FORGERY

FIRST DIVISION

[G.R. No. L-29432. August 6, 1975.]

JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
ISLAND, Respondent.

Bausa, Ampil & Suarez for Petitioner.

Aviado & Aranda for Respondent.

SYNOPSIS
Petitioner deposited in its current account with respondent bank several checks with a total face value of
P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games and a sale agent
of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were all temporarily credited
to petitioners account in accordance with the clause printed on the banks deposit slip. Subsequently,
Ramirez resigned and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas
discovered that all the indorsement made on the cheeks purportedly by its cashiers, as well as the rubber
stamp impression thereon reading "Inter-Island Gas Service, Inc.", were forgeries. It informed petitioner,
the respondent, the drawers and the drawee banks of the said checks and forgeries and filed a criminal
complaint against its former employee. In view of these circumstances, the respondent Bank debited the
petitioners current account and forwarded to the latter the checks containing the forged indorsements,
which petitioner refused to accept. Later, petitioner drew against its current account a check for
P135,000.00. This check was dishonored by respondent as its records showed that petitioners balance
after netting out the value of the checks with the forged indorsement, was insufficient to cover the value
of the check drawn. A complaint was filed by petitioner with the Court of First Instance of Manila. The
same was dismissed by the said court after due trial, as well as by the Court of Appeals, on appeal.
Hence, this petition for review.

The Supreme Court ruled that respondent acted within legal bounds when it debited petitioners account;
that the payments made by the drawee banks to the respondent on account of the checks with forged
indorsements were ineffective; that on account thereof, no creditor-debtor relationship was created
between the parties; that petitioner was grossly recreant in accepting the checks in question from
Ramirez without making any inquiry as to authority to exchange checks belonging to the payee-
corporation; and that petitioner, in indorsing the said checks when it deposited them with respondent,
guaranteed the genuineness of all prior indorsement thereon so that the respondent, which relied upon its
warranty, cannot be held liable for the resulting loss.

Judgment affirmed

SYLLABUS

1. NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. A forged
signature in a negotiable instrument makes it 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.

2. ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES CREATED
EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY COLLECTED THE
PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONERS ACCOUNT; REASON.
Where the indorsement made on the checks were forged prior to their delivery to depositor, the
payments made by the drawee-banks to the collecting bank on account of the said checks were
ineffective. Such being the case, the relationship of creditor and debtor between the depositor and the
depository had not been validly effected, the checks not having properly and legitimately converted into
cash.

3. ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS THE
VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE CASE OF
GREAT EASTERN LIFE INSURANCE CO. v. HONGKONG & SHANGHAI BANK. In Great
Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678 (1992), 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 to anyone else upon a forged
signature." "It was its duty to know," said the Court, "that (the payees) endorsement was genuine before
cashing the check." The depositor must in turn shoulder the loss of the amounts which the respondent, as
its collecting agent, had no reimburse to the drawee-banks.

4. ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE CASE OF
INSULAR DRUG CO. v. NATIONAL. In Insular Drug Co. v. National, 58 Phil. 685 (1933), 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 by agents, does so at his peril, and must
abide by the consequences if the agent who endorses the same is without authority."cralaw virtua1aw
library

5. ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK WHO
RELIED ON INDORSERS WARRANTY. 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." Where the depositor indorsed the
checks with forged indorsement when it deposited them with the collecting bank, the former as an
FORGERY
endorser guaranteed the genuineness of all prior indorsement thereon. The collecting bank which relied
upon this warranty cannot be held liable for the resulting loss.

6. ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO COLLECTING
BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. The transfer by the drawee-banks
of funds to the collecting bank on account of forged checks would be ineffectual when made under the
mistaken and valid assumption that the indorsement of the payee thereon were genuine. Under Article
2154 of the New Civil Code "If something is received when there is no right to demand it and it was
unduly delivered through mistake, the obligation to return it arises," By virtue thereof, there can be no
valid payment of money by drawee-banks to the collecting bank on account of forged checks.


D E C I S I O N


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:chanrob1es virtual 1aw library

1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the
Inter-Island Gas Service Inc. or order:chanrob1es virtual 1aw library

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:chanrob1es virtual 1aw library

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:chanrob1es virtual 1aw library

5/18/59 VN430188 P940.8025cralaw:red

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-
Island Gas Service, Inc. order:chanrob1es virtual 1aw library

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 petitioners account in accordance with the clause printed on the deposit slips issued by
the respondent and which reads:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

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 respondents cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31,
1959, called up the petitioners cashier, Manuel Garcia, and advised the latter that in view of the
circumstances he would debit the value of the checks against the petitioners 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
FORGERY
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 petitioners 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:chanrob1es
virtual 1aw library

(a) Whether the respondent had the right to debit the petitioners 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 petitioners 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 petitioners 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 petitioners 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 bounds when it debited the petitioners 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 petitioners account, so that following the rule in Gullas v. 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 petitioners 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."cralaw virtua1aw library

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. v. 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 payees] 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. v. 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)

FORGERY
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 petitioners 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 payees 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 petitioners 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 actual receipt by the bank of current
funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds to the
respondent on account of the checks in question was ineffectual because made under the mistaken and
valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the
New Civil Code "If something is received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises." There was, therefore, in contemplation of
law, no valid payment of money made by the drawee-banks to the respondent on account of the
questioned checks.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioners cost.

Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave.


FORGERY
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.

MARTIN, J .:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060
dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at Escolta,
Manila. The check was issued by the Bureau of Treasury.
1
Plaintiff Bank was later advised by the said
bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee, "Martin
Lorenzo" was a forgery
2
since the latter had allegedly died as of July 14, 1952.
3
Plaintiff Bank was then
requested by the Bureau of Treasury to refund the amount of P1,246.08.
4
To recover what it had
refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant
Ebrada to account for the sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank sued
defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the complaint
and as affirmative defenses alleged that she was a holder in due course of the check in question, or at the
very least, has acquired her rights from a holder in due course and therefore entitled to the proceeds
thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it is in estoppel,
or so negligent as not to be entitled to recover anything from her.
5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant
Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and for Fourth-
Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance of
Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No.
BP-508060, payable to the order of one MARTIN LORENZO, in the sum of
P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will be
marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this
order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said
check on February 27, 1963 when she encashed it with the plaintiff Bank;
FORGERY
6. That immediately after defendant MAURICIA T. EBRADA received the cash
proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and fourth-
party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to
the fourth-party defendant JUSTINA TINIO on the same date, as evidenced by the
receipt signed by her which will be marked as Exhibit "1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.
Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX
08/100 (P1,246.08), with interest at the legal rate from the filing of the complaint on
June 16, 1966, until fully paid, plus the costs in both instances against Mauricia T.
Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against
Adelaida Dominguez in connection with this case is hereby reserved. The right of
the estate of Dominguez to file the fourth-party complaint against Justina Tinio is
also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE
VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER
ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR
11- YEARS AND THAT THE APPELLANT DID NOT BENEFIT FROM
ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-
appellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed on
said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-appellant
was the last indorser of the said check. As such indorser, she was supposed to have warranted that she
has good title to said check; for under Section 65 of the Negotiable Instruments Law:
6

Every person negotiating an instrument by delivery or by qualified indorsement,
warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by the
Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):
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
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one forged
signature therein will render void all the other negotiations of the check with respect to the other parties
whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on
it, it was held that it is only the negotiation based on the forged or unauthorized signature which is
inoperative. Applying this principle to the case before Us, it can be safely concluded that it is only the
negotiation predicated on the forged indorsement that should be declared inoperative. This means that
the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo,
the second indorser, should be declared of no affect, but the negotiation of the aforesaid check from
Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the
FORGERY
defendant-appellant who did not know of the forgery, should be considered valid and enforceable,
barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it
was discovered that the signature of the payee was forged? Can the drawee bank recover from the one
who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check
can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its
duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the
indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are
genuine, warranty not extending only to holders in due course. One who purchases a check or draft is
bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly asserts that he has performed his duty and the
drawee who has paid the forged check, without actual negligence on his part, may recover the money
paid from such negligent purchasers. In such cases the recovery is permitted because although the
drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had
performed his duty, the forgery would in all probability, have been detected and the fraud defeated. The
reason for allowing the drawee bank to recover from the encasher is:
Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of
the person who vouches for it. If he is deceived he has suffered a loss of his cash or
goods through his own mistake. His own credulity or recklessness, or misplaced
confidence was the sole cause of the loss. Why should he be permitted to shift the
loss due to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the forgery
when the check was presented?
8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine before
presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss and the
plaintiff Bank may recover from her the money she received for the check. As reasoned out above, had
she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would
have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew
its check for P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of
Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the signature of
Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine National
Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine
National Bank indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it
and charged the amount of the check to the insurance company. The Court held that the Hongkong and
Shanghai Banking Corporation was liable to the insurance company for the amount of the check and that
the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation.
Said the Court:
Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid
the amount of the check in question to defendant-appellant, but it has the remedy to recover from the
latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank paid the
check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has
warranted that she has good title to it
10
even if in fact she did not have it because the payee of the check
was already dead 11 years before the check was issued. The fact that immediately after receiving title
cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank, defendant-
appellant immediately turned over said amount to Adelaida Dominguez (Third-Party defendant and the
Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted as an accommodation party in the check for
which she is also liable under Section 29 of the Negotiable Instruments Law (Act 2031), thus: .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 VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.
SO ORDERED.
Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

FORGERY
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-62943 July 14, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE
NATIONAL BANK,respondents.
Juan J. Diaz and Cesar T. Basa for respondent PNB.
San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

GUTIERREZ, JR., J .:
This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of
Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First Instance of
Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as well as the
defendant's counterclaim.
The background facts which led to the filing of the instant petition are summarized in the decision of the
respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS)
is a government owned and controlled corporation created under Republic Act No.
6234 as the successor-in- interest of the defunct NWSA. The Philippine National
Bank (PNB for short), on the other hand, is the depository bank of MWSS and its
predecessor-in-interest NWSA. Among the several accounts of NWSA with PNB is
NWSA Account No. 6, otherwise known as Account No. 381-777 and which is
presently allocated No. 010-500281. The authorized signature for said Account No.
6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and its
acting General Manager Victor L. Recio. Their respective specimen signatures were
submitted by the MWSS to and on file with the PNB. By special arrangement with
the PNB, the MWSS used personalized checks in drawing from this account. These
checks were printed for MWSS by its printer, F. Mesina Enterprises, located at 1775
Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three (23) checks were
prepared, processed, issued and released by NWSA, all of which were paid and
cleared by PNB and debited by PNB against NWSA Account No. 6, to wit:
Check No. Date Payee Amount Date Paid
By PNB
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
3. 59547 3-31-69 Pangilinan 195.00 Unreleased
Enterprises
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Rosario
5. 59552 4-1-69 Villarama 987.59 5-6-69
& Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
News
FORGERY
8. 59544 3-27-69 Progressive 18,391.20 4-18 69
Const.
9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
Int. Inc.
10. 59568 4-7-69 Roberto 800.00 4-22-69
Marsan
11. 59570 4-7-69 Paz Andres 200.00 4-22-69
12. 59574 4-8-69 Florentino 100,000.00 4-11-69
Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Bulletin
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
& Pilar
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle
17. 59588 4-8-69 Treago 21,583.00 4-11 69
Tunnel
18. 59587 4-8-69 Delfin 120,000.00 4-11-69
Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
cident Inc.
21. 59577 4-8-69 Esla 9,429.78 4-29 69
22. 59601 4-16-69 Justino 20,000.00 4-18-69
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. --------------------
P 320,636.26
During the same months of March, April and May 1969, twenty-three (23) checks
bearing the same numbers as the aforementioned NWSA checks were likewise paid
and cleared by PNB and debited against NWSA Account No. 6, to wit:
Check Date Payee Amount Date Paid
No. Issued By PNB
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
FORGERY
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69
Mendoza
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
---------------
P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and
Antonio Mendoza in their respective current accounts with the Philippine
Commercial and Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC)
in the months of March, April and May 1969. Thru the Central Bank Clearing, these
checks were presented for payment by PBC and PCIB to the defendant PNB, and
paid, also in the months of March, April and May 1969. At the time of their
presentation to PNB these checks bear the standard indorsement which reads 'all
prior indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon,
Arturo Sison and Antonio Mendoza were all fictitious persons. The respective
balances in their current account with the PBC and/or PCIB stood as follows: Raul
Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23,
1969; and Arturo Sison Pl,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate
restoration to its Account No. 6, of the total sum of P3,457,903.00 corresponding to
the total amount of these twenty-three (23) checks claimed by NWSA to be forged
and/or spurious checks. "In view of the refusal of PNB to credit back to Account No.
6 the said total sum of P3,457,903.00 MWSS filed the instant complaint on
November 10, 1972 before the Court of First Instance of Manila and docketed
thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in question were regular
on its face in all respects, including the genuineness of the signatures of authorized
NWSA signing officers and there was nothing on its face that could have aroused
any suspicion as to its genuineness and due execution and; that NWSA was guilty of
negligence which was the proximate cause of the loss.
PNB also filed a third party complaint against the negotiating banks PBC and PCIB
on the ground that they failed to ascertain the Identity of the payees and their title to
the checks which were deposited in the respective new accounts of the payees with
them.
FORGERY
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS.
The dispositive portion of the decision reads:
WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in
accordance with Section 23 of the Negotiable Instruments Law, the Court hereby
renders judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage
System (MWSS) by ordering the defendant Philippine National Bank (PNB) to
restore the total sum of THREE MILLION FOUR HUNDRED FIFTY SEVEN
THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's
Account No. 6, otherwise known as Account No. 010-50030-3, with legal interest
thereon computed from the date of the filing of the complaint and until as restored in
the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby
renders judgment in favor of the third party defendants Philippine Bank of
Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by
dismissing the Third Party Complaint.
The counterclaims of the third party defendants are likewise dismissed for lack of
evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and
rendered judgment in favor of the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE
FORGED, THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER
SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN
ACCEPTING THE SPURIOUS CHECKS DESPITE THE OBVIOUS
IRREGULARITY OF TWO SETS OF CHECKS BEARING IdENTICAL
NUMBER BEING ENCASHED WITHIN DAYS OF EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS
BEING CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE
INOPERATIVE AS AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have been issued for valuable
consideration and every person whose signature appears thereon to have become a
party thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case because the
questioned checks were not those of the MWSS and neither were they drawn by its authorized
signatories. The petitioner states that granting that Section 24 of the Negotiable Instruments Law is
applicable, the same creates only a prima facie presumption which was overcome by the following
documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI Report of November 21, 1974;
(3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant
Auditor of the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5) the
admission of the respondent bank's counsel in open court that the National Bureau of Investigation
found the signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of
the respondent bank's witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by
his printing press. The petitioner contends that since the signatures of the checks were forgeries, the
respondent drawee bank must bear the loss under the rulings of this Court.
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 obligation funds, and
cannot ordinarily charge the amount so paid to the account of the depositor whose
name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence
of the Bank of the Philippine Islands in honoring and cashing the two forged checks.
(San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)
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 the forger. That
the Philippine National Bank then endorsed the chock and forwarded it to the
Shanghai Bank by whom it was paid. The Philippine National Bank had no license
FORGERY
or authority to pay the money to Maasim or anyone else upon a forged signature. It
was its legal duty to know that Malicor's endorsement was genuine before cashing
the check. Its remedy is against Maasim to whom it paid the money. (Great Eastern
Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and categorical
finding in these documents that the twenty-three (23) questioned checks were indeed signed by persons
other than the authorized MWSS signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an "inside job" and
that the petitioner's delay in the reconciliation of bank statements and the laxity and loose records
control in the printing of its personalized checks facilitated the fraud. Likewise, the questioned
Documents Report No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does
not declare or prove that the signatures appearing on the questioned checks are forgeries. The report
merely mentions the alleged differences in the type face, checkwriting, and printing characteristics
appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry
Report No. C-74-891 merely describes the inks and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on the inherent qualities of the signatures which are
indispensable in the determination of the existence of forgery. There must be conclusive findings that
there is a variance in the inherent characteristics of the signatures and that they were written by two or
more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It
must be established by clear, positive, and convincing evidence. This was not done in the present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great
Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
inapplicable in this case because the forgeries in those cases were either clearly established or admitted
while in the instant case, the allegations of forgery were not clearly established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioner's signatories without their knowing that they were
bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was unable to
ten the difference between the allegedly forged signature and his own genuine signature. On the other
hand, the MWSS officials admitted that these checks could easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine
National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an
instance where even the concerned NWSA officials could not ten the differences between the genuine
checks and the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his
office at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA
and Romeo Oliva of the same office were present. Upon my arrival I observed the
NAWASA officials questioning the issue of the NAWASA checks appearing in
their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To
everybody there present namely VIP Maramag, the two abovementioned NAWASA
officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A.
Lopez and L. Lechuga, both C/A bookkeepers, no one was able to point out any
difference on the signatures of the NAWASA officials appearing on the checks
compared to their official signatures on file. In fact 3 checks, one of those under
question, were presented to the NAWASA treasurer for verification but he could not
point out which was his genuine signature. After intent comparison, he pointed on
the questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or
made without authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party thereto can be acquired through or
under such signature unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even after
the same had already been negotiated. (See Republic v. Equitable Banking Corporation, 10 SCRA 8)
The records show that at the time the twenty-three (23) checks were prepared, negotiated, and encashed,
the petitioner was using its own personalized checks, instead of the official PNB Commercial blank
checks. In the exercise of this special privilege, however, the petitioner failed to provide the needed
security measures. That there was gross negligence in the printing of its personalized checks is shown by
the following uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;
FORGERY
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek
writing, and print used by its printer in the printing of its checks and of the inks and pens used in signing
the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of
Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the National
Waterworks and Sewerage Authority (NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing
NAWASA Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in
connection with the printing of these check vouchers?
A: There is none, sir. No instruction whatsoever was given to
me.
16. Q: Were you not advised as to what kind of paper would be
used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
A: From Tan Chiong, a paper dealer with store located at Juan
Luna, Binondo, Manila. (In front of the Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you submitted
to NAWASA?
A: Not all, sir. Because we have to make reservations or
allowances for spoilage.
25. Q: Out of these vouchers printed by you, how many were
spoiled and how many were the excess printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot
determine the proportion of the excess and spoiled because the
final act of perforating these check vouchers has not yet been
done and spoilage can only be determined after this final act of
printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA authorities to
bum these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed check
vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered by
the NAWASA, how many sheets were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the
process of printing and perforating.
33. Q: What did you do with these spoilages?
FORGERY
A: Spoiled printed materials are usually thrown out, in the
garbage can.
34. Q: Was there any representative of the NAWASA to
supervise the printing or watch the printing of these check
vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work, what
measures do you undertake to safeguard the mold and other
paraphernalia used in the printing of these particular orders of
NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing
shop and at the same time do the guarding, we just leave the
mold attached to the machine and the other finished or
unfinished work check vouchers are left in the rack so that the
work could be continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus
xxx xxx xxx
60. We observed also that there is some laxity and loose control
in the printing of NAWASA cheeks. We gathered from
MESINA ENTERPRISES, the printing firm that undertook the
printing of the check vouchers of NAWASA that NAWASA had
no representative at the printing press during the process of the
printing and no particular security measure instructions adopted
to safeguard the interest of the government in connection with
printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question
was the failure of the petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements and
debt and credit memos through the mail. The records show that the petitioner requested the respondent
drawee bank to discontinue the practice of mailing the bank statements, but instead to deliver the same
to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he was
unreasonably delayed in taking prompt deliveries of the said bank statements and credit and debit
memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements with the petitioner's
records. If Mr. Zaporteza had not been remiss in his duty of taking the bank statements and reconciling
them with the petitioner's records, the fraudulent encashments of the first checks should have been
discovered, and further frauds prevented. This negligence was, therefore, the proximate cause of the
failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks
which he may fill out and use whenever he wishes. Each time he issues a check, he
should also fill out the check stub to which the check is usually attached. This stub,
if properly kept, will contain the number of the check, the date of its issue, the name
of the payee and the amount thereof. The drawer would therefore have a complete
record of the checks he issues. It is the custom of banks to send to its depositors a
monthly statement of the status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders. If the depositor has
filled out his check stubs properly, a comparison between them and the cancelled
checks will reveal any forged check not taken from his checkbook. It is the duty of a
depositor to carefully examine the bank's statement, his cancelled checks, his check
stubs and other pertinent records within a reasonable time, and to report any errors
without unreasonable delay. If his negligence should cause the bank to honor a
forged check or prevent it from recovering the amount it may have already paid on
such check, he cannot later complain should the bank refuse to recredit his account
with the amount of such check. (First Nat. Bank of Richmond v. Richmond Electric
Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather
Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish
and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]).
Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the
National Bureau of Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank
(PNB) statements with the NAWASA bank accounts. x x x. Had the NAWASA
representative come to the PNB early for the statements and had the bank been
advised promptly of the reported bogus check, the negotiation of practically all of
the remaining checks on May, 1969, totalling P2,224,736.00 could have been
prevented.
The records likewise show that the petitioner failed to provide appropriate security measures over its
own records thereby laying confidential records open to unauthorized persons. The petitioner's own Fact
Finding Committee, in its report submitted to their General manager underscored this laxity of records
FORGERY
control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury Department at the
NAWASA) is quite open to any person known to him or his staff members and that the check writer is
merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
Investigation. Mr. Ongtengco could only state that:
A. Generally my order is not to allow anybody to enter my
office. Only authorized persons are allowed to enter my office.
There are some cases, however, where some persons enter my
office because they are following up their checks. Maybe, these
persons may have been authorized by Mr. Pantig. Most of the
people entering my office are changing checks as allowed by the
Resolution of the Board of Directors of the NAWASA and the
Treasurer. The check writer was never placed on my table.
There is a place for the check write which is also under lock and
key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to
enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized
persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people
following up checks are employees of the NAWASA.
Q. Was the authority given by the Board of Directors and the
approval by the Treasurer for employees, and other persons to
encash their checks carry with it their authority to enter your
office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed that
actually there is laxity and poor control on your part with
regards to the preparations of check payments inasmuch as you
allow unauthorized persons to follow up their vouchers inside
your office which may leakout confidential informations or your
books of account. After being apprised of all the shortcomings
in your office, as head of the Cashiers' Office of the Treasury
Department what remedial measures do you intend to
undertake?
A. Time and again the Treasurer has been calling our attention
not to allow interested persons to hand carry their voucher
checks and we are trying our best and if I can do it to follow the
instructions to the letter, I will do it but unfortunately the
persons who are allowed to enter my office are my co-
employees and persons who have connections with our higher
ups and I can not possibly antagonize them. Rest assured that
even though that everybody will get hurt, I win do my best not
to allow unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of the
posting of check payments in your books that leakage of
payments to the banks came from your office?
A. I am not aware of it but it only takes us a couple of minutes
to process the checks. And there are cases wherein every
information about the checks may be obtained from the
Accounting Department, Auditing Department, or the Office of
the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded
in its Report dated November 2, 1970 that the fraudulent encashment of the twenty-three (23)cheeks in
question was an "inside job". Thus-
We have all the reasons to believe that this fraudulent act was an inside job or one
pulled with inside connivance at NAWASA. As pointed earlier in this report, the
serial numbers of these checks in question conform with the numbers in current use
of NAWASA, aside from the fact that these fraudulent checks were found to be of
the same kind and design as that of NAWASA's own checks. While knowledge as to
such facts may be obtained through the possession of a NAWASA check of current
issue, an outsider without information from the inside can not possibly pinpoint
which of NAWASA's various accounts has sufficient balance to cover all these
fraudulent checks. None of these checks, it should be noted, was dishonored for
insufficiency of funds. . .
FORGERY
Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank
that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine National Bank
v. Court of Appeals(25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB
had found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe that
the check was genuine and good in every respect, but, also, to pay its amount to
Augusto Lim. In other words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.
The argument has no merit. The records show that the respondent drawee bank, had taken the necessary
measures in the detection of forged checks and the prevention of their fraudulent encashment. In fact,
long before the encashment of the twenty-three (23) checks in question, the respondent Bank had issued
constant reminders to all Current Account Bookkeepers informing them of the activities of forgery
syndicates. The Memorandum of the Assistant Vice-President and Chief Accountant of the Philippine
National Bank dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current
account depositors are now the target of the forgery syndicate. To protect the interest
of the bank, you are hereby enjoined to be more careful in examining said checks
especially those coming from the clearing, mails and window transactions. As a
reminder please be guided with the following:
1. Signatures of drawers should be properly scrutinized and compared with those we
have on file.
2. The serial numbers of the checks should be compared with the serial numbers
registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks should be compared
with the sample we have on file with the Cashier's Dept.
4. Checks bearing several indorsements should be given a special attention.
5. Alteration in amount both in figures and words should be carefully examined even
if signed by the drawer.
6. Checks issued in substantial amounts particularly by depositors who do not
usually issue checks in big amounts should be brought to the attention of the drawer
by telephone or any fastest means of communication for purposes of confirmation.
and your attention is also invited to keep abreast of previous circulars and memo
instructions issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the
checks because the printing of the petitioner's personalized checks was not done under the supervision
and control of the Bank. There is no evidence on record indicating that because of this private printing
the petitioner furnished the respondent Bank with samples of checks, pens, and inks or took other
precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the
fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
Paras * , J., took no part.


FORGERY
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE
CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH XCII
(92), respondents.

GANCAYCO, J .:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City
promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de Oro Savings and
Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House Corporation
after a review of the Decision of the Board of Directors of the Philippine Clearing House Corporation
(PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage
(BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through
its Visa Card Department, drew six crossed Manager's check (Exhibits "A" to "F",
and herein referred to as Checks) having an aggregate amount of Forty Five
Thousand Nine Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable
to certain member establishments of Visa Card. Subsequently, the Checks were
deposited with the defendant to the credit of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual
endorsements. All prior and/or lack of endorsement guaranteed the defendant sent
the checks for clearing through the Philippine Clearing House Corporation (PCHC).
Accordingly, plaintiff paid the Checks; its clearing account was debited for the value
of the Checks and defendant's clearing account was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the
Checks and purporting to be that of the payees were forged and/or unauthorized or
otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the
Checks directly to the defendant for the purpose of claiming reimbursement from the
latter. However, defendant refused to accept such direct presentation and to
reimburse the plaintiff for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the
plaintiff the sum of P45,982.23 with interest at the rate of 12% per annum from the
date of the complaint plus attorney's fees in the amount of P10,000.00 as well as the
cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the
dispute was presented for Arbitration; and Atty. Ceasar Querubin was designated as
the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in
favor of the plaintiff and against the defendant ordering the PCHC to debit the
clearing account of the defendant, and to credit the clearing account of the plaintiff
of the amount of P45,982.23 with interest at the rate of 12% per annum from date of
the complaint and Attorney's fee in the amount of P5,000.00. No pronouncement as
to cost was made.
1

In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed the
decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the
Philippine Clearing House Corporation is hereby ordered to debit the clearing
account of the defendant and credit the clearing account of plaintiff the amount of
Forty Five Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23) Pesos with
interest at the rate of 12% per annum from date of the complaint, and the Attorney's
fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
FORGERY
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the
PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this nature by
the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules
and Regulations of PCHC cover and apply only to checks that are genuinely negotiable. Emphasis is laid
on the primary purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and
relevant exchange and facilitate service limited to check processing and sorting by
way of assisting member banks, entities in clearing checks and other clearing
items as defined in existing and in future Central Bank of the Philippines circulars,
memoranda, circular letters, rules and regulations and policies in pursuance to the
provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance
with the provisions of Section 1000 shall serve as a basis for the clearing of checks,
and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that fits the
articles of incorporation of the PCHC, the Central Bank and the Clearing House Rules stating that it is a
negotiable instrument citing the definition of a "check" as basically a "bill of exchange" under Section
185 of the NIL and that it should be payable to "order" or to "bearer" under Section 126 of game law.
Petitioner alleges that with the cancellation of the printed words "or bearer from the face of the check, it
becomes non-negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein petitioner
as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no
distinction as to the character or nature of the checks subject of its jurisdiction. The
pertinent provisions quoted in petitioners memorandum simply refer to check(s).
Where the law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the
Appellate Court categorically stated that there are four kinds of checks in this
jurisdiction; the regular check; the cashier's check; the traveller's check; and the
crossed check. The Court, further elucidated, that while the Negotiable Instruments
Law does not contain any provision on crossed checks, it is coon practice in
commercial and banking operations to issue checks of this character, obviously in
accordance with Article 541 of the Code of Commerce. Attention is likewise called
to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of exchange drawn
on a bank payable on demand. Except as herein otherwise
provided, the provisions of this act applicable to a bill of
exchange payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument
an express stipulation negating or limiting his own liability to the holder.
Consequently, it appears that the use of the term "check" in the Articles of
Incorporation of PCHC is to be perceived as not limited to negotiable checks only,
but to checks as is generally known in use in commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the
ruling of the PCHC 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
defendant's clear warranty; ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED.
With. out 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.
FORGERY
The principle of estoppel, effectively prevents the defendant
from denying liability for any damage sustained by the plaintiff
which, relying upon an action or declaration of the defendant,
paid on the Checks. The same principle of estoppel effectively
prevents the defendant from denying the existence of the
Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing checks
and other clearing items." No doubt transactions on non-negotiable checks are within the ambit of its
jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere
debemos."
2
It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and
phrases in a statute should ordinarily be accorded their natural and general
significance. In other words, there should be no distinction in the application of a
statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for courts are not
authorized to distinguish where the law makes no distinction. They should instead administer the law not
as they think it ought to be but as they find it and without regard to consequences.
3

The term check as used in the said Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be conceived to be limited to negotiable
checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate banking
operations. It is of the essence to be payable on demand, because the contract between the banker and
the customer is that the money is needed on demand.
4

The participation of the two banks, petitioner and private respondent, in the clearing operations of
PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR
clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and
understanding that any participant in the Philippine Clearing House Corporation,
MICR clearing operations by the mere fact of their participation, thereby manifests
its agreement to these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the clearing
operations of the PCHC shall be deemed its written and subscribed consent to the
binding effect of this arbitration agreement as if it had done so in accordance with
section 4 of the Republic Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing between them at the time of the submission and
which may be the subject of an action, or the parties of any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them.
Such submission or contract shall be valid and irrevocable, save upon grounds as
exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations,
appraisals or other controversies which may be collateral, incidental, precedent or
subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged
endorsement when such endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting Bank and not through the regular
clearing house facilities within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity sending the same.
(Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be
interpreted to be applicable only to checks which are negotiable instruments but also to non-negotiable
instruments and that the PCHC has jurisdiction over this case even as the checks subject of this litigation
are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question.
It stamped its guarantee on the back of the checks and subsequently presented these checks for clearing
and it was on the basis of these endorsements by the petitioner that the proceeds were credited in its
clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the
liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements"
(Exh. A-2 to F-2) is now estopped from claiming that the checks under consideration are not negotiable
FORGERY
instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in
order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude
of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments
and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior
endorsements at the back of the checks. It led the said respondent to believe that it was acting as
endorser of the checks and on the strength of this guarantee said respondent cleared the checks in
question and credited the account of the petitioner. Petitioner is now barred from taking an opposite
posture by claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals
5
a point relevant to the issue
when it stated the doctrine of estoppel is based upon the grounds of public policy, fair dealing, good
faith and justice and its purpose is to forbid one to speak against his own act, representations or
commitments to the injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a
forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements
and thus logically guarantees the same as such there can be no doubt said bank has considered the
checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized 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. This is laid down in the case of PNB vs. National City Bank.
6
In another case, this court
held that if the drawee-bank discovers that the signature of the payee was forged after it has paid the
amount of the check to the holder thereof, it can recover the amount paid from the collecting bank.
7

A truism stated by this Court is that "The doctrine of estoppel precludes a party from repudiating an
obligation voluntarily assumed after having accepted benefits therefrom. To countenance such
repudiation would be contrary to equity and put premium on fraud or misrepresentation".
8

We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor
Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawers signature and his capacity to issue
the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by
the said bank, it can not recover from a holder who did not participate in the forgery
and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that
this word is used in Section 62 of the Negotiable Instruments Act.
9

The point that comes uppermost is whether the drawee bank was negligent in failing to discover the
alteration or the forgery. Very akin to the case at bar is one which involves a suit filed by the drawer of
checks against the collecting bank and this came about in Farmers State Bank
10
where it was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer)
accrued as a result of the bank breaching its implied warranty of the genuineness of
the indorsements of the name of the payee by bringing about the presentation of the
checks (to the drawee bank) and collecting the amounts thereof, the right to enforce
that cause of action was not destroyed by the circumstance that another cause of
action for the recovery of the amounts paid on the checks would have accrued in
favor of the appellee against another or to others than the bank if when the checks
were paid they have been indorsed by the payee. (United States vs. National
Exchange Bank, 214 US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84;
Onondaga County Savings Bank vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent
holders in due course' (a) that the instrument is genuine and in all respects what it
purports to be; (b) that he has good title to it; (c) that all prior parties have capacity
to contract; and (d) that the instrument is at the time of his indorsement valid and
subsisting.
11

It has been enunciated in an American case particularly in American Exchange National Bank vs.
Yorkville Bank
12
that: "the drawer owes no duty of diligence to the collecting bank (one who had
accepted an altered check and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and check stubs or other equivalent
record, and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no
defense to the collecting bank are that there is no privity between the drawer and the
collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the
drawer owe to that bank no duty of vigilance (New York Produce Exchange Bank
vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank is induced
by any act or representation or admission of the drawer (Seaboard National Bank vs.
Bank of America (supra) and it follows that negligence on the part of the drawer
cannot create any liability from it to the collecting bank, and the drawer thus is
neither a necessary nor a proper party to an action by the drawee bank against such
bank. It is quite true that depositors in banks are under the obligation of examining
their passbooks and returned vouchers as a protection against the payment by the
FORGERY
depository bank against forged checks, and negligence in the performance of that
obligation may relieve that bank of liability for the repayment of amounts paid out
on forged checks, which but for such negligence it would be bound to repay. A
leading case on that subject is Morgan vs. United States Mortgage and Trust Col.
208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, 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 and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof
remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would
deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is
entitled to receive payment payable for the Checks. As the checks are not payable to
defendant's depositor, payments to persons other than payees named therein, their
successor-in-interest or any person authorized to receive payment are not valid.
Article 1240, New Civil Code of the Philippines unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor
the obligation has been constituted, or his successo-in-interest,
or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to
receive payments for the Checks, payments to any of them give rise to an obligation
to return the amounts received. Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks
notwithstanding that the underlying transactions were fictitious This contention has
no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens,
plaintiffs right to recover from the defendant. Such nullity clearly emphasizes the
obligation of the payees to return the proceeds of the Checks. If a failure of
consideration is sufficient to warrant a finding that a payee is not entitled to payment
or must return payment already made, with more reason the defendant, who is
neither the payee nor the person authorized by the payee, should be compelled to
surrender the proceeds of the Checks received by it. Defendant does not have any
title to the Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
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
bank of the checks are the defendant'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.
The principle of estoppel effectively prevents the defendant from denying liability
for any damages sustained by the plaintiff which, relying upon an action or
declaration of the defendant, paid on the Checks. The same principle of estoppel
effectively prevents the defendant from denying the existence of the Checks.
FORGERY
Whether the Checks have been issued for valuable considerations or not is of no
serious moment to this case. These Checks have been made the subject of contracts
of endorsement wherein the defendant made expressed warranties to induce payment
by the drawer of the Checks; and the defendant cannot now refuse liability for
breach of warranty as a consequence of such forged endorsements. The defendant
has falsely warranted in favor of plaintiff the validity of all endorsements and the
genuineness of the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is
irreparable. The collecting bank has privity with the depositor who is the principal
culprit in this case. The defendant knows the depositor; her address and her history,
Depositor is defendant's client. It has taken a risk on its depositor when it allowed
her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the
defendant is guilty of negligence; the risk of wrongful payment has to be assumed
by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors
finds no reason to reverse the decision of the Arbiter. The defendant's failure to
reimburse the plaintiff has constrained the plaintiff to regular the services of counsel
in order to protect its interest notwithstanding that plaintiffs claim is plainly valid
just and demandable. In addition, defendant's clear obligation is to reimburse
plaintiff upon direct presentation of the checks; and it is undenied that up to this
time the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The
decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are hereby declared to
be immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.


FORGERY
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

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

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

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

Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks.
3
Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled
checks she had issued and which were debited against her current account. It was only after the lapse of
more two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63)
out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account
No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under
the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that they
did not receive nor even see the subject checks and that the indorsements appearing at the back of the
checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of Ernest L.
Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no other official of
the respondent drawee bank, may accept a second indorsement on a check for deposit. In the case at bar,
all the deposit slips of the eighty-two (82) checks in question were initialed and/or approved for deposit
by Ernest L. Boon. The Branch Managers of the Ongpin and Elcao branches accepted the deposits
made in the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's demand.
On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank.
The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, who
instituted this action to recover from the drawee bank the money value of eighty-two (82) checks paid
out by the drawee bank to holders of those checks where the indorsements of the payees were forged.
How and by whom the forgeries were committed are not established on the record, but the respective
payees admitted that they did not receive those checks and therefore never indorsed the same. The
applicable law is the Negotiable Instruments Law
4
(heretofore referred to as the NIL). Section 23 of the
NIL provides:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
FORGERY
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because he never gave the bank the order to pay.
And said section does not refer only to the forged signature of the maker of a promissory note
and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of
the payee or indorsee of a note or check. Since under said provision a forged signature is
"wholly inoperative", no one can gain title to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party from acquiring any right as against any
party whose name appears prior to the forgery. Although rights may exist between and among
parties subsequent to the forged indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent
parties as against parties prior to the forgery. However, the law makes an exception to these
rules where a party is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was forged by
an agent of the drawer. This difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements. While there is no duty resting on the depositor to look
for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for
forgeries of his own name, a depositor is under a duty to set up an accounting system and a business
procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn
by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact
to the drawee bank.
5
For his negligence or failure either to discover or to report promptly the fact of
such forgery to the drawee, the drawer loses his right against the drawee who has debited his account
under a forged indorsement.
6
In other words, he is precluded from using forgery as a basis for his claim
for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to
the payee for the purpose of giving effect thereto.
7
The first delivery of the instrument, complete in
form, to the payee who takes it as a holder, is called issuance of the instrument.
8
Without the initial
delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding
contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant of
the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established that the
signatures of the payees as first indorsers were forged. The record fails to show the identity of the party
who made the forged signatures. The checks were then indorsed for the second time with the names of
Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The
second indorsements were all genuine signatures of the alleged holders. All the eighty-two (82) checks
bearing the forged indorsements of the payees and the genuine second indorsements of Alfredo Y.
Romero and Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to
the credit of their respective savings accounts in the Buendia, Ongpin and Elcao branches of the same
bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid
out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's
checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge
the drawer's account for the amount of said check. An exception to this rule is where the drawer is guilty
of such negligence which causes the bank to honor such a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere
examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to
his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty
as to forged indorsements. A different situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active participation of the latter. Most of the cases
involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee
often time shave business relations of long standing. The continued occurrence of business transactions
of the same nature provides the opportunity for the agent/employee to commit the fraud after having
developed familiarity with the signatures of the parties. However, sooner or later, some leak will show
on the drawer's books. It will then be just a question of time until the fraud is discovered. This is
specially true when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case at
bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not even
verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the same
invoices. Otherwise, she could have easily discovered the discrepancies between the checks and the
documents serving as bases for the checks. With such discovery, the subsequent forgeries would not
have been accomplished. It was not until two years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her account,
at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-
payment. Assuming that even one single complaint had been made, petitioner would have been duty-
bound, as far as the respondent drawee Bank was concerned, to make an adequate investigation on the
matter. Had this been done, the discrepancies would have been discovered, sooner or later. Petitioner's
failure to make such adequate inquiry constituted negligence which resulted in the bank's honoring of
the subsequent checks with forged indorsements. On the other hand, since the record mentions nothing
about such a complaint, the possibility exists that the checks in question covered inexistent sales. But
FORGERY
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
FORGERY
by its internal banking rules and regulations which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second endorsements are not to be accepted without
the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of
fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to
the acceptance of checks with second indorsement for deposit even without the approval of the branch
manager despite periodic inspection conducted by a team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173 provides

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


FORGERY
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.
x x x x x x x x x x x x x x x x x x x x x
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
D E C I S I O N
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 check
4
with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in
his personal savings account with the same bank. Pangilinan was able to withdraw the money when the
check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan
followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20,
1978,
5
as well as for twenty-eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981.
6
All the checks bore the stamp
of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks
were paid to him for certain projects with the hospital.
7
He did not find as irregular the fact that the
checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted
that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan
preferential treatment on this account.
8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of
the various amounts debited from the current account of the Province.
9

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981.
10

FORGERY
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan.
11

After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from
March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National
Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering
the latter to reimburse to the former the amount of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully
paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of
action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint,
the same are hereby ordered dismissed for lack of merit.
SO ORDERED.
12

PNB and Associated Bank appealed to the Court of Appeals.
13
Respondent court affirmed the trial
court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province
of Tarlac from liability when, in fact, the latter was negligent because it delivered and released the
questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should
have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid
circuity.
14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the
drawee bank (PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead
of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has
the force and effect of law.
15
The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of
prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior
indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place
the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation
and will always bear the loss as against the drawee bank.
16

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in
question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check.
17

While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should
solely bear the loss because it cleared and paid the forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief.
They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The
infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements
which are forgeries. At the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the
forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made
without authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature unless the party
FORGERY
against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person whose signature to an instrument was forged was never a
party and never consented to the contract which allegedly gave rise to such instrument.
18
Section 23
does not avoid the instrument but only the forged signature.
19
Thus, a forged indorsement does not
operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the
genuineness of the signature in question and those who, by their acts, silence or negligence are estopped
from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the
instrument.
20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument.
Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course.
21

The checks involved in this case are order instruments, hence, the following discussion is made with
reference to the effects of a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto.
22

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting."
23
He cannot interpose the defense that
signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the
drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's
client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check
to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the
check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did
not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the
drawer.
24
The general rule then is that the drawee bank may not debit the drawer's account and is not
entitled to indemnification from the drawer.
25
The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged signature, the drawer is precluded from asserting
the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the
loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent
bank.
26

In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from
the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit
the amount of the check to the account of the drawer. The liability chain ends with the drawee bank
whose responsibility it is to know the drawer's signature since the latter is its customer.
27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability
does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who took from the forger and, of
course, to the forger himself, if available.
28
In other words, the drawee bank canseek reimbursement or
a return of the amount it paid from the presentor bank or person.
29
Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who
took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If
the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money paid by the latter because it was paid wrongfully.
30

More importantly, by reason of the statutory warranty of a general indorser in section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and
presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement.
Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the
drawee bank because of its indorsement.
FORGERY
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of the endorsements."
31

The drawee bank is not similarly situated as the collecting bank because the former makes no warranty
as to the genuineness. of any indorsement.
32
The drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
check. The bank knows him, his address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the
forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is deemed negligent and can
no longer recover from the presentor.
33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the
Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of
Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee
bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were
negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which
presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,
liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the
loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already
retired from government service, was no longer connected with the hospital. With the exception of the
first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's
retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the
checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan
and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting
the checks for the hospital is an unmistakable sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that
the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of
Concepcion Emergency Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan
represented himself as also authorized to help in the release of these checks and we were
apparently misled because they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they were, Pangilinan, like the
rest, was able to present an official receipt to acknowledge these receipts and according to
them since this is a government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they released the checks
to Pangilinan aside from Miss Juco.
34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss
tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount
paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it
cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA,
35
six crossed checks with forged indorsements were deposited in
the forger's account with the collecting bank and were later paid by four different drawee banks. The
Court found the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
FORGERY
reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited
the checks with the collecting bank. Here, the checks were all payable to Concepcion Emergency
Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but
remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is
within the bank's discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting
bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks
deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will
preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of
the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery
of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by
the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours. Associated Bank now argues that the
aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an
administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The
Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by
the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event,
the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks
was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery
but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to
give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger.
If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after
its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within
twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the
circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in
going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the
Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of
Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks
from PNB.
36

Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated
had only P24.63 in it.
37
Had Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-
party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness.
38
Hence, Associated Bank was not prejudiced by PNB's failure to
comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter
paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and
paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer
who was supposed to have indorsed the checks is also a customer of the drawee bank.
39
PNB's duty was
to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement.
Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the
payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to
the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB.
The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the
collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date
of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case
stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans.
40
Central Bank Circular No. 416 prescribes a twelve percent (12%)
interest per annum for loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding
them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for
the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the
Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per
FORGERY
annum. The interest rate shall be computed from the date of default, or the date of judicial or
extrajudicial demand.
41
The trial court did not err in granting legal interest from March 20, 1981, the
date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due
to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a
period close to three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent
thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It
is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital,
Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the
payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R.
No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank
(G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine
National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest
from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.

FORGERY
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55079 November 19, 1982
METROPOLITAN BANK and TRUST COMPANY, petitioner,
vs.
THE FIRST NATIONAL CITY BANK and THE COURT OF APPEALS, respondents.
Resales, Perez & Assoc. for petitioner.
Siguion, Reyna, Montecillo and Ongsiako for respondent PNCB.

MELENCIO-HERRERA, J .:
This is a Petition for Review on certiorari of the Decision of the Court of Appeals in CA-G.R. No.
57129-R entitled, First National City Bank vs. Metropolitan Bank and Trust Company, which
affirmed in toto the Decision of the Court of First Instance of Manila, Branch VIII, in Civil Case No.
61488, ordering petitioner herein, Metropolitan Bank, to reimburse respondent First National City Bank
the amount of P50,000.00, with legal rate of interest from June 25, 1965, and to pay attorney's fees of
P5,000.00 and costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH, drawn by
Joaquin Cunanan & Company on First National City Bank (FNCB for brevity) was deposited with
Metropolitan Bank and Trust Company (Metro Bank for short) by a certain Salvador Sales. Earlier that
day, Sales had opened a current account with Metro Bank depositing P500.00 in cash.
1
Metro Bank
immediately sent the cash check to the Clearing House of the Central Bank with the following words
stamped at the back of the check:
Metropolitan Bank and Trust Company Cleared (illegible) office All prior
endorsements and/or Lack of endorsements Guaranteed.
2

The check was cleared the same day. Private respondent paid petitioner through clearing the amount of
P50,000.00, and Sales was credited with the said amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On August
28, 1964, he withdrew P32,100.00. Then on August 31, 1964, he withdrew the balance of P17,920.00
and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to drawer
Joaquin Cunanan & Company, together with the monthly statement of the company's account with
FNCB. That same day, the company notified FNCB that the check had been altered. The actual amount
of P50.00 was raised to P50,000.00, and over the name of the payee, Manila Polo Club, was
superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a letter,
which was received by Metro Bank on the following day, September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of
P50,000.00. The latter did not oblige, so that FNCB reiterated its request on September 29, 1964. Metro
Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case No.
61488 against Metro Bank for recovery of the amount of P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse FNCB the
amount of P50,000.00 with legal rate of interest from June 25, 1965 until fully paid, to pay attorney's
fees of P5,000.00, and costs.
Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No. 57129-R). On August 29, 1980,
respondent Appellate Court
3
affirmed in toto the judgment of the Trial Court.
Petitioner came to this instance on appeal by Certiorari, alleging:
I
The Respondent Court of Appeals erred in completely ignoring and disregarding the
24-hour clearing house rule provided for under Central Bank Circular No. 9, as
amended, although:
1. The 24-hour regulation of the Central Bank in clearing house operations is valid
and banks are subject to and are bound by the same; and
2. The 24-hour clearing house rule applies to the present case of the petitioner and
the private respondent.
FORGERY
II
The Respondent Court of Appeals erred in relying heavily on its decision in
Gallaites, et al. vs. RCA, etc., promulgated on October 23, 1950 for the same is not
controlling and is not applicable to the present case.
III
The Respondent Court of Appeals erred in disregarding and in not applying the
doctrines in the cases of Republic of the Philippines vs. Equitable Banking
Corporation (10 SCRA 8) and Hongkong & Shanghai Banking Corporation vs.
People's Bank and Trust Company (35 SCRA 140) for the same are controlling and
apply four square to the present case.
IV
The Respondent Court of Appeals erred in not finding the private respondent guilty
of operative negligence which is the proximate cause of the loss.
The material facts of the case are not disputed. The issue for resolution is, which bank is liable for the
payment of the altered check, the drawee bank (FNCB) or the collecting bank (Metro Bank)?
The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17, 1949) as
amended by Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30, 1964). Section 4 of
said Circular, as amended, states:
Section 4. Clearing Procedures.
(c) Procedures for Returned Items
Items which should be returned for any reason whatsoever shall be delivered to and
received through the clearing Office in the special red envelopes and shall be
considered and accounted as debits to the banks to which the items are returned.
Nothing in this section shall prevent the returned items from being settled by
reinbursement to the bank, institution or entity returning the items. All items cleared
on a particular clearing shall be returned not later than 3:30 P.M. on the following
business day.
xxx xxx xxx
The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank
receiving the check for clearing from the Central Bank Clearing House must return the check to the
collecting bank within the 24-hour period if the check is defective for any reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the other hand,
relies on the guarantee of all previous indorsements made by Metro Bank which guarantee had allegedly
misled FNCB into believing that the check in question was regular and the payee's indorsements
genuine; as well as on "the general rule of law founded on equity and justice that a drawee or payor bank
which in good faith pays the amount of materially altered check to the holder thereof is entitled to
recover its payment from the said holder, even if he be an innocent holder.
4

The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic vs.
Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are part of our
banking system, and both are subject to the regulations of the Central Bank, they are bound by the 24-
hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house
period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro Bank to the
alteration of the check in question until after the lapse of nine days, negates whatever right it might have
had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against Metro
Bank, but against the party responsible for the changing the name of the payee
5
and the amount on the
face of the check.
FNCB contends that the stamp reading,
Metropolitan Bank and Trust Company Cleared (illegible) office All prior
endorsements and/or Lack of endorsements Guaranteed.
6

made by Metro Bank is an unqualified representation that the endorsement on the check was that of the
true payee, and that the amount thereon was the correct amount. In that connection, this Court in the
Hongkong & Shanghai Bank case, supra, ruled:
.. But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during
clearing house operations. The indorsement, itself, is very clear when it begins with
words 'For clearance, clearing office **** In other words, such an indorsement must
be read together with the 24-hour regulation on clearing House Operations of the
Central Bank. Once that 24- hour period is over, the liability on such an indorsement
has ceased. This being so, Plaintiff Bank has not made out a case for relief.
7

Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered check.
FORGERY
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal of the
balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and first verified, through its
Assistant Cashier Federico Uy, the regularity and genuineness of the check deposit from Marcelo
Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by the fast
movement of the account. Only upon being assured that the same is not unusual' did Metro Bank allow
the withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No. 3805,
October 23, 1950, by stating:
... The laxity of appellant in its dealing with customers, particularly in cases where
the Identity of the person is new to them (as in the case at bar) and in the obvious
carelessness of the appellant in handling checks which can easily be forged or
altered boil down to one conclusion-negligence in the first order. This negligence
enabled a swindler to succeed in fraudulently encashing the chock in question
thereby defrauding drawee bank (appellee) in the amount thereof.
is misplaced not only because the factual milieu is not four square with this case but more so because it
cannot prevail over the doctrine laid down by this Court in the Hongkong & Shanghai Bank case which
is more in point and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is hereby
set aside, and Civil Case No. 61488 is hereby dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.
Plana, Vasquez, Relova and Gutierrez, Jr., JJ., concur.
Teehankee ** (Chairman), J., took no part.


FORGERY


FIRST DIVISION

[G.R. No. 42725. April 22, 1991.]

REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL CITY
BANK,Respondents.

Lourdes C. Dorado for Petitioner.

Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.


SYLLABUS


1. COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE APPLIES TO
COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO COMPLY WITH RULE ABSOLVES
COLLECTING BANKS. The 24-hour clearing house rule is a valid rule applicable to commercial
banks (Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co.
v. First National City Bank, 118 SCRA 537). It is true that when an endorsement is forged, the
collecting bank or last endorser, as a general rule, bears the loss (Banco de Oro Savings & Mortgage
Bank v. Equitable Banking Corp., 157 SCRA 188). But the unqualified endorsement of the collecting
bank on the check should be read together with the 24-hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. v. First National City Bank, supra). Thus, when the drawee bank fails
to return a forged or altered check to the collecting bank within the 24-hour clearing period, the
collecting bank is absolved from liability. The following decisions of this Court are also relevant and
persuasive.

2. ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY RESPONSIBLE FOR
FORGERY OR ALTERATION. Every bank that issues checks for the use of its customers should
know whether or not the drawers signature thereon is genuine, whether there are sufficient funds in the
drawers account to cover checks issued, and it should be able to detect alterations, erasures,
superimpositions or intercalations thereon, for these instruments are prepared, printed and issued by
itself, it has control of the drawers account, and it is supposed to be familiar with the drawers
signature. It should possess appropriate detecting devices for uncovering forgeries and/or alterations on
these instruments. Unless an alteration is attributable to the fault or negligence of the drawer himself,
such as when he leaves spaces on the check which would allow the fraudulent insertion of additional
numerals in the amount appearing thereon, the remedy of the drawee bank that negligently clears a forge
and/or altered check for payment is against the party responsible for the forgery or alteration (Hongkong
& Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It
may not charge the amount so paid to the account of the drawer, if the latter was free from blame, nor
recover it from the collecting bank if the latter made payment after proper clearance from the drawee.


D E C I S I O N


GRIO-AQUINO, J .:


On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No. 108854 for
P240, Philippine currency, on its account in the respondent First National City Bank ("FNCB" for
brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and without authority of the drawer, SMC, altered by
increasing it from P240 to P9,240. The check was indorsed and deposited on March 14, 1966 by
Delgado in his account with the petitioner Republic Bank (hereafter "Republic").

Republic accepted the check for deposit without ascertaining its genuineness and regularity. Later,
Republic endorsed the check to FNCB by stamping on the back of the check "all prior and/or lack of
indorsement guaranteed" and presented it to FNCB for payment through the Central Bank Clearing
House. Believing the check was genuine, and relying on the guaranty and endorsement of Republic
appearing on the back of the check, FNCB paid P9,240 to Republic through the Central Bank Clearing
House on March 15, 1966.

On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check in
question. FNCB lost no time in recrediting P9,240 to SMC. On May 19, 1966, FNCB informed Republic
in writing of the alteration and the forgery of the endorsement of J. Roberto C. Delgado. By then,
Delgado had already withdrawn his account from Republic.

On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the latters
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the
alteration; that it was not guilty of negligence; that it was the drawers (SMCs) fault in drawing the
check in such a way as to permit the insertion of numerals increasing the amount; that FNCB, as drawee,
was absolved of any liability to the drawer (SMC), thus, FNCB had no right of recourse against
Republic.

On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB with 6%
interest per annum from February 27, 1967 until fully paid, plus P2,000 for attorneys fees and costs of
the suit. The Court of Appeals affirmed that decision, but modified the award of attorneys fees by
reducing it to P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December 22,
1975).chanrobles virtual lawlibrary

In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected, by the
FORGERY
24-hour clearing house rule, found in CB Circular No. 9, as amended, from liability to refund the
amount paid by FNCB, as drawee of the SMC dividend check.

The petition for review is meritorious and must be granted.

The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as amended,
provides:jgc:chanrobles.com.ph

"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 returned items from being settled by direct reimbursement to the bank, institution or entity returning
the items. All items cleared at 11:00 oclock A.M. shall be returned not later than 2:00 oclock P.M. on
the same day and all items cleared at 3:00 oclock 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 8:30
A.M. of the following day."cralaw virtua1aw library

The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic v. Equitable
Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. v. First National City Bank,
118 SCRA 537).

It is true that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears
the loss (Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation (Metropolitan Bank & Trust Co. v. First National City Bank,
supra). Thus, when the drawee bank fails to return a forged or altered check to the collecting bank within
the 24-hour clearing period, the collecting bank is absolved from liability. The following decisions of
this Court are also relevant and persuasive:chanrob1es virtual 1aw library

In Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35 SCRA 140), a check for
P14,608.05 was drawn by the Philippine Long Distance Telephone Company on the Hongkong &
Shanghai Banking Corporation payable to the same bank. It was mailed to the payee but fell into the
hands of a certain Florentino Changco who erased the name of the payee, typed his own name, and
thereafter deposited the altered check in his account in the Peoples Bank & Trust Co. which presented it
to the drawee bank with the following indorsement:chanrobles law library

"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed. Peoples
Bank and Trust Company."cralaw virtua1aw library

The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the Peoples
Bank credited Changco with the amount of the check. Changco thereafter withdrew the contents of his
bank account. A month later, when the check was returned to PLDT, the alteration was discovered. The
Hongkong & Shanghai Bank sued to recover from the Peoples Bank the sum of P14,608.05. The
complaint was dismissed. Affirming the decision of the trial court, this Court
held:jgc:chanrobles.com.ph

"The entire case of plaintiff is based on the indorsement that has been heretofore copied namely, a
guarantee of all prior indorsement, made by Peoples Bank and since such an indorsement carries with it
a concomitant guarantee of genuineness, the Peoples Bank is liable to the Hongkong Shanghai Bank for
alteration made in the name of payee. On the other hand, the Peoples Bank relies on the 24-hour
regulation of the Central Bank that requires after a clearing, that all cleared items must be returned not
later than 3:00 P.M. of the following business day. And since the Hongkong Shanghai Bank only
advised the Peoples Bank as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples
Bank claims that it is now too late to do so. This regulation of the Central Bank as to 24 hours is
challenged by Plaintiff Bank as being merely part of an ingenious device to facilitate banking
transactions. Be that what it may as both Plaintiff as well as Defendant Banks are part of our banking
system and both are subject to regulations of the Central Bank they are both bound by such
regulations. . . . But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during
clearing house operations. The indorsement, itself, is very clear when it begins with the words `For
clearance, clearing office . . . In other words, such an indorsement must be read together with the 24-
hour regulation on clearing House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased. This being so, Plaintiff Bank has not made out a case for
relief."cralaw virtua1aw library

"x x x

"Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention is made of a principle
on which defendant Bank could have acted without incurring the liability now sought to be imposed by
plaintiff. Thus: It is a settled rule that a person who presents for payment checks such as are here
involved guarantees the genuineness of the check, and the drawee bank need concern itself with nothing
but the genuineness of the signature, and the state of the account with it of the drawee. (Interstate Trust
Co. v. United States National Bank, 185 Pac. 260 [1919]). If at all, then, whatever remedy the plaintiff
has would lie not against defendant Bank but as against the party responsible for changing the name of
the payee. Its failure to call the attention of defendant Bank as to such alteration until after the lapse of
27 days would, in the light of the above Central Bank circular, negate whatever right it might have had
against defendant Bank. . . ." (35 SCRA 140, 142-143; 145-146.)

In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118 SCRA 537, 542) a check for
P50, drawn by Joaquin Cunanan and Company on its account at FNCB and payable to Manila Polo
Club, was altered by changing the amount to P50,000 and the payee was changed to "Cash." It was
deposited by a certain Salvador Sales in his current account in the Metropolitan Bank which sent it to the
clearing house. The check was cleared the same day by FNCB which paid the amount of P50,000 to
Metro Bank. Sales immediately withdrew the whole amount and closed his account. Nine (9) days later,
the alteration was discovered and FNCB sought to recover from Metro Bank what it had paid. The trial
court and the Court of Appeals rendered judgment for FNCB but this Court reversed it. We
ruled:jgc:chanrobles.com.ph
FORGERY

"The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic v.
Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are part of our
banking system, and both are subject to the regulations of the Central Bank, they are bound by the 24-
hour clearing house rule of the Central Bank.chanrobles.com.ph : virtual law library

"In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house
period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro Bank to the
alteration of the check in question until after the lapse of nine days, negates whatever right it might have
had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against Metro
Bank, but against the party responsible for changing the name of the payee (Hongkong & Shanghai
Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140) and the amount on the face of the check."
(p. 542.)

Every bank that issues checks for the use of its customers should know whether or not the drawers
signature thereon is genuine, whether there are sufficient funds in the drawers account to cover checks
issued, and it should be able to detect alterations, erasures, superimpositions or intercalations thereon,
for these instruments are prepared, printed and issued by itself, it has control of the drawers account,
and it is supposed to be familiar with the drawers signature. It should possess appropriate detecting
devices for uncovering forgeries and/or alterations on these instruments. Unless an alteration is
attributable to the fault or negligence of the drawer himself, such as when he leaves spaces on the check
which would allow the fraudulent insertion of additional numerals in the amount appearing thereon, the
remedy of the drawee bank that negligently clears a forged and/or altered check for payment is against
the party responsible for the forgery or alteration (Hongkong & Shanghai Banking Corp. v. Peoples
Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge the amount so paid to
the account of the drawer, if the latter was free from blame, nor recover it from the collecting bank if the
latter made payment after proper clearance from the drawee. As this Court pointed out in Philippine
National Bank v. Quimpo, Et Al., 158 SCRA 582, 584:jgc:chanrobles.com.ph

"There is nothing inequitable in such a rule for if in the regular course of business the check comes to
the drawee bank which, having the opportunity to ascertain its character, pronounces it to be valid and
pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the
commercial law places upon it, and the result of its negligence must rest upon it."cralaw virtua1aw
library

The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank, the burden
of loss for the payment of the altered SMC check, the fraudulent character of which FNCB failed to
detect and warn Republic about, within the 24-hour clearing house rule. The Court of Appeals departed
from the ruling of this Court in an earlier PNB case, that:jgc:chanrobles.com.ph

"Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any
intentional fraud, through whose means it has succeeded. (Phil. National Bank v. National City Bank of
New York, 63 Phil. 711, 733.)"

WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby
reversed and set aside, and another is entered absolving the petitioner Republic Bank from liability to
refund to the First National City Bank the sum of P9,240, which the latter paid on the check in question.
No costs.

SO ORDERED.

Narvasa, Gancayco and Medialdea, JJ., concur.

Cruz, J., took no part.

FORGERY
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision
1
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 Decision
3
of the Court of
Appeals and its March 5, 1997 Resolution
4
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,
FORGERY
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 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

FORGERY
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
FORGERY
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.
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.
SO ORDERED."
15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the
trial court. Hence, this petition.
FORGERY
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.
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.
FORGERY
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
FORGERY
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 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 5
31
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.
FORGERY
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 62
32
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 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 areAFFIRMED. 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.
FORGERY
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 ORDEREDto 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.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

FORGERY
SECOND DIVISION
[G.R. No. 139130. November 27, 2002]
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and THE MANILA
BANKING CORPORATION, respondents.
D E C I S I O N
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,
x x x
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]

Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but
without success. The appellate court held that petitioners own negligence was the proximate cause of
his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant.
SO ORDERED.
[8]

Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT
BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT THERE WAS NO
FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE CHECK
BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA
THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST
KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING
THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-
COMPLAINT.
[9]

FORGERY
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE
INSTRUMENTS LAW.
[10]

C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF
IS WITH THE RESPONDENT BANK TO PROVE THE DUE DILIGENCE TO
PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT
NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES.
[11]

D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
BANK SHOULD BEAR THE LOSS, AND SHOULD BE MADE TO PAY
PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO
ESTEBAN.
[12]

Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against
private respondent; and (2) whether or not private respondent, in filing an estafacase against petitioners
secretary, is barred from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect
the discrepant checks. He adds that as a general rule a bank which has obtained possession of a check
upon an unauthorized or forged endorsement of the payees signature and which collects the amount of
the check from the drawee is liable for the proceeds thereof to the payee. Petitioner invokes the doctrine
of estoppel, saying that having itself instituted a forgery case against Eugenio, Manila Bank is now
estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the
accepted and usual course of judicial proceedings, hence there is no reason for the reversal of its
ruling. Manila Bank additionally points out that Section 23
[13]
of the Negotiable Instruments Law is
inapplicable, considering that the fact of forgery was never proven. Lastly, the bank negates petitioners
claim of estoppel.
[14]

On the first issue, we find that petitioner has no cause of action against Manila Bank. To be
entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to
detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the
fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on the
questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as
requested by the National Bureau of Investigation from which to draw a conclusive finding regarding
forgery. The Court of Appeals found that petitioner, by his own inaction, was precluded from setting up
forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the
alleged forgery is not convincing enough. The burden to prove forgery was upon the plaintiff, which
burden he failed to discharge. Aside from his own testimony, the appellant presented no other evidence
to prove the fact of forgery. He did not even submit his own specimen signatures, taken on or about the
date of the questioned checks, for examination and comparison with those of the subject checks. On the
other hand, the appellee presented specimen signature cards of the appellant, taken at various years,
namely, in 1976, 1979 and 1981 (Exhibits 1, 2, 3 and 7), showing variances in the appellants
unquestioned signatures. The evidence further shows that the appellee, as soon as it was informed by
the appellant about his questioned signatures, sought to borrow the questioned checks from the appellant
for purposes of analysis and examination (Exhibit 9), but the same was denied by the appellant. It was
also the former which sought the assistance of the NBI for an expert analysis of the signatures on the
questioned checks, but the same was unsuccessful for lack of sufficient specimen signatures.
[15]

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.
FORGERY
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. CA
[24]
to buttress his contention that respondent Manila Bank as the collecting or last
endorser generally suffers 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.
Bellosillo, Acting C.J., (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

FORGERY
SECOND DIVISION
[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.
D E C I S I O N
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 RTCDecision 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]

FORGERY
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)
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:
FORGERY
[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 Laboratory Services 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?
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
FORGERY
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
FORGERY
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 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 specified person.
[68]
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]

FORGERY
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.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.