paid. PCIB, as instructed by Rivera, replaced the check
with two of its manager’s checks.
It was further discovered that Rivera was actually a
member of a syndicate and the manager’s checks were
subsequently deposited with the Pacific Banking
Corporation by other members of the syndicate.
Thereafter, Rivera and the other members became
fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in
the amounts of P5,851,706.37 and P6,311,591.73
respectively. Both checks are again for tax payments.
Both checks are for “Payee’s account only” or for the
CIR’s bank savings account only with Metrobank. Again,
these checks never reached the CIR.
In an investigation, it was found that these checks were
embezzled by the same syndicate to which Rivera was a
member. It was established that an employee of PCIB,
also a member of the syndicate, created a PCIB account
under a fictitious name upon which the two checks,
through high end manipulation, were deposited. PCIB
unwittingly endorsed the checks to Citibank which the
latter cleared. Upon clearing, the amount was withdrawn
from the fictitious account by syndicate members.
NEGO MIDTERM (FORGERY) 37
As a general rule, a bank is liable for the negligent or
tortuous act of its employees within the course and
apparent scope of their employment or authority. Hence,
PCIB is liable for the fraudulent act of its employee who
set up the savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the
performance of its obligations with respect to its
agreement with Ford. The checks which were drawn
against Ford’s account with Citibank clearly states that
they are payable to the CIR only yet Citibank delivered
said payments to PCIB. Citibank however argues that
the checks were indorsed by PCIB to Citibank and that
the latter has nothing to do but to pay it. The Supreme
Court cited Section 62 of the Negotiable Instruments Law
which mandates the Citibank, as an acceptor of the
checks, to engage in paying the checks according to the
tenor of the acceptance which is to deliver the payment
to the “payee’s account only”.
But the Supreme Court ruled that in the consolidated
cases, that PCIB and Citibank are not the only negligent
parties. Ford is also negligent for failing to examine its
passbook in a timely manner which could have avoided
further loss. But this negligence is not the proximate
cause of the loss but is merely contributory.
Nevertheless, this mitigates the liability of PCIB and
Citibank hence the rate of interest, with which PCIB and
Citibank is to pay Ford, is lowered from 12% to 6% per
annum.

ISSUE: What are the liabilities of each party?

HELD: G.R. No. 121413/G.R. No. 121479

PCIB is liable for the amount of the check

(P4,746,114.41). PCIB, as a collecting bank has been
negligent in verifying the authority of Rivera to negotiate
the check. It failed to ascertain whether or not Rivera can
validly recall the check and have them be replaced with
PCIB’s manager’s checks as in fact, Ford has no
knowledge and did not authorize such. A bank (in this
case PCIB) which cashes a check drawn upon another
bank (in this case Citibank), without requiring proof as to
the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against
the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. Hence,
PCIB is liable for the amount of the embezzled check.

G.R. No. 128604

PCIB and Citibank are liable for the amount of the

checks on a 50-50 basis.

G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE
CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING
CORPORATION and PHILIPPINE NATIONAL
BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and
Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the
defendants are banking corporations, and each is duly
licensed to do its respective business in the Philippines
Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on
the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of Lazaro
Melicor. E. M. Maasim fraudulently obtained possession
of the check, forged Melicor's signature, as an endorser,
and then personally endorsed and presented it to the
Philippine National Bank where the amount of the check
was placed to his credit. After having paid the check, and
on the next day, the Philippine national Bank endorsed
the check to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the
check to the account of the plaintiff. In the ordinary
course of business, the Hongkong Shanghai Banking
Corporation rendered a bank statement to the plaintiff
showing that the amount of the check was charged to its
account, and no objection was then made to the
statement. About four months after the check was
charged to the account of the plaintiff, it developed that
Lazaro Melicor, to whom the check was made payable,
had never received it, and that his signature, as an
endorser, was forged by Maasim, who presented and
deposited it to his private account in the Philippine
National Bank. With this knowledge , the plaintiff
promptly made a demand upon the Hongkong and
Shanghai Banking Corporation that it should be given
credit for the amount of the forged check, which the bank
refused to do, and the plaintiff commenced this action to
recover the P2,000 which was paid on the forged check.
On the petition of the Shanghai Bank, the Philippine
National Bank was made defendant. The Shanghai Bank
denies any liability, but prays that, if a judgment should
be rendered against it, in turn, it should have like
judgment against the Philippine National Bank which
denies all liability to either party.
Upon the issues being joined, a trial was had and
judgment was rendered against the plaintiff and in favor
of the defendants, from which the plaintiff appeals,
claiming that the court erred in dismissing the case,
notwithstanding its finding of fact, and in not rendering a
judgment in its favor, as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact
made by the trial court, and the plaintiff relies upon them
for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order, when
its value was collected by a third person by means of
forgery of the signature of the payee? Is it the drawee or
the last indorser, who ignored the forgery at the time of
making the payment, or the forger?
To lower court found that Melicor's name was forged to
the check. "So that the person to whose order the check
was issued did not receive the money, which was
collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held
responsible for the payment of made to Maasim in good
faith of the amount of the check, because the
indorsement of Maasim is unquestionable and his
signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser.
Neither could the Hongkong and Shanghai Banking
Corporation be held responsible in making payment in
good faith to the National Bank, because the latter is a
holder in due course of the check in question. In other
words, the two defendant banks can not be held civilly
responsible for the consequences of the falsification or
forgery of the signature of Lazaro Melicor, the National
Bank having had no notice of said forgery in making
payment to Maasim, nor the Hongkong bank in making
payment to National Bank. Neither bank incurred in any
responsibility arising from that crime, nor was either of
the said banks by subsequent acts, guilty of negligence
or fault.
This was fundamental error.
NEGO MIDTERM (FORGERY) 38
Plaintiff's check was drawn on Shanghai Bank payable to paid. The Philippine National Bank had no license or
the order of Melicor. In other words, the plaintiff authority to pay the money to Maasim or anyone else
authorized and directed the Shanghai Bank to pay upon a forge signature. It was its legal duty to know that
Melicor, or his order, P2,000. It did not authorize or direct Melicor's endorsment was genuine before cashing the
the bank to pay the check to any other person than check. Its remedy is against Maasim to whom it paid the
Melicor, or his order, and the testimony is undisputed money.
that Melicor never did part with his title or endorse the
check, and never received any of its proceeds. Neither is
The judgment of the lower court is reversed, and one will
the plaintiff estopped or bound by the banks statement,
which was made to it by the Shanghai Bank. This is not a be entered here in favor of the plaintiff and against the
case where the plaintiff's own signature was forged to Hongkong and Shanghai Banking Corporation for the
P2,000, with interest thereon from November 8, 1920 at
one of it checks. In such a case, the plaintiff would have
known of the forgery, and it would have been its duty to the rate of 6 per cent per annum, and the costs of this
action, and a corresponding judgment will be entered in
have promptly notified the bank of any forged signature,
and any failure on its part would have released bank favor of the Hongkong Shanghai Banking Corporation
from any liability. That is not this case. Here, the forgery against the Philippine National Bank for the same
was that of Melicor, who was the payee of the check, and amount, together with the amount of its costs in this
action. So ordered.
the legal presumption is that the bank would not honor
the check without the genuine endorsement of Melicor.
In other words, when the plaintiff received it banks
statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the
bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable
Instruments Law, says:
When a signature is forged or made without the authority
of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired
through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it
had no legal right to pay it out to anyone except the
plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never paid
to Melicor, and he never paid to Melicor, and he never
personally endorsed the check, or authorized any one to
endorse it for him, and the alleged endorsement was a
forgery. Hence, upon the undisputed facts, it must follow
that the Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed
the check upon a forged signature, and placed the
money to the credit of Maasim, who was a forger. That
the Philippine National Bank then endorsed the check
and forwarded it to the Shanghai Bank by whom it was

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private
respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals
(CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for
Review, on the issue of the right of the drawer to recover
from the drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the
drawer's account.
The records show that on January 23, 1985, petitioner
filed a Complaint against the private respondent
Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82)
checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees'
indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case,
rendered a decision on November 17, 1987 dismissing
the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a
decision rendered on February 22, 1990, affirmed the
decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing
the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must
nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990,
the petitioner filed this petition under Rule 45 of the
Rules of Court setting forth the following as the alleged
errors of the respondent Court:1
I Practically, all the checks issued and honored by the
THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER
IS THE PROXIMATE CAUSE OF THE RESULTING
INJURY TO THE DRAWEE BANK, AND THE DRAWER
IS PRECLUDED FROM SETTING UP THE FORGERY
OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO
ERRED IN NOT FINDING AND RULING THAT IT IS
THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN
FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE
TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE
TO PETITIONER WHOSE SAVING (SIC) ACCOUNT
WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO
ERRED IN NOT ORDERING THE RESPONDENT
BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN
CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO
(82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and
operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, Caloocan City. Among
these groceries are D.G. Shopper's Mart and D.G. Whole
Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of
the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against
her checking account with the respondent bank as
drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks
were prepared and filled up as to all material particulars
by her trusted bookkeeper, Alicia Galang, an employee
for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were
submitted to the petitioner for her signature, together
with the corresponding invoice receipts which indicate
the correct obligations due and payable to her suppliers.
Petitioner signed each and every check without
bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner
admitted that she did not make any verification as to
whether or not the checks were delivered to their
respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by
the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually
received the checks in payment for the supplies she
received. In the course of her business operations
covering a period of two years, petitioner issued,
following her usual practice stated above, a total of
eighty-two (82) checks in favor of several suppliers.
These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking
account numbered 30-00038-1. Most of the
aforementioned checks were for amounts in excess of
her actual obligations to the various payees as shown in
their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the
amount of P11,895.23 in favor of Kawsek Inc. (Exh.
A-60), appellant's actual obligation to said payee was
only P895.33 (Exh. A-83); (2) in Check No. 652282
issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April
7, 1984 for the amount of P11,672.47 in favor of
Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May
10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31)
her actual obligation was only P677.10 (Exhs. C and
C-1); (5) in Check No. 651862 dated August 9, 1984 in
favor of Malinta Exchange Mart for P11,107.16 (Exh.
A-62), her obligation was only P1,107.16 (Exh. D-2); (6)
in Check No. 651863 dated August 11, 1984 in favor of
Grocer's International Food Corp. in the amount of
P11,335.60 (Exh. A-66), her obligation was only
P1,335.60 (Exh. E and E-1); (7) in Check No. 589019
dated March 17, 1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her obligation was
only P648.00 (Exh. G); (8) in Check No. 589028 dated
March 10, 1984 for the amount of P11,520.00 in favor of
the Yakult Philippines (Exh. A-73), the latter's invoice
was only P520.00 (Exh. H-2); (9) in Check No. 62033
dated May 23, 1984 in the amount of P11,504.00 in favor
of Monde Denmark Biscuit (Exh. A-34), her obligation
was only P504.00 (Exhs. I-1 and I-2).2
respondent drawee bank were crossed checks.3 Aside
from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching
NEGO MIDTERM (FORGERY) 39
thereto all the cancelled checks she had issued and
which were debited against her current account. It was
only after the lapse of more two (2) years that petitioner
found out about the fraudulent manipulations of her
bookkeeper.
All the eighty-two (82) checks with forged signatures of
the payees were brought to Ernest L. Boon, Chief
Accountant of respondent drawee Bank at the Buendia
branch, who, without authority therefor, accepted them
all for deposit at the Buendia branch to the credit and/or
in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y.
Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5
of Alfredo Y. Romero at the respondent drawee Bank's
Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of
the checks were deposited in Account No. 0443-4, under
the name of Benito Lam at the Elcaño branch of the
respondent drawee Bank.
About thirty (30) of the payees whose names were
specifically written on the checks testified that they did
not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were
not theirs.
The team of auditors from the main office of the
respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon.
Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent
drawee bank, may accept a second indorsement on a
check for deposit. In the case at bar, all the deposit slips
of the eighty-two (82) checks in question were initialed
and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcaño branches
accepted the deposits made in the Buendia branch and
credited the accounts of Alfredo Y. Romero and Benito
Lam in their respective branches.
On November 7, 1984, petitioner made a written demand
on respondent drawee Bank to credit her account with
the money value of the eighty-two (82) checks totalling
P1,208.606.89 for having been wrongfully charged
against her account. Respondent drawee Bank refused
to grant petitioner's demand. On January 23, 1985,
petitioner filed the complaint with the Regional Trial
Court.
This is not a suit by the party whose signature was
forged on a check drawn against the drawee bank. The

payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value
of eighty-two (82) checks paid out by the drawee bank to
holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries
were committed are not established on the record, but
the respective payees admitted that they did not receive
those checks and therefore never indorsed the same.
The applicable law is the Negotiable Instruments
Law4 (heretofore referred to as the NIL). Section 23 of
the NIL provides:
When a signature is forged or made without the authority
of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired
through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or
absolute defense by the party whose signature is forged.
A party whose signature to an instrument was forged
was never a party and never gave his consent to the
contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot
be held liable thereon by anyone, not even by a holder in
due course. Thus, if a person's signature is forged as a
maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a
person's signature as a drawer of a check is forged, the
drawee bank cannot charge the amount thereof against
the drawer's account because he never gave the bank
the order to pay. And said section does not refer only to
the forged signature of the maker of a promissory note
and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain
title to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party
from acquiring any right as against any party whose
name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the
forged indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent parties
as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is
precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising
from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the
drawer — for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements.
While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast
to a duty imposed upon him to look for forgeries of his
own name, a depositor is under a duty to set up an
accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's
own employees. And if the drawer (depositor) learns that
a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report
such fact to the drawee bank.5For his negligence or
failure either to discover or to report promptly the fact of
such forgery to the drawee, the drawer loses his right
against the drawee who has debited his account under a
forged indorsement.6 In other words, he is precluded
from using forgery as a basis for his claim for re-crediting
of his account.
In the case at bar, petitioner admitted that the checks
were filled up and completed by her trusted employee,
Alicia Galang, and were given to her for her signature.
Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid
contract yet.
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument to the
payee for the purpose of giving effect thereto.7 The first
delivery of the instrument, complete in form, to the payee
who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the instrument
from the drawer of the check to the payee, there can be
no valid and binding contract and no liability on the
instrument.
Petitioner completed the checks by signing them as
drawer and thereafter authorized her employee Alicia
Galang to deliver the eighty-two (82) checks to their
respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of
the respondent drawee Bank, a certain Ernest L. Boon. It
was established that the signatures of the payees as first
indorsers were forged. The record fails to show the
identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the
names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The
second indorsements were all genuine signatures of the
alleged holders. All the eighty-two (82) checks bearing
the forged indorsements of the payees and the genuine
second indorsements of Alfredo Y. Romero and Benito
Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective
savings accounts in the Buendia, Ongpin and Elcaño
branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks,
were credited and paid out by respondent drawee Bank
to Alfredo Y. Romero and Benito Lam, and debited
against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which
an indorsement has been forged cannot charge the
drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check
or checks. If a check is stolen from the payee, it is quite
obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although
a depositor owes a duty to his drawee bank to examine
his cancelled checks for forgery of his own signature, he
has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's
indorsement. The drawer and the payee often time
shave business relations of long standing. The continued
occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to
commit the fraud after having developed familiarity with
the signatures of the parties. However, sooner or later,
some leak will show on the drawer's books. It will then be
just a question of time until the fraud is discovered. This
is specially true when the agent perpetrates a series of
forgeries as in the case at bar.
The negligence of a depositor which will prevent
recovery of an unauthorized payment is based on failure
of the depositor to act as a prudent businessman would
under the circumstances. In the case at bar, the
petitioner relied implicitly upon the honesty and loyalty of
her bookkeeper, and did not even verify the accuracy of
amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly
received her bank statements, she apparently did not
carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily
discovered the discrepancies between the checks and
the documents serving as bases for the checks. With
such discovery, the subsequent forgeries would not have
been accomplished. It was not until two years after the
NEGO MIDTERM (FORGERY) 40
bookkeeper commenced her fraudulent scheme that
petitioner discovered that eighty-two (82) checks were
wrongfully charged to her account, at which she notified
the respondent drawee bank.
It is highly improbable that in a period of two years, not
one of Petitioner's suppliers complained of non-payment.
Assuming that even one single complaint had been
made, petitioner would have been duty-bound, as far as
the respondent drawee Bank was concerned, to make an
adequate investigation on the matter. Had this been
done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted
in the bank's honoring of the subsequent checks with
forged indorsements. On the other hand, since the
record mentions nothing about such a complaint, the
possibility exists that the checks in question covered
inexistent sales. But even in such a case, considering the
length of a period of two (2) years, it is hard to believe
that petitioner did not know or realize that she was
paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be
disappearing or that there may be a leak in her business,
and refrain from taking the steps that a careful and
prudent businessman would take in such circumstances
and if taken, would result in stopping the continuance of
the fraudulent scheme. If she fails to take steps, the facts
may establish her negligence, and in that event, she
would be estopped from recovering from the bank.9
One thing is clear from the records — that the petitioner
failed to examine her records with reasonable diligence
whether before she signed the checks or after receiving
her bank statements. Had the petitioner examined her
records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she
compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices,
she would have easily discovered that in some checks,
the amounts did not tally with those appearing in the
sales invoices. Had she noticed these discrepancies, she
should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular
entries. Likewise had petitioner been more vigilant in
going over her current account by taking careful note of
the daily reports made by respondent drawee Bank in
her issued checks, or at least made random scrutiny of
cancelled checks returned by respondent drawee Bank
at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang,
and could have reported the matter to the respondent
drawee Bank. The respondent drawee Bank then could
have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence

was the proximate cause of her loss. And since it was
her negligence which caused the respondent drawee
Bank to honor the forged checks or prevented it from
recovering the amount it had already paid on the checks,
petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now
precluded from using the forgery to prevent the bank's
debiting of her account.
The doctrine in the case of Great Eastern Life Insurance
Co. vs. Hongkong & Shanghai Bank 11 is not applicable
to the case at bar because in said case, the check was
fraudulently taken and the signature of the payee was
forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the drawer;
neither was the forging of the payee's indorsement due
to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the
drawer's account the amount theretofore paid under the
check with a forged payee's indorsement because the
drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should
not have honored the checks because they were crossed
checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the
payee's bank which in turn must present it for payment
against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot
be presented for payment but it can only be deposited
and the drawee bank may only pay to another bank in
the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit
the drawee bank from having checks with more than one
indorsement. The banking rule banning acceptance of
checks for deposit or cash payment with more than one
indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate
the negotiation or transfer of the said check. In effect,
this rule destroys the negotiability of bills/checks by
limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement
which stops the further negotiation of an instrument is a
restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. — An
indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to
transfer or negotiate must be written in express words at
the back of the instrument, so that any subsequent party
may be forewarned that ceases to be negotiable.
However, the restrictive indorsee acquires the right to
receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as such
indorsee where the form of the indorsement does not
authorize him to do so. 12
Although the holder of a check cannot compel a drawee
bank to honor it because there is no privity between them,
as far as the drawer-depositor is concerned, such bank
may not legally refuse to honor a negotiable bill of
exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or
check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the
drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee
will make itself liable to a suit for damages at the
instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded
from raising the defense of forgery by reason of her
gross negligence. But under Section 196 of the NIL, any
case not provided for in the Act shall be governed by the
provisions of existing legislation. Under the laws
of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and
supervision of its employees as being the cause of the
loss because negligence is the proximate cause thereof
and under Article 2179 of the Civil Code, she may not be
awarded damages. However, under Article 1170 of the
same Code the respondent drawee Bank may be held
liable for damages. The article provides —
Those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in any
manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation
between petitioner as depositor (obligee) and the
respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound
by its internal banking rules and regulations which form
part of any contract it enters into with any of its
depositors. When it violated its internal rules that second
endorsements are not to be accepted without the
approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank
did not discover the irregularity with respect to the
acceptance of checks with second indorsement for
deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of
auditors from the main office constitutes negligence on
the part of the bank in carrying out its obligations to its
depositors. Article 1173 provides —
The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstance
of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with
public interest where the trust and confidence of the
public in general is of paramount importance such that
the appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such
a degree of diligence that is required of it. There is no
way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious
but primary wherein the defense of exercise of due
diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is
adjudged liable to share the loss with the petitioner on a
fifty-fifty ratio in accordance with Article 172 which
provides:
Responsibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be regulated by the
courts according to the circumstances.
With the foregoing provisions of the Civil Code being
relied upon, it is being made clear that the decision to
hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although
the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from
applying to the circumstances of the case the laws
pertinent thereto. Thus, the fact that petitioner's
negligence was found to be the proximate cause of her
loss does not preclude her from recovering damages.
NEGO MIDTERM (FORGERY) 41
The reason why the decision dealt on a discussion on
proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent
court. And in breaches of contract under Article 1173,
due diligence on the part of the defendant is not a
defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the reception of
evidence to determine the exact amount of loss suffered
by the petitioner, considering that she partly benefited
from the issuance of the questioned checks since the
obligation for which she issued them were apparently
extinguished, such that only the excess amount over and
above the total of these actual obligations must be
considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
FACTS:
Gempensaw was the owner of many grocery stores.
She paid her suppliers through the issuance of
checks drawn against her checking account
with respondent bank. The checks were
prepared by her bookkeeper Galang. In the
signing of the checks prepared by Galang, Gempensaw
didn't bother
herself in verifying to whom the checks were
being paid and if the issuances were
necessary. She didn't even verify the returned
checks of the bank when the latter notifies her of the
same. During her two years in business, there were
incidents shown that the amounts paid for
were in excess of what should have been paid. It was
also shown that even if the checks were crossed, the
intended payees didn't receive the amount of the checks.
This prompted Gempensaw to demand the
bank to credit her account for the amount of the
forged checks. The bank refused to do so and this
prompted her to file the case against the bank.
HELD:
Forgery is a real defense by the party whose signature
was forged. A party whose signature was forged was
never a party and never gave his consent to the
instrument. Since his signature doesn’t
appear in the instrument, the same cannot be
enforced against him even by a holder in due course.
The drawee bank cannot charge the account of the
drawer whose signature was forged because he never
gave the bank the order to pay.
In the case at bar the checks were filled
up by petitioner’s employee Galang and were later
 NEGO MIDTERM (FORGERY) 42
given to her for signature. Her signing the checks made
the negotiable instruments complete. Prior to signing of
the checks, there was no valid contract yet.
Petitioner completed the checks by signing them
and thereafter authorized Galang to deliver the same to
their respective payees. The checks were
then indorsed, forged indorsements thereon.

As a rule, a drawee bank who has paid a check on which

an indorsement has been forged cannot debit
the account of a drawer for the amount of
said check. An exception to this rule is
when the drawer is guilty of negligence which
causes the bank to honor such checks. Petitioner in
this case has relied solely on the honesty
and loyalty of her bookkeeper and never
bothered to verify the accuracy of the
amounts of the checks she signed the invoices
attached thereto. And though she received
her bank statements, she didn't carefully
examine the same to double-check her
payments. Petitioner didn't exercise reasonable
diligence which eventually led to the fruition of her
bookkeeper’s fraudulent schemes.

G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO
CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES,
doing business under the name and style "Melissa's
RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila
Law Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the
private respondent has a cause of action against the
petitioners for their encashment and payment to another
person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of
ready-to-wear garments under the firm name "Melissa's
RTW." She deals with, among other customers,
Robinson's Department Store, Payless Department
Store, Rempson Department Store, and the Corona
Bazaar.
These companies issued in payment of their respective
accounts crossed checks payable to Melissa's RTW in
the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what
she thought were still unpaid accounts, she was
informed of the issuance of the above-listed crossed
checks. Further inquiry revealed that the said checks had
been deposited with the Associated Bank (hereinafter,
"the Bank") and subsequently paid by it to one Rafael
Sayson, one of its "trusted depositors," in the words of its
branch manager and co-petitioner, Conrado Cruz,
Sayson had not been authorized by the private
respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the
Regional Trial Court of Quezon City for recovery of the
total value of the checks plus damages. After trial,
judgment was rendered requiring them to pay the private
respondent the total value of the subject checks in the
amount of P15,805.00 plus 12% interest, P50,000.00
actual damages, P25,000.00 exemplary damages,
P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court,
reiterating their argument that the private respondent had
no cause of action against them and should have
proceeded instead against the companies that issued the
checks. In disposing of this contention, the Court of
Appeals 2 said:
The cause of action of the appellee in the case at bar
arose from the illegal, anomalous and irregular acts of
the appellants in violating common banking practices to
the damage and prejudice of the appellees, in allowing to
be deposited and encashed as well as paying to
improper parties without the knowledge, consent,
authority or endorsement of the appellee which totalled
P15,805.00, the six (6) checks in dispute which were
"crossed checks" or "for payee's account only," the
appellee being the payee.
The three (3) elements of a cause of action are present
in the case at bar, namely: (1) a right in favor of the
plaintiff by whatever means and under whatever law it
arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate such right;
and (3) an act or omission on the part of such defendant
violative of the right of the plaintiff or constituting a
breach thereof. (Republic Planters Bank vs. Intermediate
Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence
of great weight. The contents of the said checks issued
by the customers of the appellee had not been
questioned. There is no dispute that the same are
crossed checks or for payee's account only, which is
Melissa's RTW. The appellee had clearly shown that she
had never authorized anyone to deposit the said checks
nor to encash the same; that the appellants had allowed
all said checks to be deposited, cleared and paid to one
Rafael Sayson in violation of the instructions in the said
crossed checks that the same were for payee's account
only; and that the appellee maintained a savings account
with the Prudential Bank, Cubao Branch, Quezon City
which never cleared the said checks and the appellee
had been damaged by such encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is
done by writing two parallel lines diagonally on the left
top portion of the checks. The crossing is special where
the name of a bank or a business institution is written
between the two parallel lines, which means that the
drawee should pay only with the intervention of that
company. 3 The crossing is general where the words
written between the two parallel lines are "and Co." or
"for payee's account only," as in the case at bar. This
means that the drawee bank should not encash the
check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared
that "the effects of crossing a check are: (1) that the
check may not be encashed but only deposited in the
bank; (2) that the check may be negotiated only once ––
to one who has an account with a bank; and (3) that the
act of crossing the check serves as a warning to the
holder that the check has been issued for a definite
purpose so that he must inquire if he has received the
check pursuant to that purpose."
The effects therefore of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72 of
the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or
by some person authorized to receive payment on his
behalf. Who the holder or authorized person is depends
on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only signify
that the drawers had intended the same for deposit only
by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for
violation of the common instruction found on the face of
the checks exclusively belongs to the issuers thereof and
not to the payee. Moreover, having acted in good faith as
they merely facilitated the encashment of the checks,
they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the
Bank for the account of Rafael Sayson although they
were crossed checks and the payee was not Sayson but
Melissa's RTW. The Bank stamped thereon its
guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate
NEGO MIDTERM (FORGERY) 43
and positive act, the Bank had for all legal intents and
purposes treated the said checks as negotiable
instruments and, accordingly, assumed the warranty of
the endorser.
The weight of authority is to the effect that "the
possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is
collected on the check, the bank can be held 'for moneys
had and received." 6 The proceeds are held for the
rightful owner of the payment and may be recovered by
him. The position of the bank taking the check on the
forged or unauthorized indorsement is the same as if it
had taken the check and collected without indorsement
at all. The act of the bank amounts to conversion of the
check. 7
It is not disputed that the proceeds of the subject checks
belonged to the private respondent. As she had not at
any time authorized Rafael Sayson to endorse or encash
them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed
notwithstanding that title had not passed to the endorser,
it did so at its peril and became liable to the payee for the
value of the checks. This liability attached whether or not
the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should
have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit the
proceeds of the checks to his own account. The Bank
was by reason of the nature of the checks put upon
notice that they were issued for deposit only to the
private respondent's account. Its failure to inquire into
Sayson's authority was a breach of a duty it owed to the
private respondent.
As the Court stressed in Banco de Oro Savings and
Mortgage Bank vs. Equitable Banking Corp., 9 "the law
imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking,
holds itself out to the public as the expert on this field,
and the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no
cause of action against them because they have no
privity of contract with her. They also argue that it was
Eddie Reyes, the private respondent's own husband,
who endorsed the checks.
 NEGO MIDTERM (FORGERY) 44
Assuming that Eddie Reyes did endorse the crossed
checks, we hold that the Bank would still be liable to the
private respondent because he was not authorized to
make the endorsements. And even if the endorsements
were forged, as alleged, the Bank would still be liable to
the private respondent for not verifying the endorser's
authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement
by a person not authorized to make the signature and the
affixing of a name to a check as an endorsement by a
person not authorized to endorse it. 10

The Bank does not deny collecting the money on the

endorsement. It was its responsibility to inquire as to the
authority of Rafael Sayson to deposit crossed checks
payable to Melissa's RTW upon a prior endorsement by
Eddie Reyes. The failure of the Bank to make this inquiry
was a breach of duty that made it liable to the private
respondent for the amount of the checks.

There being no evidence that the crossed checks were

actually received by the private respondent, she would
have a right of action against the drawer companies,
which in turn could go against their respective drawee
banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to
simplify proceedings, the payee of the illegally encashed
checks should be allowed to recover directly from the
bank responsible for such encashment regardless of
whether or not the checks were actually delivered to the
payee. 11We approve such direct action in the case at
bar.

It is worth repeating that before presenting the checks for

clearing and for payment, the Bank had stamped on the
back thereof the words: "All prior endorsements and/or
lack of endorsements guaranteed," and thus made the
assurance that it had ascertained the genuineness of all
prior endorsements.

We find that the respondent court committed no

reversible error in holding that the private respondent
had a valid cause of action against the petitioners and
that the latter are indeed liable to her for their
unauthorized encashment of the subject checks. We also
agree with the reduction of the award of the exemplary
damages for lack of sufficient evidence to support them.

WHEREFORE, the petition is DENIED, with costs

against the petitioner. It is so ordered.

Narvasa, C.J., Griño-Aquino, Medialdea and Bellosillo,

JJ., concur.

JAI-ALAI CORPORATION OF THE
PHILIPPINES, Petitioner, v. BANK OF THE
PHILIPPINE ISLAND, Respondent.
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the
Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court
of Appeals in C.A.-G.R. 34042-R dated June 25,
1968 in favor of the Bank of the Philippine Islands
(hereinafter referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks
with a total face value of P8,030.58 were
deposited by the petitioner in its current account
with the respondent bank. The particulars of these
checks are as follows:
1. Drawn by the Delta Engineering Service upon
the Pacific Banking Corporation and payable to the
Inter-Island Gas Service Inc. or order:
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the
Pacific Banking Corporation and payable to the
Inter-Island Gas Service, Inc. or bearer:
4/13/59 B-335063 P 2108.70 21
4/27/59 B-335072 P2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon
the China Banking Corporation and payable to the
Inter-Island Gas Service, Inc. or bearer:
5/18/59 VN430188 P940.80 25
4. Drawn by the Roxas Manufacturing, Inc. upon
the Philippine National Bank and payable to the
Inter-Island Gas Service, Inc. order:
5/14/59 1860160 P 500.00 26
5/18/59 1860660 P 500.00 27
All the foregoing checks, which were acquired by
the petitioner from one Antonio J. Ramirez, a sales
agent of the Inter-Island Gas and a regular bettor
at jai-alai games, were, upon deposit, temporarily
credited to the petitioner's account in accordance
with the clause printed on the deposit slips issued
by the respondent and which reads:
"Any credit allowed the depositor on the books of
the Bank for checks or drafts hereby received for
deposit, is provisional only, until such time as the
proceeds thereof, in current funds or solvent
credits, shall have been actually received by the
Bank and the latter reserves to itself the right to
charge back the item to the account of its
depositor, at any time before that event,
regardless of whether or not the item itself can be
returned."
About the latter part of July 1959, after Ramirez
had resigned from the Inter-Island Gas and after
the checks had been submitted to inter-bank
clearing, the Inter-Island Gas discovered that all
the indorsements made on the checks purportedly
by its cashiers, Santiago Amplayo and Vicenta
Mucor (who were merely authorized to deposit
checks issued payable to the said company) as
well as the rubber stamp impression thereon
reading "Inter-Island Gas Service, Inc.," were
forgeries. In due time, the Inter-Island Gas
advised the petitioner, the respondent, the
drawers and the drawee-banks of the said checks
about the forgeries, and filed a criminal complaint
against Ramirez with the Office of the City Fiscal of
Manila. 1
The respondent's cashier, Ramon Sarthou, upon
receipt of the latter of Inter-Island Gas dated
August 31, 1959, called up the petitioner's cashier,
Manuel Garcia, and advised the latter that in view
of the circumstances he would debit the value of
the checks against the petitioner's account as soon
as they were returned by the respective
drawee-banks.
Meanwhile, the drawers of the checks, having
been notified of the forgeries, demanded
reimbursement to their respective accounts from
the drawee-banks, which in turn demanded from
the respondent, as collecting bank, the return of
the amounts they had paid on account thereof.
When the drawee-banks returned the checks to
the respondent, the latter paid their value which
the former in turn paid to the Inter-Island Gas. The
respondent, for its part, debited the petitioner's
current account and forwarded to the latter the
checks containing the forged indorsements, which
the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its
current account with the respondent a check for
P135,000 payable to the order of the Mariano
Olondriz y Cia. in payment of certain shares of
stock. The check was, however, dishonored by the
respondent as its records showed that as of
October 8, 1959 the current account of the
petitioner, after netting out the value of the checks
P8,030.58) with the forged indorsements, had a
balance of only P128,257.65.
The petitioner then filed a complaint against the
respondent with the Court of First Instance of
Manila, which was however dismissed by the trial
court after due trial, and as well by the Court of
Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant
petition may be briefly stated as follows:
(a) Whether the respondent had the right to debit
the petitioner's current account in the amount
corresponding to the total value of the checks in
question after more than three months had
elapsed from the date their value was credited to
the petitioner's account:(b) Whether the
respondent is estopped from claiming that the
amount of P8,030.58, representing the total value
of the checks with the forged indorsements, had
not been properly credited to the petitioner's
account, since the same had already been paid by
the drawee-banks and received in due course by
the respondent; and(c) On the assumption that
the respondent had improperly debited the
petitioner's current account, whether the latter is
entitled to damages.
These three issues interlock and will be resolved
jointly.
In our opinion, the respondent acted within legal
NEGO MIDTERM (FORGERY) 45
bounds when it debited the petitioner's account.
When the petitioner deposited the checks with the
respondent, the nature of the relationship created
at that stage was one of agency, that is, the bank
was to collect from the drawees of the checks the
corresponding proceeds. It is true that the
respondent had already collected the proceeds of
the checks when it debited the petitioner's account,
so that following the rule in Gullas vs. Philippine
National Bank 2 it might be argued that the
relationship between the parties had become that
of creditor and debtor as to preclude the
respondent from using the petitioner's funds to
make payments not authorized by the latter. It is
our view nonetheless that no creditor-debtor
relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act
2031) states that 3 —
"When a signature is forged or made without the
authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party
thereto, can be acquired through or under such
signature, unless the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority."
Since under the foregoing provision, a forged
signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce
its payment can be acquired through or under the
forged signature except against a party who
cannot invoke the forgery, it stands to reason,
upon the facts of record, that the respondent, as a
collecting bank which indorsed the checks to the
drawee-banks for clearing, should be liable to the
latter for reimbursement, for, as found by the
court a quo and by the appellate court, the
indorsements on the checks had been forged prior
to their delivery to the petitioner. In legal
contemplation, therefore, the payments made by
the drawee-banks to the respondent on account of
the said checks were ineffective; and, such being
the case, the relationship of creditor and debtor
between the petitioner and the respondent had not
been validly effected, the checks not having been
properly and legitimately converted into cash. 4
In Great Eastern Life Ins. Co. vs. Hongkong &
Shanghai Bank, 5 the Court ruled that it is the
obligation of the collecting bank to reimburse the

drawee-bank the value of the checks subsequently
found to contain the forged indorsement of the
payee. The reason is that the bank with which the
check was deposited has no right to pay the sum
stated therein to the forger "or anyone else upon a
forged signature." "It was its duty to know," said
the Court, "that [the payee's] endorsement was
genuine before cashing the check." The petitioner
must in turn shoulder the loss of the amounts
which the respondent; as its collecting agent, had
to reimburse to the drawee-banks.
We do not consider material for the purposes of
the case at bar that more than three months had
elapsed since the proceeds of the checks in
question were collected by the respondent. The
record shows that the respondent had acted
promptly after being informed that the
indorsements on the checks were forged.
Moreover, having received the checks merely for
collection and deposit, the respondent cannot he
expected to know or ascertain the genuineness of
all prior indorsements on the said checks. Indeed,
having itself indorsed them to the respondent in
accordance with the rules and practices of
commercial banks, of which the Court takes due
cognizance, the petitioner is deemed to have given
the warranty prescribed in Section 66 of the
Negotiable Instruments Law that every single one
of those checks "is genuine and in all respects
what it purports to be.".
The petitioner was, moreover, grossly recreant in
accepting the checks in question from Ramirez. It
could not have escaped the attention of the
petitioner that the payee of all the checks was a
corporation — the Inter-Island Gas Service, Inc.
Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its
jai-alai games without making any inquiry as to his
authority to exchange checks belonging to the
payee-corporation. In Insular Drug Co. vs.
National 6 the Court made the pronouncement
that.
". . . The right of an agent to indorse commercial
paper is a very responsible power and will not be
lightly inferred. A salesman with authority to
collect money belonging to his principal does not
have the implied authority to indorse checks
received in payment. 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." (underscoring supplied)
It must be noted further that three of the checks in
question are crossed checks, namely, exhs. 21, 25
and 27, which may only be deposited, but not
encashed; yet, the petitioner negligently accepted
them for cash. That two of the crossed checks,
namely, exhs. 21 and 25, are bearer instruments
would not, in our view, exculpate the petitioner
from liability with respect to them. The fact that
they are bearer checks and at the same time
crossed checks should have aroused the
petitioner's suspicion as to the title of Ramirez
over them and his authority to cash them
(apparently to purchase jai-alai tickets from the
petitioner), it appearing on their face that a
corporate entity — the Inter Island Gas Service,
Inc. — was the payee thereof and Ramirez
delivered the said checks to the petitioner
ostensibly on the strength of the payee's cashiers'
indorsements.
At all events, under Section 67 of the Negotiable
Instruments Law, "Where a person places his
indorsement on an instrument negotiable by
delivery he incurs all the liability of an indorser,"
and under Section 66 of the same statute a
general indorser warrants that the instrument "is
genuine and in all respects what it purports to be."
Considering that the petitioner indorsed the said
checks when it deposited them with the
respondent, the petitioner as an indorser
guaranteed the genuineness of all prior
indorsements thereon. The respondent which
relied upon the petitioner's warranty should not be
held liable for the resulting loss. This conclusion
applied similarly to exh. 22 which is an uncrossed
bearer instrument, for under Section 65 of the
Negotiable Instrument Law. "Every person
negotiating an instrument by delivery . . . warrants
(a) That the instrument is genuine and in all
respects what it purports to be." Under that same
section this warranty "extends in favor of no
holder other than the immediate transferee,"
which, in the case at bar, would be the respondent.
The provision in the deposit slip issued by the
respondent which stipulates that it "reserves to
itself the right to charge back the item to the
account of its depositor," at any time before
"current funds or solvent credits shall have been
actually received by the Bank," would not
materially affect the conclusion we have reached.
That stipulation prescribes that there must be an
NEGO MIDTERM (FORGERY) 46
actual receipt by the bank of current funds or forged signature except against a party
solvent credits; but as we have earlier indicated who cannot invoke its forgery or want of
the transfer by the drawee-banks of funds to the authority. It stands to reason that as
respondent on account of the checks in question a collecting bank which
was ineffectual because made under the mistaken indorsed the checks to the drawee-banks
and valid assumption that the indorsements of the for clearing, should be liable to the latter
payee thereon were genuine. Under article 2154 of for reimbursement for the indorsements on the
the New Civil Code "If something is received when checks had been forged prior to their delivery to
there is no right to demand it and it was unduly the petitioner. The payments made by the
delivered through mistake, the obligation to return drawee banks to respondent were
it arises." There was, therefore, in contemplation ineffective—the creditor-debtor relationship
of law, no valid payment of money made by the hadn’t been validly effected.
drawee-banks to the respondent on account of the
questioned checks.
ACCORDINGLY, the judgment of the Court of
Appeals is affirmed, at petitioner's cost.
FACTS:
Checks were deposited by petitioner in its current
account with the bank. These checks were
from a certain Ramirez, a consistent
better in its games, who was a sales
agent from Inter-Island Gas. Inter-Island
later found out that of the forgeries
committed in the checks and thus, it
informed all the parties concerned. Upon the
demands on the bank as the collecting bank, it
debited the account of petitioner. Thereafter,
petitioner tried to issue a check for
payment of shares of stock but such
was dishonored for insufficient funds. It filed a
complaint against the bank.
HELD:
Respondent bank acted within legal bounds when
it debited the account of petitioner. When the
petitioner deposited the checks to its
account, the relationship created was one of
agency still and not of creditor-debtor. The bank
was to collect from the drawees of the checks with
the corresponding
proceeds.
The Bank may have the proceeds already
when it debited the account of petitioner.
Nonetheless, there is still no creditor-debtor
relationship.
Following Section 23, a forged signature is wholly
inoperative and no right to discharge it or enforce
its payment can be acquired through or under the

G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST
COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN
ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson
for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent
Golden Savings & Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a
simple question of negligence. The facts, pruned of all
non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial
bank with branches throughout the Philippines and even
abroad. Golden Savings and Loan Association was, at
the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an
account with Golden Savings and deposited over a
period of two months 38 treasury warrants with a total
value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by its
Auditor. Six of these were directly payable to Gomez
while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second
indorser.1
On various dates between June 25 and July 16, 1979, all
these warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to
its Savings Account No. 2498 in the Metrobank branch in
Calapan, Mindoro. They were then sent for clearing by
the branch office to the principal office of Metrobank,
which forwarded them to the Bureau of Treasury for
special clearing.2
More than two weeks after the deposits, Gloria Castillo
went to the Calapan branch several times to ask whether
the warrants had been cleared. She was told to wait.
Accordingly, Gomez was meanwhile not allowed to
withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also
as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to
withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the
amount of P508,000.00, the second on July 13, 1979, in
the amount of P310,000.00, and the third on July 16,
1979, in the amount of P150,000.00. The total
withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to
make withdrawals from his own account, eventually
collecting the total amount of P1,167,500.00 from the
proceeds of the apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings
that 32 of the warrants had been dishonored by the
Bureau of Treasury on July 19, 1979, and demanded the
refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its
account.
The demand was rejected. Metrobank then sued Golden
Savings in the Regional Trial Court of Mindoro.5 After
trial, judgment was rendered in favor of Golden Savings,
which, however, filed a motion for reconsideration even
as Metrobank filed its notice of appeal. On November 4,
1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the
plaintiff;
2. Dissolving and lifting the writ of attachment of the
properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo
and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting
Savings Account No. 2498 of the sum of P1,754,089.00
and to reinstate and credit to such account such amount
existing before the debit was made including the amount
of P812,033.37 in favor of defendant Golden Savings
and Loan Association, Inc. and thereafter, to allow
defendant Golden Savings and Loan Association, Inc. to
withdraw the amount outstanding thereon before the
debit;
4. Ordering the plaintiff to pay the defendant Golden
Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses
Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was
affirmed, prompting Metrobank to file this petition for
review on the following grounds:
1. Respondent Court of Appeals erred in disregarding
and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to
charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot
be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by
respondent Court of Appeals, Metrobank is made to pay
for warrants already dishonored, thereby perpetuating
the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that
as between Metrobank and Golden Savings, the latter
should bear the loss.
4. Respondent Court of Appeals erred in holding that the
treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the
Court that Metrobank was indeed negligent in giving
Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it was
safe to allow Gomez to withdraw the proceeds thereof
NEGO MIDTERM (FORGERY) 47
from his account with it. Without such assurance, Golden
Savings would not have allowed the withdrawals; with
such assurance, there was no reason not to allow the
withdrawal. Indeed, Golden Savings might even have
incurred liability for its refusal to return the money that to
all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw
fit.
It was, in fact, to secure the clearance of the treasury
warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no clearing
facilities of its own. It relied on Metrobank to determine
the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until
Metrobank allowed Golden Savings itself to withdraw
them from its own deposit.7 It was only when Metrobank
gave the go-signal that Gomez was finally allowed by
Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should
have exercised more care in checking the personal
circumstances of Gomez before accepting his deposit
does not hold water. It was Gomez who was entrusting
the warrants, not Golden Savings that was extending him
a loan; and moreover, the treasury warrants were subject
to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of
Gomez's identity or of the genuineness of his signature
as checked by Golden Savings. In fact, the treasury
warrants were dishonored allegedly because of the
forgery of the signatures of the drawers, not of Gomez as
payee or indorser. Under the circumstances, it is clear
that Golden Savings acted with due care and diligence
and cannot be faulted for the withdrawals it allowed
Gomez to make.
By contrast, Metrobank exhibited extraordinary
carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was
1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it
would not have lost a single centavo by waiting. Yet,
despite the lack of such clearance — and
notwithstanding that it had not received a single centavo
from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to
withdraw — not once, not twice, but thrice — from
the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent
inquiries of Gloria Castillo about the clearance and it also
wanted to "accommodate" a valued client. It "presumed"
that the warrants had been cleared simply because of

8
"the lapse of one week." For a bank with its long
experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank
would invoke the conditions printed on the dorsal side of
the deposit slips through which the treasury warrants
were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank
obligates itself only as the depositor's collecting agent,
assuming no responsibility beyond care in selecting
correspondents, and until such time as actual payment
shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any
amount previously credited, whether or not such item is
returned. This also applies to checks drawn on local
banks and bankers and their branches as well as on this
bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason.
(Emphasis supplied.)
According to Metrobank, the said conditions clearly show
that it was acting only as a collecting agent for Golden
Savings and give it the right to "charge back to the
depositor's account any amount previously credited,
whether or not such item is returned. This also applies to
checks ". . . which are unpaid due to insufficiency of
funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the
nature of contractual stipulations and became binding on
Golden Savings when Gloria Castillo, as its Cashier,
signed the deposit slips.
Doubt may be expressed about the binding force of the
conditions, considering that they have apparently been
imposed by the bank unilaterally, without the consent of
the depositor. Indeed, it could be argued that the
depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set
forth in the given permit at the back of the deposit slip.
We do not have to rule on this matter at this time. At any
rate, the Court feels that even if the deposit slip were
considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the
circumstances of this case.
In stressing that it was acting only as a collecting agent
for Golden Savings, Metrobank seems to be suggesting
that as a mere agent it cannot be liable to the principal.
This is not exactly true. On the contrary, Article 1909 of
the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud,
but also for negligence, which shall be judged 'with more
or less rigor by the courts, according to whether the
agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently
established. To repeat for emphasis, it was the clearance
given by it that assured Golden Savings it was already
safe to allow Gomez to withdraw the proceeds of the
treasury warrants he had deposited
Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists
(although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only
once or even twice but three times. The total withdrawal
was in excess of its original balance before the treasury
warrants were deposited, which only added to its belief
that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed
amount if the warrants are not paid for any reason is not
acceptable. Any reason does not mean no reason at all.
Otherwise, there would have been no need at all for
Golden Savings to deposit the treasury warrants with it
for clearance. There would have been no need for it to
wait until the warrants had been cleared before paying
the proceeds thereof to Gomez. Such a condition, if
interpreted in the way the petitioner suggests, is not
binding for being arbitrary and unconscionable. And it
becomes more so in the case at bar when it is
considered that the supposed dishonor of the warrants
was not communicated to Golden Savings before it
made its own payment to Gomez.
The belated notification aggravated the petitioner's
earlier negligence in giving express or at least implied
clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not all.
On top of this, the supposed reason for the dishonor, to
wit, the forgery of the signatures of the general manager
and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts
which we see no reason to disturb. And as we said in
MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al.,
139 SCRA 238). It must be established by clear, positive
and convincing evidence. This was not done in the
present case.
A no less important consideration is the circumstance
that the treasury warrants in question are not negotiable
instruments. Clearly stamped on their face is the word
"non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law,
especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An
instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to pay
a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified
order or promise to pay is unconditional within the
meaning of this Act though coupled with —
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to
be debited with the amount; or
(b) A statement of the transaction which gives rise to the
instrument judgment.
But an order or promise to pay out of a particular fund is
not unconditional.
The indication of Fund 501 as the source of the payment
to be made on the treasury warrants makes the order or
promise to pay "not unconditional" and the warrants
themselves non-negotiable. There should be no question
that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This
NEGO MIDTERM (FORGERY) 48
conclusion conforms to Abubakar vs. Auditor
General11 where the Court held:
The petitioner argues that he is a holder in good faith and
for value of a negotiable instrument and is entitled to the
rights and privileges of a holder in due course, free from
defenses. But this treasury warrant is not within the
scope of the negotiable instrument law. For one thing,
the document bearing on its face the words "payable
from the appropriation for food administration, is actually
an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last
sentence and section [1(b)] of the Negotiable
Instruments Law).
Metrobank cannot contend that by indorsing the warrants
in general, Golden Savings assumed that they were
"genuine and in all respects what they purport to be," in
accordance with Section 66 of the Negotiable
Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The
indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the
warrants but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the
guarantee when it stamped on the back of the warrants:
"All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan
Branch."
The petitioner lays heavy stress on Jai Alai Corporation v.
Bank of the Philippine Islands,12 but we feel this case is
inapplicable to the present controversy.1âwphi1 That
case involved checks whereas this case involves
treasury warrants. Golden Savings never represented
that the warrants were negotiable but signed them only
for the purpose of depositing them for clearance. Also,
the fact of forgery was proved in that case but not in the
case before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without
question from one Antonio Ramirez notwithstanding that
the payee was the Inter-Island Gas Services, Inc. and it
did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct.
However, we will have to amend it insofar as it directs the
petitioner to credit Golden Savings with the full amount of
the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored
was P1,754,089.00, from which Gomez was allowed to
withdraw P1,167,500.00 before Golden Savings was
 NEGO MIDTERM (FORGERY) 49
notified of the dishonor. The amount he has withdrawn
must be charged not to Golden Savings but to Metrobank,
which must bear the consequences of its own negligence.
But the balance of P586,589.00 should be debited to
Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden
Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been
informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED,

with the modification that Paragraph 3 of the dispositive
portion of the judgment of the lower court shall be
reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of

P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw the
amount outstanding thereon, if any, after the debit.

SO ORDERED.

G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S.
MIRANDA, respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency
selling airline tickets on commission basis for and in
behalf of different airline companies. Private respondent
Arturo S. Miranda had a revolving credit line with
petitioner. He procured tickets from petitioner on behalf
of airline passengers and derived commissions
therefrom.
On 14 June 1972, Travel-On filed suit before the Court of
First Instance ("CFI") of Manila to collect on six (6)
checks issued by private respondent with a total face
amount of P115,000.00. The complaint, with a prayer for
the issuance of a writ of preliminary attachment and
attorney's fees, averred that from 5 August 1969 to 16
January 1970, petitioner sold and delivered various
airline tickets to respondent at a total price of
P278,201.57; that to settle said account, private
respondent paid various amounts in cash and in kind,
and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by
the drawee banks. Travel-On further alleged that in
March 1972, private respondent made another payment
of P10,000.00 reducing his indebtedness to P105,000.00.
The writ of attachment was granted by the court a quo.
In his answer, private respondent admitted having had
transactions with Travel-On during the period stipulated
in the complaint. Private respondent, however, claimed
that he had already fully paid and even overpaid his
obligations and that refunds were in fact due to him. He
argued that he had issued the postdated checks for
purposes of accommodation, as he had in the past
accorded similar favors to petitioner. During the
proceedings, private respondent contested several
tickets alleged to have been erroneously debited to his
account. He claimed reimbursement of his alleged over
payments, plus litigation expenses, and exemplary and
moral damages by reason of the allegedly improper
attachment of his properties.
In support of his theory that the checks were issued for
accommodation, private respondent testified that he bad
issued the checks in the name of Travel-On in order that
its General Manager, Elita Montilla, could show to
Travel-On's Board of Directors that the accounts
receivable of the company were still good. He further
stated that Elita Montilla tried to encash the same, but
that these were dishonored and were subsequently
returned to him after the accommodation purpose had
been attained.
Travel-On's witness, Elita Montilla, on the other hand
explained that the "accommodation" extended to
Travel-On by private respondent related to situations
where one or more of its passengers needed money in
Hongkong, and upon request of Travel-On respondent
would contact his friends in Hongkong to advance
Hongkong money to the passenger. The passenger then
paid Travel-On upon his return to Manila and which
payment would be credited by Travel-On to respondent's
running account with it.
In its decision dated 31 January 1975, the court a
quo ordered Travel-On to pay private respondent the
amount of P8,894.91 representing net overpayments by
private respondent, moral damages of P10,000.00 for
the wrongful issuance of the writ of attachment and for
the filing of this case, P5,000.00 for attorney's fees and
the costs of the suit.
The trial court ruled that private respondent's
indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued
not for the purpose of encashment to pay his
indebtedness but to accommodate the General Manager
of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was,
however, denied by the trial court, which in fact then
increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of
the trial court, but reduced the award of moral damages
to P20,000.00, with interest at the legal rate from the
date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of
Appeal's' decision, without success.
In the instant Petition for Review, it is urged that the
postdated checks are per se evidence of liability on the
part of private respondent. Petitioner further argues that
even assuming that the checks were for accommodation,
private respondent is still liable thereunder considering
that petitioner is a holder for value.
Both the trial and appellate courts had rejected the
checks as evidence of indebtedness on the ground that
the various statements of account prepared by petitioner
did not show that Private respondent had an outstanding
balance of P115,000.00 which is the total amount of the
checks he issued. It was pointed out that while the
various exhibits of petitioner showed various
accountabilities of private respondent, they did not
satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court
made much of the fact that the figures representing
private respondent's unpaid accounts found in the
"Schedule of Outstanding Account" dated 31 January
1970 did not tally with the figures found in the statement
which showed private respondent's transactions with
petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the total outstanding
amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to
the table of transactions for the year 1969 and 1970, the
total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows
that the 7 April 1972 Statement of Account had simply
not been updated; that if we use as basis the figure as of
31 January 1970 which is P278,432.74 and from it
deduct P38,638.17 which represents some of the
payments subsequently made by private respondent, the
figure — P239,794.57 will be obtained.
Also, the fact alone that the various statements of
account had variances in figures, simply did not mean
that private respondent had no more financial obligations
to petitioner. It must be stressed that private
respondent's account with petitioner was
a running or open one, which explains the varying
figures in each of the statements rendered as of a given
date.
The appellate court erred in considering only the
statements of account in determining whether private
respondent was indebted to petitioner under the checks.
By doing so, it failed to give due importance to the most
telling piece of evidence of private respondent's
indebtedness — the checks themselves which he had
issued.
Contrary to the view held by the Court of Appeals, this
Court finds that the checks are the all important evidence
NEGO MIDTERM (FORGERY) 50
of petitioner's case; that these checks clearly established
private respondent's indebtedness to petitioner; that
private respondent was liable thereunder.
It is important to stress that a check which is regular on
its face is deemed prima facie to have been issued for a
valuable consideration and every person whose
signature appears thereon is deemed to have become a
party thereto for value. 1 Thus, the mere introduction of
the instrument sued on in evidence prima facie entitles
the plaintiff to recovery. Further, the rule is quite settled
that a negotiable instrument is presumed to have been
given or indorsed for a sufficient consideration unless
otherwise contradicted and overcome by other
competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the
existence of valuable consideration upon petitioner. This
cannot be countenanced; it was up to private respondent
to show that he had indeed issued the checks without
sufficient consideration. The Court considers that Private
respondent was unable to rebut satisfactorily this legal
presumption. It must also be noted that those checks
were issued immediately after a letter demanding
payment had been sent to private respondent by
petitioner Travel-On.
The fact that all the checks issued by private respondent
to petitioner were presented for payment by the latter
would lead to no other conclusion than that these checks
were intended for encashment. There is nothing in the
checks themselves (or in any other document for that
matter) that states otherwise.
We are unable to accept the Court of Appeals'
conclusion that the checks here involved were issued for
"accommodation" and that accordingly private
respondent maker of those checks was not liable thereon
to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law
does refer to accommodation transactions, no such
transaction was here shown. Section 29 of the
Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. — An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the

instrument, knew him to be only an accommodation
party.
In accommodation transactions recognized by the
Negotiable Instruments Law, an accommodating party
lends his credit to the accommodated party, by issuing or
indorsing a check which is held by a payee or indorsee
as a holder in due course, who gave full value therefor to
the accommodated party. The latter, in other words,
receives or realizes full value which the accommodated
party then must repay to the accommodating party,
unless of course the accommodating party intended to
make a donation to the accommodated party. But the
accommodating party is bound on the check to the
holder in due course who is necessarily a third party and
is not the accommodated party. Having issued or
indorsed the check, the accommodating party has
warranted to the holder in due course that he will pay the
same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6)
checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On
obviously was not an accommodated party; it realized no
value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory
presumption that it was a holder in due course, 4 that the
checks were supported by valuable
consideration. 5 Private respondent maker of the checks
did not successfully rebut these presumptions. The only
evidence aliunde that private respondent offered was his
own self-serving uncorroborated testimony. He claimed
that he had issued the checks to Travel-On as payee to
"accommodate" its General Manager who allegedly
wished to show those checks to the Board of Directors of
Travel-On to "prove" that Travel-On's account
receivables were somehow "still good." It will be seen
that this claim was in fact a claim that the checks were
merely simulated, that private respondent did not intend
to bind himself thereon. Only evidence of the clearest
and most convincing kind will suffice for that
purpose; 6 no such evidence was submitted by private
respondent. The latter's explanation was denied by
Travel-On's General Manager; that explanation, in any
case, appears merely contrived and quite hollow to us.
Upon the other hand, the "accommodation" or assistance
extended to Travel-On's passengers abroad as testified
by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but
rather the circumvention of then existing foreign
exchange regulations by passengers booked by
Travel-On, which incidentally involved receipt of full
consideration by private respondent.
NEGO MIDTERM (FORGERY) 51
Thus, we believe and so hold that private respondent were for accommodation purposes only. The
must be held liable on the six (6) checks here involved. company needed to show to its Board of Directors that its
Those checks in themselves constituted evidence of accounts receivable was in good standing. The RTC
indebtedness of private respondent, evidence not and CA held Miranda not to be liable.
successfully overturned or rebutted by private
respondent. HELD:
Reliance by the lower and appellate court on
the company’s financial statements were wrong, to
Since the checks constitute the best evidence of private
see if Miranda was liable or not. This financial
respondent's liability to petitioner Travel-On, the amount statements were actually not updated to show that there
of such liability is the face amount of the checks, reduced was indebtedness on the part of Miranda. The
only by the P10,000.00 which Travel-On admitted in its best evidence that the courts should have
complaint to have been paid by private respondent looked at were the checks itself. There is a prima facie
sometime in March 1992.
presumption that a check was issued for valuable
consideration and the provision puts the burden
upon the drawer to disprove this presumption. Miranda
The award of moral damages to Private respondent must
be set aside, for the reason that Petitioner's application was unable to relieve himself of this burden.
for the writ of attachment rested on sufficient basis and
no bad faith was shown on the part of Travel-On. If Only clear and convincing evidence and not mere
self-serving evidence of drawer can rebut this
anyone was in bad faith, it was private respondent who
issued bad checks and then pretended to have presumption. The company was entitled to
"accommodated" petitioner's General Manager by the benefit conferred by the statutory provision.
assisting her in a supposed scheme to deceive Miranda failed to show that the checks weren’t
petitioner's Board of Directors and to misrepresent issued for any valuable consideration. The checks
Travel-On's financial condition. were
clear by stating that the company was the
payee and not a mere accommodated party.
ACCORDINGLY, the Court Resolved to GRANT due And also, notice was given to the fact that
course to the Petition for Review on Certiorari and to the checks were issued after a written demand
REVERSE and SET ASIDE the Decision dated 22 by the company regarding Miranda’s unpaid
October 1980 and the Resolution of 23 January 1981 of liabilities
the Court of Appeals, as well as the Decision dated 31
January 1975 of the trial court, and to enter a new
decision requiring private respondent Arturo S. Miranda
to pay to petitioner Travel-On the amount of P105,000.00
with legal interest thereon from 14 June 1972, plus ten
percent (10%) of the total amount due as attorney's fees.
Costs against Private respondent.
FACTS:
Petitioner was a travel agency involved in
ticket sales on a commission basis for and
on behalf of different airline companies.
Miranda has a revolving credit line with the
company. He procured tickets on behalf of
others and derived commissions from it.
Petitioner filed a collection suit against
Miranda for the unpaid amount of six checks.
Petitioner alleged that Miranda procured tickets
from them which he paid with cash and checks but the
checks were dishonored upon presentment to the
bank. This was being refuted by Miranda
by saying
that he actually paid for his obligations, even
in the excess. He argued that the checks

[G.R. No. 138074. August 15, 2003]
CELY YANG, petitioner, vs. HON. COURT OF
APPEALS, PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, FAR EAST BANK
& TRUST CO., EQUITABLE BANKING
CORPORATION, PREMCHANDIRAMANI and
FERNANDO DAVID, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the decision[1] of the
Court of Appeals, dated March 25, 1999, in CA-G.R. CV
No. 52398, which affirmed with modification the joint
decision of the Regional Trial Court (RTC) of Pasay City,
Branch 117, dated July 4, 1995, in Civil Cases Nos.
5479[2] and 5492.[3] The trial court dismissed the
complaint against herein respondents Far East Bank &
Trust Company (FEBTC), Equitable Banking Corporation
(Equitable), and Philippine Commercial International
Bank (PCIB) and ruled in favor of respondent Fernando
David as to the proceeds of the two cashiers checks,
including the earnings thereof pendente lite. Petitioner
Cely Yang was ordered to pay David moral damages
of P100,000.00 and attorneys fees also in the amount
of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely
Yang and private respondent Prem Chandiramani
entered into an agreement whereby the latter was to give
Yang a PCIB managers check in the amount of P4.2
million in exchange for two (2) of Yangs managers
checks, each in the amount of P2.087 million, both
payable to the order of private respondent Fernando
David. Yang and Chandiramani agreed that the
difference of P26,000.00 in the exchange would be their
profit to be divided equally between them.
Yang and Chandiramani also further agreed that
the former would secure from FEBTC a dollar draft in the
amount of US$200,000.00, payable to PCIB FCDU
Account No. 4195-01165-2, which Chandiramani would
exchange for another dollar draft in the same amount to
be issued by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang
procured the following:
a) Equitable Cashiers Check No. CCPS
14-009467 in the sum
of P2,087,000.00, dated December
22, 1987, payable to the order of
Fernando David;
b) FEBTC Cashiers Check No. 287078, in the
amount of P2,087,000.00, dated
December 22, 1987, likewise
payable to the order of Fernando
David; and
c) FEBTC Dollar Draft No. 4771, drawn on
Chemical Bank, New York, in the
amount of US$200,000.00, dated
December 22, 1987, payable to
PCIB FCDU Account No.
4195-01165-2.
At about one oclock in the afternoon of the same
day, Yang gave the aforementioned cashiers checks and
dollar drafts to her business associate, Albert Liong, to
be delivered to Chandiramani by Liongs messenger,
Danilo Ranigo. Ranigo was to meet Chandiramani at
Philippine Trust Bank, Ayala Avenue, Makati City, Metro
Manila where he would turn over Yangs cashiers checks
and dollar draft to Chandiramani who, in turn, would
deliver to Ranigo a PCIB managers check in the sum of
P4.2 million and a Hang Seng Bank dollar draft for
US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous
and Ranigo allegedly lost the two cashiers checks and
the dollar draft bought by petitioner. Ranigo reported the
alleged loss of the checks and the dollar draft to Liong at
half past four in the afternoon of December 22, 1987.
Liong, in turn, informed Yang, and the loss was then
reported to the police.
It transpired, however, that the checks and the
dollar draft were not lost, for Chandiramani was able to
get hold of said instruments, without delivering the
exchange consideration consisting of the PCIB
managers check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2)
hours after Chandiramani and Ranigo were to meet in
Makati City, Chandiramani delivered to respondent
Fernando David at China Banking Corporation branch in
San Fernando City, Pampanga, the following: (a) FEBTC
Cashiers Check No. 287078, dated December 22, 1987,
in the sum of P2.087 million; and (b) Equitable Cashiers
Check No. CCPS 14-009467, dated December 22, 1987,
also in the amount of P2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which
Chandiramani deposited in the savings account of his
wife, Pushpa Chandiramani; and his mother, Rani
Reynandas, who held FCDU Account No. 124 with the
United Coconut Planters Bank branch in Greenhills, San
Juan, Metro Manila. Chandiramani also deposited
FEBTC Dollar Draft No. 4771, dated December 22, 1987,
drawn upon the Chemical Bank, New York for
US$200,000.00 in PCIB FCDU Account No.
4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and
Equitable to stop payment on the instruments she
believed to be lost. Both banks complied with her request,
but upon the representation of PCIB, FEBTC
subsequently lifted the stop payment order on FEBTC
Dollar Draft No. 4771, thus enabling the holder of PCIB
FCDU Account No. 4195-01165-2 to receive the amount
of US$200,000.00.
On December 28, 1987, herein petitioner Yang
lodged a Complaint[4] for injunction and damages against
Equitable, Chandiramani, and David, with prayer for a
temporary restraining order, with the Regional Trial Court
of Pasay City. The Complaint was docketed as Civil
Case No. 5479. The Complaint was subsequently
amended to include a prayer for Equitable to return to
Yang the amount of P2.087 million, with interest thereon
until fully paid.[5]
On January 12, 1988, Yang filed a separate case
for injunction and damages, with prayer for a writ of
preliminary injunction against FEBTC, PCIB,
Chandiramani and David, with the RTC of Pasay City,
docketed as Civil Case No. 5492. This complaint was
later amended to include a prayer that defendants
therein return to Yang the amount of P2.087 million, the
value of FEBTC Dollar Draft No. 4771, with interest at
18% annually until fully paid.[6]
On February 9, 1988, upon the filing of a bond by
Yang, the trial court issued a writ of preliminary injunction
in Civil Case No. 5479. A writ of preliminary injunction
was subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for
dismissal of the cases against him and for
reconsideration of the Orders granting the writ of
preliminary injunction, but these motions were denied.
David then elevated the matter to the Court of Appeals in
a special civil action for certiorari docketed as CA-G.R.
SP No. 14843, which was dismissed by the appellate
court.
As Civil Cases Nos. 5479 and 5492 arose from
the same set of facts, the two cases were consolidated.
The trial court then conducted pre-trial and trial of the two
cases, but the proceedings had to be suspended after a
fire gutted the Pasay City Hall and destroyed the records
of the courts.
NEGO MIDTERM (FORGERY) 52
After the records were reconstituted, the
proceedings resumed and the parties agreed that the
money in dispute be invested in Treasury Bills to be
awarded in favor of the prevailing side. It was also
agreed by the parties to limit the issues at the trial to the
following:
1. Who, between David and Yang, is
legally entitled to the proceeds of
Equitable Banking Corporation (EBC)
Cashiers Check No. CCPS
14-009467 in the sum
of P2,087,000.00 dated December 22,
1987, and Far East Bank and Trust
Company (FEBTC) Cashiers Check
No. 287078 in the sum
of P2,087,000.00 dated December 22,
1987, together with the earnings
derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB
solidarily liable to Yang for having
allowed the encashment of FEBTC
Dollar Draft No. 4771, in the sum of
US$200,000.00 plus interest thereon
despite the stop payment order of
Cely Yang?[7]
On July 4, 1995, the trial court handed down its
decision in Civil Cases Nos. 5479 and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of
defendant Fernando David against the plaintiff Cely Yang and
declaring the former entitled to the proceeds of the two (2)
cashiers checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the
defendant Fernando David moral damages in the amount
of P100,000.00; attorneys fees in the amount of P100,000.00
and to pay the costs. The complaint against Far East Bank and
Trust Company (FEBTC), Philippine Commercial
International Bank (PCIB) and Equitable Banking Corporation
(EBC) is dismissed. The decision is without prejudice to
whatever action plaintiff Cely Yang will file against defendant
Prem Chandiramani for reimbursement of the amounts
received by him from defendant Fernando David.
SO ORDERED.[8]
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due
course for the reason that the cashiers checks were complete
on their face when they were negotiated to him. They were not
yet overdue when he became the holder thereof and he had no
notice that said checks were previously dishonored; he took

the cashiers checks in good faith and for value. He parted
some $200,000.00 for the two (2) cashiers checks which were
given to defendant Chandiramani; he had also no notice of any
infirmity in the cashiers checks or defect in the title of the
drawer. As a matter of fact, he asked the manager of the China
Banking Corporation to inquire as to the genuineness of the
cashiers checks (tsn, February 5, 1988, p. 21, September 20,
1991, pp. 13-14). Another proof that defendant David is a
holder in due course is the fact that the stop payment order on
[the] FEBTC cashiers check was lifted upon his inquiry at the
head office (tsn, September 20, 1991, pp. 24-25). The
apparent reason for lifting the stop payment order was because
of the fact that FEBTC realized that the checks were not
actually lost but indeed reached the payee defendant David. [9]
Yang then moved for reconsideration of the RTC
judgment, but the trial court denied her motion in its
Order of September 20, 1995.
In the belief that the trial court misunderstood the
concept of a holder in due course and misapprehended
the factual milieu, Yang seasonably filed an appeal with
the Court of Appeals, docketed as CA-G.R. CV No.
52398.
On March 25, 1999, the appellate court decided
CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the
lower court with modification and hereby orders the
plaintiff-appellant to pay defendant-appellant PCIB the
amount of Twenty-Five Thousand Pesos (P25,000.00).
SO ORDERED.[10]
In affirming the trial courts judgment with respect
to herein respondent David, the appellate court found
that:
In this case, defendant-appellee had taken the necessary
precautions to verify, through his bank, China Banking
Corporation, the genuineness of whether (sic) the cashiers
checks he received from Chandiramani. As no stop payment
order was made yet (at) the time of the inquiry,
defendant-appellee had no notice of what had transpired
earlier between the plaintiff-appellant and Chandiramani. All
he knew was that the checks were issued to Chandiramani
with whom he was he had (sic) a transaction. Further on,
David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to
David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to
make further inquiry as to any infirmity in the instrument(s)
and defect of title of the holder. To mandate that each holder
inquire about every aspect on how the instrument came about
will unduly impede commercial transactions,
Although negotiable instruments do not constitute legal
tender, they often take the place of money as a means of
payment.
The mere fact that David and Chandiramani knew one another
for a long time is not sufficient to establish that they connived
with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory. [11]
The appellate court awarded P25,000.00 in
attorneys fees to PCIB as it found the action filed by
Yang against said bank to be clearly unfounded and
baseless. Since PCIB was compelled to litigate to protect
itself, then it was entitled under Article 2208[12] of the Civil
Code to attorneys fees and litigation expenses.
Hence, the instant recourse wherein petitioner
submits the following issues for resolution:
a - WHETHER THE CHECKS WERE
ISSUED TO PREM
CHANDIRAMANI BY
PETITIONER;
b - WHETHER THE ALLEGED
TRANSACTION BETWEEN
PREM CHANDIRAMANI AND
FERNANDO DAVID IS
LEGITIMATE OR A SCHEME BY
BOTH PRIVATE RESPONDENTS
TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE
PREM CHANDIRAMANI
US$360,000.00 OR JUST A
FRACTION OF THE AMOUNT
REPRESENTING HIS SHARE OF
THE LOOT;
d - WHETHER PRIVATE RESPONDENTS
FERNANDO DAVID AND PCIB
ARE ENTITLED TO DAMAGES
AND ATTORNEYS FEES. [13]
At the outset, we must stress that this is a petition
for review under Rule 45 of the 1997 Rules of Civil
Procedure. It is basic that in petitions for review under
Rule 45, the jurisdiction of this Court is limited to
reviewing questions of law, questions of fact are not
entertained absent a showing that the factual findings
complained of are totally devoid of support in the record
or are glaringly erroneous.[14] Given the facts in the
instant case, despite petitioners formulation, we find that
the following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in
holding herein respondent Fernando
David to be a holder in due course;
and
b) Whether the appellate court committed a
reversible error in awarding
damages and attorneys fees to David
and PCIB.
On the first issue, petitioner Yang contends that
private respondent Fernando David is not a holder in due
course of the checks in question. While it is true that he
was named the payee thereof, David failed to inquire
from Chandiramani about how the latter acquired
possession of said checks. Given his failure to do so, it
cannot be said that David was unaware of any defect or
infirmity in the title of Chandiramani to the checks at the
time of their negotiation. Moreover, inasmuch as the
checks were crossed, then David should have, pursuant
to our ruling in Bataan Cigar & Cigarette Factory, Inc. v.
Court of Appeals, G.R. No. 93048, March 3, 1994, 230
SCRA 643, been put on guard that the checks were
issued for a definite purpose and accordingly, made
inquiries to determine if he received the checks pursuant
to that purpose. His failure to do so negates the finding in
the proceedings below that he was a holder in due
course.
Finally, the petitioner argues that there is no
showing whatsoever that David gave Chandiramani any
consideration of value in exchange for the
aforementioned checks.
Private respondent Fernando David counters that
the evidence on record shows that when he received the
checks, he verified their genuineness with his bank, and
only after said verification did he deposit them. David
stresses that he had no notice of previous dishonor or
any infirmity that would have aroused his suspicions, the
instruments being complete and regular upon their face.
David stresses that the checks in question were cashiers
checks. From the very nature of cashiers checks, it is
highly unlikely that he would have suspected that
something was amiss. David also stresses negotiable
instruments are presumed to have been issued for
valuable consideration, and he who alleges otherwise
must controvert the presumption with sufficient evidence.
The petitioner failed to discharge this burden, according
to David. He points out that the checks were delivered to
him as the payee, and he took them as holder and payee
NEGO MIDTERM (FORGERY) 53
thereof. Clearly, he concludes, he should be deemed to
be their holder in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is
deemed prima facie a holder in due course. However,
this presumption arises only in favor of a person who is a
holder as defined in Section 191 of the Negotiable
Instruments Law,[15] meaning a payee or indorsee of a
bill or note, who is in possession of it, or the bearer
thereof.
In the present case, it is not disputed that David
was the payee of the checks in question. The weight of
authority sustains the view that a payee may be a holder
in due course.[16] Hence, the presumption that he is
a prima facie holder in due course applies in his favor.
However, said presumption may be rebutted. Hence,
what is vital to the resolution of this issue is whether
David took possession of the checks under the
conditions provided for in Section 52[17] of the Negotiable
Instruments Law. All the requisites provided for in
Section 52 must concur in Davids case, otherwise he
cannot be deemed a holder in due course.
We find that the petitioners challenge to Davids
status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David
tendered any valuable consideration for the disputed
checks; and (2) Davids failure to inquire from
Chandiramani as to how the latter acquired possession
of the checks, thus resulting in Davids intentional
ignorance tantamount to bad faith. In sum, petitioner
posits that the last two requisites of Section 52 are
missing, thereby preventing David from being considered
a holder in due course. Unfortunately for the petitioner,
her arguments on this score are less than meritorious
and far from persuasive.
First, with respect to consideration, Section
24[18] of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired
the same for a consideration[19] or for value.[20] Thus, the
law itself creates a presumption in Davids favor that he
gave valuable consideration for the checks in question.
In alleging otherwise, the petitioner has the onus to prove
that David got hold of the checks absent said
consideration. In other words, the petitioner must present
convincing evidence to overthrow the presumption. Our
scrutiny of the records, however, shows that the
petitioner failed to discharge her burden of proof. The
petitioners averment that David did not give valuable
consideration when he took possession of the checks is
unsupported, devoid of any concrete proof to sustain it.
Note that both the trial court and the appellate court
found that David did not receive the checks gratis, but
instead gave Chandiramani US$360,000.00 as

consideration for the said instruments. Factual findings of
the Court of Appeals are conclusive on the parties and
not reviewable by this Court; they carry great weight
when the factual findings of the trial court are affirmed by
the appellate court.[21]
Second, petitioner fails to point any circumstance
which should have put David on inquiry as to the why
and wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction
between petitioner and Chandiramani. Instead,
Chandiramani and David had a separate dealing in
which it was precisely Chandiramanis duty to deliver the
checks to David as payee. The evidence shows that
Chandiramani performed said task to the letter.
Petitioner admits that David took the step of asking the
manager of his bank to verify from FEBTC and Equitable
as to the genuineness of the checks and only accepted
the same after being assured that there was nothing
wrong with said checks. At that time, David was not
aware of any stop payment order. Under these
circumstances, David thus had no obligation to ascertain
from Chandiramani what the nature of the latters title to
the checks was, if any, or the nature of his possession.
Thus, we cannot hold him guilty of gross neglect
amounting to legal absence of good faith, absent any
showing that there was something amiss about
Chandiramanis acquisition or possession of the checks.
David did not close his eyes deliberately to the nature or
the particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any
knowledge on his part that the action in taking the
instruments amounted to bad faith.[22]
Belatedly, and we say belatedly since petitioner
did not raise this matter in the proceedings below,
petitioner now claims that David should have been put on
alert as the instruments in question were crossed checks.
Pursuant to Bataan Cigar & Cigarette Factory, Inc. v.
Court of Appeals, David should at least have inquired as
to whether he was acquiring said checks for the purpose
for which they were issued, according to petitioners
submission.
Petitioners reliance on the Bataan Cigar case,
however, is misplaced. The facts in the present case are
not on all fours with Bataan Cigar. In the latter case, the
crossed checks were negotiated and sold at a discount
by the payee, while in the instant case, the payee did not
negotiate further the checks in question but promptly
deposited them in his bank account.
The Negotiable Instruments Law is silent with
respect to crossed checks, although the Code of
Commerce[23] makes reference to such instruments.
Nonetheless, this Court has taken judicial cognizance of
the practice that a check with two parallel lines in the
upper left hand corner means that it could only be
[24]
deposited and not converted into cash. The effects of
crossing a check, thus, relates to the mode of payment,
meaning that the drawer had intended the check for
deposit only by the rightful person, i.e., the payee named
therein. In Bataan Cigar, the rediscounting of the check
by the payee knowingly violated the avowed intention of
crossing the check. Thus, in accepting the cross checks
and paying cash for them, despite the warning of the
crossing, the subsequent holder could not be considered
in good faith and thus, not a holder in due course. Our
ruling in Bataan Cigar reiterates that in De Ocampo & Co.
v. Gatchalian.[25]
The factual circumstances in De Ocampo and
in Bataan Cigar are not present in this case. For here,
there is no dispute that the crossed checks were
delivered and duly deposited by David, the payee named
therein, in his bank account. In other words, the purpose
behind the crossing of the checks was satisfied by the
payee.
Proceeding to the issue of damages, petitioner
merely argues that respondents David and PCIB are not
entitled to damages, attorneys fees, and costs of suit as
both acted in bad faith towards her, as shown by her
version of the facts which gave rise to the instant case.
Respondent David counters that he was
maliciously and unceremoniously dragged into this suit
for reasons which have nothing to do with him at all, but
which arose from petitioners failure to receive her share
of the profit promised her by Chandiramani. Moreover, in
filing this suit which has lasted for over a decade now,
the petitioner deprived David of the rightful enjoyment of
the two checks, to which he is entitled, under the law,
compelled him to hire the services of counsel to vindicate
his rights, and subjected him to social humiliation and
besmirched reputation, thus harming his standing as a
person of good repute in the business community of
Pampanga. David thus contends that it is but proper that
moral damages, attorneys fees, and costs of suit be
awarded him.
For its part, respondent PCIB stresses that it was
established by both the trial court and the appellate court
that it was needlessly dragged into this case. Hence, no
error was committed by the appellate court in declaring
PCIB entitled to attorneys fees as it was compelled to
litigate to protect itself.
We have thoroughly perused the records of this
case and find no reason to disagree with the finding of
the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages
as he has been needlessly and unceremoniously dragged into
NEGO MIDTERM (FORGERY) 54
this case which should have been brought only between the get money in return. Consequently, Yang asked for the
plaintiff and defendant Chandiramani.[26] stoppage of payment of the checks she believe
to be lost, relying on the report of her
messenger. The stoppage order was eventually lifted
A careful reading of the findings of facts made by by the banks and the drafts and checks were able to be
both the trial court and appellate court clearly shows that encashed. Yang then filed an action for injunction and
the petitioner, in including David as a party in these damages against the banks, Chandimari and
proceedings, is barking up the wrong tree. It is apparent David. The
from the factual findings that David had no dealings with
trial court and CA held in favor of David as a holder in
the petitioner and was not privy to the agreement of the due course.
latter with Chandiramani. Moreover, any loss which the
petitioner incurred was apparently due to the acts or HELD:
omissions of Chandiramani, and hence, her recourse Every holder of a negotiable instrument is presumed to
should have been against him and not against David. By
be a holder in due course. This is specially true if one is
needlessly dragging David into this case all because he a holder because he is the payee or indorsee of the
and Chandiramani knew each other, the petitioner not instrument. In the case at bar, it is evident that David
only unduly delayed David from obtaining the value of was the payee of the checks. The prima
the checks, but also caused him anxiety and injured his facie presumption of him being a holder in
business reputation while waiting for its outcome. Recall due course is in his favor. Nonetheless,
that under Article 2217[27] of the Civil Code, moral this presumption is disputable. On whether he took
damages include mental anguish, serious anxiety, the check under the conditions set forth in Section 52
besmirched reputation, wounded feelings, social must be proven. Petitioner relies on two
humiliation, and similar injury. Hence, we find the award arguments on why
of moral damages to be in order. David isn’t a holder in due course—first,
because he took the checks without valuable
The appellate court likewise found that like David,
consideration; and second, he failed to inquire
PCIB was dragged into this case on unfounded and
on Chandimari’s title to the checks given to him.
baseless grounds. Both were thus compelled to litigate to
The law gives rise to the presumption of valuable
protect their interests, which makes an award of
consideration. Petitioner has the burden of
attorneys fees justified under Article 2208 (2)[28] of the
debunking such presumption, which it failed to
Civil Code. Hence, we rule that the award of attorneys
do so. Her allegation that David received the
fees to David and PCIB was proper.
checks without consideration is unsupported and
WHEREFORE, the instant petition is DENIED. devoid of any evidence.
The assailed decision of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Furthermore, petitioner wasn't able to show any
Costs against the petitioner. circumstance which should have placed David in inquiry
as to why and wherefore of the possession of the
SO ORDERED. checks by Chandimari. David wasn't a privy
to the transactions between Yang and
Chandimari. Instead, Chandimari and David
FACTS: had the agreement between themselves of the delivery
Yang and Chandimari entered into an agreement that the of the checks. David even inquired with the banks on
latter would issue to the former a manager’s check in the genuineness of the checks in issue. At that time, he
exchange for two checks that Yang has payable to wasn't aware of any request for the stoppage of payment.
the order of David. The difference in Under
amount would be the profit of the two of these circumstances, David had no obligation to
them. It was further agreed upon that Yang ascertain from Chandimari what the nature of the latter’s
would title to the checks was, if any, or the nature of his
secure a dollar draft, which Chandimari would exchange possession.
with another dollar draft to be secured from a
Hong Kong bank. At the agreed time of
rendezvous, it was reported by Yang’s
messenger that Chandimari didn't show up and the
drafts and checks were allegedly stolen. This wasn't
true however. Chandimari was able to get hold of the
drafts and checks. He was even able to deliver
to David the two checks and was able to