[G. R. No. 116320.
November 29, 1999] checks; Francisco then indorsed the checks for a second time by signing her name at the back of
ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS , HERBY COMMERCIAL &
CONSTRUCTION CORPORATION AND JAIME C. ONG, respondents.
DECISION
GONZAGA_REYES, J.:
Assailed in this petition for review on certiorari is the decision[1] of the Court of Appeals
affirming the decision[2] rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case
No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and Construction
Contract which was entered into on June 23, 1977 by A. Francisco Realty & Development
Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and private
respondent Herby Commercial & Construction Corporation (HCCC), represented by its President and
General Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC
at San Jose del Monte, Bulacan, financed by the Government Service Insurance System
(GSIS). Under the contract, HCCC agreed to undertake the construction of 35 housing units and the
development of 35 hectares of land. The payment of HCCC for its services was on a turn-key basis,
that is, HCCC was to be paid on the basis of the completed houses and developed lands delivered
to and accepted by AFRDC and the GSIS. To facilitate payment, AFRDC executed a Deed of
Assignment in favor of HCCC to enable the latter to collect payments directly from the GSIS.
Furthermore, the GSIS and AFRDC put up an Executive Committee Account with the Insular Bank
of Asia & America (IBAA) in the amount of P4,000,000.00 from which checks would be issued and
co-signed by petitioner Francisco and the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint[3] with the Regional Trial Court of Quezon City
against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land
Development and Construction Contract in the amount of P515,493.89 for completed and delivered
housing units and land development. However, the parties eventually arrived at an amicable
settlement of their differences, which was embodied in a Memorandum Agreement executed by
HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that HCCC had
turned over 83 housing units which have been accepted and paid for by the GSIS. The GSIS
acknowledged that it still owed HCCC P520,177.50 representing incomplete construction of housing
units, incomplete land development and 5% retention, which amount will be discharged when the
defects and deficiencies are finally completed by HCCC. It was also provided that HCCC was
indebted to AFRDC in the amount of P180,234.91 which the former agreed would be paid out of
the proceeds from the 40 housing units still to be turned over by HCCC or from any amount due to
HCCC from the GSIS. Consequently, the trial court dismissed the case upon the filing by the parties
of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz
and Francisco had executed and signed seven checks[4], of various dates and amounts, drawn
against the IBAA and payable to HCCC for completed and delivered work under the contract. Ong,
however, claims that these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong
learned that the GSIS gave Francisco custody of the checks since she promised that she would
deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge
or consent, at the dorsal portion of the said checks to make it appear that HCCC had indorsed the
the checks and deposited the checks in her IBAA savings account. IBAA credited Franciscos account
with the amount of the checks and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging
Francisco with estafa thru falsification of commercial documents. Francisco denied having forged
Ongs signature on the checks, claiming that Ong himself indorsed the seven checks in behalf of
HCCC and delivered the same to Francisco in payment of the loans extended by Francisco to
HCCC. According to Francisco, she agreed to grant HCCC the loans in the total amount of
P585,000.00 and covered by eighteen promissory notes in order to obviate the risk of the non-
completion of the project. As a means of repayment, Ong allegedly issued a Certification authorizing
Francisco to collect HCCCs receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona gave
credence to Franciscos claims and accordingly, dismissed the complaints, which dismissal was
affirmed by the Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against Francisco
and IBAA for the recovery of P370,475.00, representing the total value of the seven checks, and for
damages, attorneys fees, expenses of litigation and costs. After trial on the merits, the trial court
rendered its decision in favor of private respondents, the dispositive portion of which provides -
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to
jointly and severally pay the plaintiffs the amount of P370.475.00 plus interest thereon at the rate
of 12% per annum from the date of the filing of the complaint until the full amount is paid; moral
damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00;
litigation expenses of P5,000.00; and attorneys fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia
Francisco, the latter is ordered to reimburse the former for the sums that the Bank shall pay to
the plaintiff on the forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation
(NBI), the trial court held that Francisco had indeed forged the signature of Ong to make it appear
that he had indorsed the checks. Also, the court ruled that there were no loans extended, reasoning
that it was unbelievable that HCCC was experiencing financial difficulties so as to compel it to obtain
the loans from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC at about
the same time that the alleged advances were made. The trial court stated that it was plausible that
Francisco concealed the fact of issuance of the checks from private respondents in order to make it
appear as if she were accommodating private respondents, when in truth she was lending HCCC its
own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil
Case No. Q-24628, the trial court held that the same did not make any mention of the forged checks
since private respondents were as of yet unaware of their existence, that fact having been effectively
concealed by Francisco, until private respondents acquired knowledge of Franciscos misdeeds in
1979.
 IBAA was held liable to private respondents for having honored the checks despite such
obvious irregularities as the lack of initials to validate the alterations made on the check, the absence
of the signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on
a second indorsement in the savings account of Francisco. However, the trial court allowed IBAA
recourse against Francisco, who was ordered to reimburse the IBAA for any sums it shall have to
pay to private respondents.[5]
Both Francisco and IBAA appealed the trial courts decision, but the Court of Appeals dismissed
IBAAs appeal for its failure to file its brief within the 45-day extension granted by the appellate
court. IBAAs motion for reconsideration and petition for review on certiorari filed with this Court
were also similarly denied. On November 21, 1989, IBAA and HCCC entered into a Compromise
Agreement which was approved by the trial court, wherein HCCC acknowledged receipt of the
amount of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the right
of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence this petition for
review on certiorari filed by petitioner, assigning the following errors to the appealed decision
1. The respondent Court of Appeals erred in concluding that private respondents did not owe
Petitioner the sum covered by the Promissory Notes Exh.2-2-A-2-P (FRANCISCO). Such conclusion
was based mainly on conjectures, surmises and speculation contrary to the unrebutted pleadings
and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of
private respondent ONG on the checks in question without any authority therefor which is patently
contradictory to the unrebutted pleading and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to pay the loans
extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in question were not
taken up in the liquidation and reconciliation of all outstanding account between AFRDC and
HERBY as acknowledged by the parties in Memorandum Agreement (Exh. 5) is a pure conjecture,
surmise and speculation contrary to the unrebutted evidence presented by petitioners. It is an
inference made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and
dismissing the appeal.[6]
The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the
seven checks. In this connection, we uphold the lower courts finding that the subject matter of the
present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to
November 1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the
Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed by
the trial court, aside from there being absolutely no mention of the checks in the said agreement,
the amounts represented by said checks could not have been included in the Memorandum
Agreement executed in 1978 because private respondents only discovered Franciscos acts of forgery
in 1979. The lower courts found that Francisco was able to easily conceal from private respondents
even the fact of the issuance of the checks since she was a co-signatory thereof.[7] We also note
that Francisco had custody of the checks, as proven by the check vouchers bearing her uncontested
signature,[8]by which she, in effect, acknowledged having received the checks intended for
HCCC. This contradicts Franciscos claims that the checks were issued to Ong who delivered them
to Francisco already indorsed.[9]
As regards the forgery, we concur with the lower courts finding that Francisco forged the
signature of Ong on the checks to make it appear as if Ong had indorsed said checks and that, after
indorsing the checks for a second time by signing her name at the back of the checks, Francisco
deposited said checks in her savings account with IBAA. The forgery was satisfactorily established
in the trial court upon the strength of the findings of the NBI handwriting expert.[10] Other than
petitioners self-serving denials, there is nothing in the records to rebut the NBIs findings. Well-
entrenched is the rule that findings of trial courts which are factual in nature, especially when
affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court,
provided it is supported by substantial evidence on record,[11] as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs name on the checks by
virtue of the Certification executed by Ong in her favor giving her the authority to collect all the
receivables of HCCC from the GSIS, including the questioned checks.[12] Petitioners alternative
defense must similarly fail. The Negotiable Instruments Law provides that where any person is
under obligation to indorse in a representative capacity, he may indorse in such terms as to negative
personal liability.[13] An agent, when so signing, should indicate that he is merely signing in behalf
of the principal and must disclose the name of his principal; otherwise he shall be held personally
liable.[14] Even assuming that Francisco was authorized by HCCC to sign Ongs name, still, Francisco
did not indorse the instrument in accordance with law. Instead of signing Ongs name, Francisco
should have signed her own name and expressly indicated that she was signing as an agent of
HCCC. Thus, the Certification cannot be used by Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.[15] Due to her forgery of Ongs signature which enabled her to
deposit the checks in her own account, Francisco deprived HCCC of the money due it from the GSIS
pursuant to the Land Development and Construction Contract. Thus, we affirm respondent courts
award of compensatory damages in the amount of P370,475.00, but with a modification as to the
interest rate which shall be six percent (6%) per annum, to be computed from the date of the filing
of the complaint since the amount of damages was alleged in the complaint; [16] however, the rate
of interest shall be twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory until its satisfaction and the basis for the computation of this twelve
percent (12%) rate of interest shall be the amount of P370,475.00. This is in accordance with the
doctrine enunciated in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al.,[17] which was
reiterated in Philippine National Bank vs. Court of Appeals,[18] Philippine Airlines, Inc. vs. Court of
Appeals[19]and in Keng Hua Paper Products Co., Inc. vs. Court of Appeals,[20] which provides that -
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of six percent (6%) per annum. No interest, however, shall be adjudged on unliquidated claims
or damages except when or until the demand can be established with reasonable [3]
Docketed as Civil Case No. Q-24628.
certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall [4]
1. Check No. 0756055, dated October 20, 1977, for P61,800.00 (Exhibit C).
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the demand is made, the 2. Check No. 0756067, dated October 27, 1977, for P67,100.00 (Exhibit C-1).
interest shall begin to run only from the date the judgment of the court is made (at which time the
3. Check No. 0756061, dated October 25, 1977, for P51,475.00 (Exhibit C-2).
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged. 4. Check No. 0756081, dated November 5, 1977, for P32,050.00 (Exhibit C-3).
3. When the judgment of the court awarding a sum of money becomes final and executory, 5. Check No. 0756066, dated October 27, 1977, for P36,250.00 (Exhibit C-4).
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
twelve percent (12%) per annum from such finality until its satisfaction, this interim period being 6. Check No. 0756062, dated October 25, 1977, for P56,700.00 (Exhibit C-5).
deemed to be by then an equivalent to a forbearance of credit. 7. Check No. 0756082, dated November 5, 1977, for P65,100.00 (Exhibit C-6).
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article [5]
RTC Records, 455-464.
2229 of the Civil Code, exemplary damages are imposed by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or compensatory damages. Considering
[6]
Rollo, 19-20.
petitioners fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and [7]
RTC Decision, 7-8; CA Decision, 10.
reasonable. The grant of exemplary damages justifies the award of attorneys fees in the amount of [8]
P50,000.00, and the award of P5,000.00 for litigation expenses.[21] Exhibits E-1 to E-7.

The appellate courts award of P50,000.00 in moral damages is warranted. Under Article 2217
[9]
Rollo, 29.
of the Civil Code, moral damages may be granted upon proof of physical suffering, mental anguish, [10]
Exhibits P-1, P-2.
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation
and similar injury.[22] Ong testitified that he suffered sleepless nights, embarrassment, humiliation Almeda vs. Court of Appeals, 269 SCRA 643 (1997); Fuentes vs. Court of Appeals, 268 SCRA 703
[11]

and anxiety upon discovering that the checks due his company were forged by petitioner and that (1997); People vs. Magallano, 266 SCRA 305 (1997).
petitioner had filed baseless criminal complaints against him before the fiscals office of Quezon City [12]
Rollo, 30-33.
which disrupted HCCCs business operations.[23]
[13]
Act No. 2031, sec. 44.
WHEREFORE, we AFFIRM the respondent courts decision promulgated on June 29, 1992,
upholding the February 16, 1988 decision of the trial court in favor of private respondents, with the Id., sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains
[14]

modification that the interest upon the actual damages awarded shall be at six percent (6%) per
annum, which interest rate shall be computed from the time of the filing of the complaint on
November 19, 1979. However, the interest rate shall be twelve percent (12%) per annum from the
time the judgment in this case becomes final and executory and until such amount is fully paid. The
basis for computation of the six percent and twelve percent rates of interest shall be the amount of
P370,475.00. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
or a person adds to his signature words indicating that he signs for or on behalf of a principal or in
a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability; Philippine Bank of
Commerce vs. Aruego, 102 SCRA 530 (1981).

[1]
The case was docketed as CA-G.R. CV No. 18555 and the decision was promulgated on June 29,
1992 by the Special Seventeenth Division composed of Cancio C. Garcia (ponente), Serafin E.
Camilon, and Cezar D. Francisco.
[2]
The decision was penned by Benjamin V. Pelayo and promulgated on February 16, 1988.
G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD., plaintiff-appellant,
vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendants-
appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.
HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged
in business in the Philippine Islands, and maintains its main office in these Islands in the City of
Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under
general power of attorney with authority of substitution. The principal employee in the Manila
office was one Joseph L. Wilson, to whom had been given a general power of attorney but
without power of substitution. In 1926 Cooper, desiring to go on vacation, gave a general power
of attorney to Newland Baldwin and at the same time revoked the power of Wilson relative to the
dealings with the Bank of the Philippine Islands, one of the banks in Manila in which plaintiff
maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk
in plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a
telegraphic transfer to the China Banking Corporation of Manila of $100,00. The money was
transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum
of P201,000, which was then the current rate of exchange. On this contract was forged the name
of Newland Baldwin and typed on the body of the contract was a note: lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling
Company or order was receipted for by Dolores. On the same date, September 28, 1927, the
manger's check was deposited with the Bank of the Philippine Islands by the following
endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos
Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum
of P201,000 and passed the cashier's check in the ordinary course of business through the
clearing house, where it was paid by the China Banking Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to
be signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named
in the letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed
the counting and packing of the money, and shortly afterwards returned with the check for the
sum of P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine
Islands but never in so large an amount, and according to the record, never under the sole
supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the
money, and he left the bank and shortly afterwards returned with another check for P1,
purporting to be signed by Newland Baldwin. Whereupon the money was turned over to Dolores,
who took it to plaintiff's office, where he turned the money over to Wilson and received as his
share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit
plaintiff with the amount withdrawn by the two forged checks of P200,000 and P1, suit was
brought against the Bank of the Philippine Islands, and finally on the suggestion of the defendant
bank, an amended complaint was filed by plaintiff against both the Bank of the Philippine Islands
and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of
the plaintiff company, that the check had been endorsed for deposit, and that as the prior
endorsement had in law been guaranteed by the Bank of the Philippine Islands, when they
presented the cashier's check to it for payment, the China Banking Corporation was absolved even
if the endorsement of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main their
contentions were that they had been guilty of no negligence, that they had dealt with the
accredited representatives of the company in the due course of business, and that the loss was
due to the dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there
was employed a woman stenographer and cashier. The agent did not keep in his personal
possession either the code-book or the blank checks of either the Bank of the Philippine Islands or
the China Banking Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking
Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in
the Bank of the Philippine Islands being the result of a forged endorsement, the relation of
depositor and banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the
Philippine Islands acted in good faith in the ordinary course of its business, was not guilty of
negligence, and therefore under article 1902 of the Civil Code which should control the case,
plaintiff could not recover; and that as the cause of loss was the criminal actions of Wilson and
Dolores, employees of plaintiff, and as Newland Baldwin, the agent, had not exercised adequate inasmuch as we desire to withdraw and make use of the money." Such language might
supervision over plaintiff's Manila office, therefore plaintiff was guilty of negligence, which ground well be treated as a ratification of the deposit.
would likewise defeat recovery.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and absolutely contrary to what the bank did. It did not take it up as a separate account but it
makes nine assignments of error which we do not deem it necessary to discuss in detail. transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks
are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for
There is a mild assertion on the part of the defendant bank that the disputed signatures of
gain, and they solicit deposits in order that they can use the money for that very purpose. In this
Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and
case the action was neither gratuitous nor was it a bailment.
turning the checks so signed over to Wilson.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond
Islands was an intermeddling bank. In the many cases cited by plaintiff where the bank that
reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to
cashed the forged endorsement was held as an intermeddler, in none was the claimant a regular
Wilson.
depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard to this
plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a item of P201,000 was that of depositor and banker, creditor and debtor.
check must know to whom it pays. In connection with the cashier's check, this duty was therefore
We now come to consider the legal effect of payment by the bank to Dolores of the sum of
upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to
P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated,
inspect and verify all endorsements of the check, even if some of them were also those of
the fact that these signatures were forged is beyond question. It is an elementary principle both
depositors in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine
of banking and of the Negotiable Instruments Law that
Islands when it gave the latter bank credit for its own cashier's check. Even if we would treat the
China Banking Corporation's cashier's check the same as the check of a depositor and attempt to A bank is bound to know the signatures of its customers; and if it pays a forged check, it
apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking must be considered as making the payment out of its own funds, and cannot ordinarily
Corporation and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted charge the amount so paid to the account of the depositor whose name was forged. (7
to plaintiff, we would at the same time have to hold that the Bank of the Philippine Islands was C.J., 683.)
indebted to the China Banking Corporation in the same amount. As, however, the money was in
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact
fact paid to plaintiff corporation, we must hold that the China Banking Corporation is indebted
lulled into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it
neither to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower court
entrusted this large sum of money.
far as it absolves the China Banking Corporation from responsibility is affirmed.
The bank paid out its money because it relied upon the genuineness of the purported signatures
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now
of Baldwin. These, they never questioned at the time its employees should have used care. In
consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of
fact, even today the bank represents that it has a relief that they are genuine signatures.
the check for cash payment but for deposit only. It is a matter of general knowledge that most
endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank The signatures to the check being forged, under section 23 of the Negotiable Instruments Law
would have been justified in accepting the check for deposit even with only a typed endorsement. they are not a charge against plaintiff nor are the checks of any value to the defendant.
It accepted the check and duly credited plaintiff's account with the amount on the face of the
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank
check. Plaintiff was not harmed by the transaction as the only result was the removal of that sum
of the Philippine Islands in honoring and cashing the two forged checks.
of money from a bank from which Wilson could have drawn it out in his own name to a bank
where Wilson would not have authority to draw checks and where funds could only be drawn out The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a
by the check of Baldwin. judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands,
defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928,
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
until payment, together with costs in both instances. So ordered.
". . . we now leave to demand that you pay over to us the entire amount of said
manager's check of two hundred one thousand (P201,000) pesos, together with interest
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.
thereon at the agreed rate of 3 per cent per annum on daily balances of our credit in
account current with your bank to this date. In the event of your refusal to pay, we shall
claim interest at the legal rate of 6 per cent from and after the date of this demand
G.R. No. L-43596 October 31, 1936
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY,
INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.
RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a
special act of the Philippine Legislature, with office as principal place of business at the
Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of
New York is a foreign banking corporation with a branch office duly authorized and
licensed to carry and engage in banking business in the Philippine Islands, with branch
office and place of business in the National City Bank Bldg., City of Manila, P. I., and that
the defendant Motor Service Company, Inc., is a corporation organized and existing
under and by virtue of the general corporation law of the Philippine Islands, with office
and principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged in the
purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant
Motor Service Company, Inc., the checks marked as Exhibits A and A-1, respectively,
which are made parts of the stipulation, in payment for automobile tires purchased from
said defendant's stores, purporting to have been issued by the "Pangasinan
Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine
National Bank and in favor of the International Auto Repair Shop, for P144.50 and
P215.75; and said checks were indorsed by said unknown persons in the manner
indicated at the back thereof, the Motor Service Co., Inc., believing at the time that the
signature of J. L. Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc.,
on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor
Service Company, Inc, at the National City Bank of New York and the former was
accordingly credited with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the
Philippine National Bank credited the National City Bank of New York for the amounts
thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar,
as Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said
Exhibits A and A-1 were forged when so informed by the said Company, and it
accordingly demanded from the defendants the reimbursement of the amounts for which
it credited the National City Bank of New York at the clearing house and for which the
latter credited the Motor Service Co., but the defendants refused, and continue to refuse,
to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check
deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court
of Manila and forming part of the record of the present case, are admitted by the parties
as genuine and are made part of this stipulation as well as Exhibit H hereto attached and
made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank
of New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of
P360.25, with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the
decision of the municipal court of Manila where this case originated, became perfected because of
plaintiff's failure to attach to the record within 15 days from receipt of notice of said decision, the
certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed
that both the appeal docket fee and the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This
question was settled by our decision in the case of Blanco vs. Bernabe and lawyers Cooperative
Publishing Co. (page 124, ante), and no further consideration. No error was committed in allowing
said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely,
whether the appellee has the right to recover from the appellant, under the circumstances of this
case, the value of the checks on which the signatures of the drawer were forged. The appellant
maintains that the question should be answered in the negative and in support of its contention
appellant advanced various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee
bank constitutes an "acceptance", and, consequently, the case should be governed by the
provisions of section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that
he will pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only the
rules governing bills of exchange payable on demand are applicable to it, according to section 185
of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in
so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the
provisions relative to "acceptance" are without application to checks. Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case of the payment of a check
because from the moment a check is paid it is withdrawn from circulation. The warranty
established by section 62, is in favor of holders of the instrument after its acceptance. When the
drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical
thereafter to speak of subsequent holders who can invoke the warranty provided in section 62
against the drawee. Moreover, according to section 191, "acceptance" means "an acceptance
completed by delivery or notification" and this concept is entirely incompatible with payment,
because when payment is made the check is retained by the bank, and there is no such thing as
delivery or notification to the party receiving the payment. Checks are not to be accepted, but
presented at once for payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as
"acceptance" in the ordinary sense of the term. A check being payable immediately and on
demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The
holder has no right to demand from the bank anything but payment of the check, and the bank
has no right, as against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A
check is not an instrument which in the ordinary course of business calls for acceptance. The
holder can never claim acceptance as his legal right. He can present for payment, and only for
payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks
for acceptance, before they are paid, in which case we have a "certification" equivalent to
"acceptance" according to section 187, which provides that "where a check is certified by the bank
on which it is drawn, the certification is equivalent to an acceptance", and it is then that the
warranty under section 62 exists. This certification or acceptance consists in the signification by
the drawee of his assent to the order of the drawer, which must not express that the drawee will
perform his promise by any other means than the payment of money. (Sec. 132.) When the
holder of a check procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the check operates as an assignment of a
part of the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing in the
nature of the check which intrinsically precludes its acceptance, in like manner and with like effect
as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is
frequently induced by convenience, by the exigencies of business, or by the desire to oblige
customers, voluntarily to incur the obligation. The act by which the bank places itself under
obligation to pay to the holder the sum called for by a check must be the expressed promise or
undertaking of the bank signifying its intent to assume the obligation, or some act from which the
law will imperatively imply such valid promise or undertaking. The most ordinary form which such
an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called,
the certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay
the check upon demand, but this is not an "acceptance" of the check in the true sense of that
term. Although a check does not call for acceptance, and the holder can present it only for
payment, the certification of checks is a means in constant and extensive use in the business of
banking, and its effects and consequences are regulated by the law merchant. Checks drawn upon
banks or bankers, thus marked and certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the payment of debts, the purchase
of property, and in the transfer of balances from one house and one bank to another. In the great
commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a
useful, valuable, and an almost indispensable office. The purpose of procuring a check to be
certified is to impart strength and credit to the paper by obtaining an acknowledgment from the
certifying bank that the drawer has funds therein sufficient to cover the check and securing the
engagement of the bank that the check will be paid upon presentation. A certified check has a
distinctive character as a species of commercial paper, and performs important functions in
banking and commercial business. When a check is certified, it ceases to possess the character, or
to perform the functions, of a check, and represents so much money on deposit, payable to the
holder on demand. The check becomes a basis of credit an easy mode of passing money from
hand to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though
acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of
the drawee, that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking that the check is good then,
and shall continue good, and this agreement is as binding on the bank as its notes of circulation, a
certificate of deposit payable to the order of the depositor, or any other obligation it can assume.
The object of certifying a check, as regards both parties is to enable the holder to use it as
money. The transferee takes it with the same readiness and sense of security that he would take
the notes of the bank. It is available also to him for all the purposes of money. Thus it continues
to perform its important functions until in the course of business it goes back to the bank for
redemption, and is extinguished by payment. It cannot be doubted that the certifying bank
intended these consequences, and it is liable accordingly. To hold otherwise would render these
important securities only a snare and a delusion. A bank incurs no greater risk in certifying a
check than in giving a certificate of deposit. In well-regulated banks the practice is at once to
charge the check to the account of the drawer, to credit it in a certified check account, and, when
the check is paid, to debit that account with the amount. Nothing can be simpler or safer than this
process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or
mark, usually the words "good", "certified" or "accepted" written upon the check by the banker or
bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the drawer here ready to pay it. We will
pay it now if you will receive it. The holder says, No, I will not take the money; you may certify
the check and retain the money for me until this check is presented. The law will not permit a
check, when due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money being due and the
check presented, it is his own fault if the holder declines to receive the pay, and for his own
convenience has the money appropriated to that check subject to its future presentment at any
time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by
the fact that they take the word "acceptance" in its ordinary meaning and not in the technical
sense in which it is used in the Negotiable Instruments Law. Appellant says that when payment is
made, such payment amounts to an acceptance, because he who pays accepts. This is true in
common parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar
meaning in the Negotiable Instruments Law, and, as has been above stated, in the instant case
there was payment but no acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor
implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court
asks, if a mere promise to pay a check is binding on a bank, why should not the absolute payment
of the check have the same effect? In response, it is submitted that the two things, that is
acceptance and payment, are entirely different. If the drawee accepts the paper after seeing it,
and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to
be prevented from setting up forgery to defeat liability to one who has taken the paper on the
faith of the acceptance, or certification. On the other hand, mere payment of the paper at the
termination of its course does not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of the conflicting arguments which
have been advanced by the courts with respect to the rule. (Annotation at 12 A. L. R., 1090
1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by
section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute,
discharges the liability only of the persons named in the statute, to wit, the drawer and
all indorsers, and the contract of indorsement by the negotiator if the check is discharged
by acceptance, certification, or payment. But clearly the statute does not say that the
contract of warranty of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a
forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's
account, do not amount to an acceptance so as to make the bank liable to the payee, is supported
by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L.
R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not
an acceptance thereof so as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L.
R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court
said:
The defendant in error contends that the payment of the check shows acceptance by the bank,
urging that there can be no more definite act by the bank upon which a check has been drawn,
showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments
Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a
check, and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the
drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the
future and continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U.
S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as
an acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse
(Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919),
and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the
Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of
the United States seems more logical, and the provision of the Negotiable Instruments Act now
require an acceptance to be in writing. Under this statute the payment of a check on a forged
indorsement, stamping it "paid," and charging it to the account of the drawer, do not constitute
an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria
Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann.
Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837;
State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee.
Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of
check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or
unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance.
(Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust
Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language
of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments
of which they complain. This suggestion does not seem forceful to us. It is the contention
which was made before the Supreme Court of the United States in First National
Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the
opinion in that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between
the payee and the bank is established by the payment of the amount of this check in the
manner described. This argument is based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have discharged all of its duty, and there
would be an end to the claim against it. The bank supposed that it had paid the check,
but this was an error. The money it paid was upon a pretended and not a real
indorsement of the name of the payee. . . . We cannot recognize the argument that
payment of the amount of the check or sight draft under such circumstances amounts to
an acceptance creating a privity of contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A
banker or individual may be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at a future time. Many, on the other
hand, are more ready to promise to pay than to meet the promise when required. The
difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not
operate as an acceptance of the check so as to authorize an action by the real owner to
 recover its amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec.
278, p. 521.) A full list of the authorities supporting the rule will be found in a footnote to
the foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So.,
570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question
was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow
ledge that the payment of the check by the two banks will constitute an acceptance. The drawee
bank simply marked it "paid" and did not write anything else except the date. The bank first
paying the check, the Commercial National Bank and Trust Company, simply wrote its name as
indorser and passed the check on to the drawee bank; does this constitute an acceptance? The
precise question has not been presented to this court for decision. Without reference to
authorities in other jurisdictions it would appear that the drawee bank had never written its name
across the paper and therefore, under the strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be illogical and unsound to say that the
payment of a check by the drawee, and the stamping of it "paid", is equivalent to the same thing
as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions
on this question. Counsel correctly states that the theory upon which the numerous courts hold
that the payment of a check creates privity between the holder of the check and the drawee bank
is tantamount to apro tanto assignment of that part of the funds. It is most easily understood how
the payment of the check, when not authorized to be done by the drawee bank, might under such
circumstances create liability on the part of the drawee to the drawer. Counsel cites the case of
Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein
Judge Lurton held that the acceptance of a check was necessary in order to give the holder
thereof a right of action thereon against the bank, and further held in a case similar to this, so far
as this question is concerned, that the acceptance of a check so as to give a right of action to the
payee is inferred from the retention of the check by the bank and its subsequent charge of the
amount to the drawer, although it was presented by, and payment made, an unauthorized
person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19
L. ed., 897), wherein the Supreme Court of the United States, not having such a case before it,
threw out the suggestion that, if it was shown that a bank had charged the check on its books
against the drawer and made settlement with the drawee that the holder could recover on
account of money had and received, invoking the rule of justice and fairness, it might be said
there was an implied promise to the holder to pay it on demand. ( SeeNational Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued
that it would be inequitable and unconscionable for the owner and payee of the check to be
limited to an action against an insolvent drawer and might thereby lose the debt. They recognized
the legal principle that there is no privity between the drawer bank and the holder, or payee, of
the check, and proceeded to hold that no particular kind of writing was necessary to constitute an
acceptance and that it became a question of fact, and the bank became liable when it stamped it
"paid" and charged it to the account of the drawer, and cites, in support of its opinion, Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am.
Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by
the State of Tennessee. However, in this case Judge Snodgrass points out that the Millard
case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the
Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio
St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to
the contrary, called attention to the fact that the Dodge case was no longer the law, and
proceeded to announce that, whatever might have been the law before the passage of
the Negotiable Instrument Act in that state, it was no longer the law; that the rule
announced in the Dodge case had been "discarded." The court, in the latter case,
expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the
rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument
Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case
of First National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229),
where the bank, without any knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended that by the payment the privity of
contract existing between the drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity
between the payee and the bank is established by the payment of the amount of this
check in the manner described. This argument is based upon the erroneous assumption
that the bank has paid this check. If this were true, it would have discharged all of its
duty, and there would be an end of the claim against it. The bank supposed that it had
paid the check; but this was an error. The money it paid was upon a pretended and not a
real indorsement of the name of the payee. The real indorsement of the payee was as
necessary to a valid payment as the real signature of the drawer; and in law the check
remains unpaid. Its pretended payment did not diminish the funds of the drawer in the
bank, or put money in the pocket of the person entitled to the payment. The state of the
account was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight
draft under such circumstances amounts to an acceptance, creating a privity of contract
with the real owner. It is difficult to construe a payment as an acceptance under any
circumstances. The two things are essentially different. One is a promise to perform an
act, the other an actual performance. A banker or an individual may be ready to make
actual payment of a check or draft when presented, while unwilling to make a promise to
pay at a future time. Many, on the other hand, are more ready to promise to pay than to
meet the promise when required. The difference between the transactions is essential
and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid"
and the charging of the amount thereof to the drawer constituted an acceptance, but we
are of opinion that none of these cases cited hold that it is in compliance with the
Negotiable Instruments Act; paying the check and stamping same is not the equivalent of
accepting the check in writing signed by the drawee. The cases holding that payment as
indicated above constituted acceptance were rendered prior to the adoption of the
Negotiable Instruments Act in the particular state, and these decisions are divided into
two classes: the one holding that the check delivered by the drawer to the holder and
presented to the bank or drawee constitutes an assignment pro tanto; the other holding
that the payment of the check and the charging of same to the drawee although paid to
 an unauthorized person creates privity of contract between the holder and the drawee
bank.
We have already seen that our own court has repudiated the assignment pro
tanto theory, and since the adoption of the Negotiable Instrument Act by this state we
are compelled to say that payment of a check is not equivalent to accepting a check in
writing and signing the name of the acceptor thereon. Payment of the check and the
charging of same to the drawer does not constitute an acceptance. Payment of the check
is the end of the voyage; acceptance of the check is to fuel the vessel and strengthen it
for continued operation on the commercial sea. What we have said applies to the holder
and not to the drawer of the check. On this question we conclude that the general rule is
that an action cannot be maintained by a payee of the check against the bank on which is
draw unless the check has been certified or accepted by the bank in compliance with the
statute, even though at the time the check is that an action cannot be maintained by a
payee of the drawer of the check out of which the check is legally payable; and that the
payment of the check by the bank on which it is drawn, even though paid on the
unauthorized indorsement of the name of the holder (without notice of the defect by the
bank), does not constitute a certification thereof, neither is it an acceptance thereof; and
without acceptance or certification, as provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check. Neither is there an
assignment pro tanto of the funds where the check is not drawn on a particular fund, or
does not show on its face that it is an assignment of a particular fund. The above rule as
stated seems to have been the rule in the majority of the states even before the passage
of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which
appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of
Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following
language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at
page 396), it was said: "The payment of a bill or check by the drawee amounts to more
than an acceptance. The rule, holding that such a payment has all the efficacy of an
acceptance, is founded upon the principle that the greater includes the less." We are
unable to agree with this statement as there is no similarity between acceptance and
payment; payment discharges the instrument, and no one else is expected to advance
anything on the faith of it; acceptance, contemplates further circulation, induced by the
fact of acceptance. The rule that the acceptor made certain admissions which will inure to
the benefit of subsequent holders, has no applicability to payment of the instrument
where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a
drawee could not recover money paid upon a forgery of the drawer's name, because it was said,
the drawee was negligent not to know the forgery and it must bear the consequence of its
negligence, is fast fading into the misty past, where it belongs. It was founded in misconception
of the fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances
(except, of course, where the purchaser of the bill has participated in the fraud upon the drawee)
would the drawee be allowed to recover bank money paid under a mistake of fact upon a bill of
exchange to which the name of the drawer had been forged. This doctrine has been freely
criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor
best calculated to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of
Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief
Justice of the Supreme Court of Massachusetts, in the case of Dedham National Bank vs. Everett
National Bank (177 Mass., 392). "Probably the rule was adopted from an impression of
convenience rather than for any more academic reason; or perhaps we may say that Lord
Mansfield took the case out of the doctrine as to payments under a mistake of fact by the
assumption that a holder who simply presents negotiable paper for payment makes no
representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States
Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B.
Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted
indorsement of a draft and presentation to the drawee is a representation that the signature of
the drawer is genuine", and in Lisbon First National Bank vs. Wyndmere Bank (15 N. D., 299), it
was also held that "the drawee of a forged check who has paid the same without detecting the
forgery, may upon discovery of the forgery, recover the money paid from the party who received
the money, even though the latter was a good faith holder, provided the latter has not been
misled or prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from
denying genuineness of the drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has ascertained the bill to be genuine. But
the holder has preceded him in negligence, by himself not ascertaining the true character of the
paper before he received it, or presented it for acceptance or payment. And although, as a
general rule, the drawee is more likely to know the drawer's handwriting than a stranger is, if he
is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by
mistake than a stranger, who, without knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of the drawee should always be allowed
to be corrected, unless the holder, acting upon faith and confidence induced by his honoring the
draft, would be placed in a worse position by according such privilege to him. This view has been
applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr.
Chitty, who says it is going a great way to charge the acceptor with knowledge of his
correspondent's handwriting, "unless some bona fide holder has purchased the paper on the faith
of such an act." Negligence in making payment under a mistake of fact is not now deemed a bar
to recovery of it, and we do not see why any exception should be made to the principle, which
would apply as well as to release an obligation not consummated by payment. ( Vol. 2, 6th
edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee
who, under a mistake of fact, has paid, and a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it is only fair to consider the question of
diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank
[1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the
genuineness of the drawer's signature, is absolute only in favor of one who has not, by his own
fault or negligence, contributed to the success of the fraud or to mislead the drawee. (National
Bank of America vs.Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony
Bank, supra; De Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank
of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment
was made was not an innocent sufferer, but was guilty of negligence in not doing something,
which plain duty demanded, and which, if it had been done, would have avoided entailing loss on
any one, he is not entitled to retain the moneys paid through a mistake on the part of the drawee
bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A.
S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S.
R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.],
188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R.,
986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12
S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash.,
484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to
retain the money obtained he must be able to show that the whole responsibility of determining
the validity of the signature was upon the drawee, and that the negligence of such drawee was
not lessened by any failure of any precaution which, from his implied assertion in presenting the
check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life
Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill.,
429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford &
Co. vs.People's Bank of Orangeburg, supra.) The recovery is permitted in such case, because,
although the drawee was constructively negligent in failing to detect the forgery, yet if the
purchaser had performed his duty, the forgery would in all probability have been detected and the
fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A.
[N. S.], 49.) In the absence of actual fault on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the forgery will not preclude his recovery from
one who took the check under circumstances of suspicion without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud. (National Bank of
America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810;
Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of
Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties alike innocent
of forgery, can be traced to the neglect or fault of either, it is unreasonable that it would be borne
by him, even if innocent of any intentional fraud, through whose means it has succeeded.
(Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank
of Salem, supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is
guilty of negligence in receiving and paying the check or draft, or has reason to believe that the
instrument is not genuine, but fails to inform the drawee of his suspicions the indorser according
to the reasoning of some courts will be held liable to the drawee upon his implied warranty that
the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry
Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now
agree that one who purchases a check or draft is bound to satisfy himself that the paper is
genuine; and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty, the drawee, who has, without
actual negligence on his part, paid the forged demand, may recover the money paid from such
negligent purchaser. (Lisbon First National Bank vs. Wyndmere Bank, supra.) Of course, the
drawee must, in order to recover back the holder, show that he himself was free from fault. (See
also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has
occurred, the drawee may recover the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the
signature of the drawer of a bill or check which he undertakes to pay has been held to be decisive
in favor of a payee of a forged bill or check to which he has himself given credit by his
indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill,
287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197
Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent disregard
of duty has contributed to induce the drawee to commit. . . . The holder must refund, if by his
negligence he has contributed to the consummation of the mistake on the part of the drawee by
misleading him. . . . If the only fault attributable to the drawee is the constructive fault which the
law raises from the bald fact that he has failed to detect the forgery, and if he is not chargeable
with actual fault in addition to such constructive fault, then he is not precluded from recovery
from a holder whose conduct has been such as to mislead the drawee or induce him to pay the
check or bill of exchange without the usual security against fraud. The holder must refund to a
drawee who is not guilty of actual fault if the holder was negligent in not making due inquiry
concerning the validity of the check before he took it, and if the drawee can be said to have been
excused from making inquiry before taking the check because of having had a right to, presume
that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn
whether or not it is genuine should not be allowed to retain the proceeds of the draft or check
from the drawee, whose sole fault was that he did not discover the forgery before he paid the
draft or check, has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware
Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R.,
337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases
it, indorses it, generally, and presents it to the drawee bank, which pays it, the latter may recover
if its only negligence was its mistake in having failed to detect the forgery, since its mistake, did
not mislead the purchaser or bring about a change in position. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check
cashed by the latter and deposited by the forger in the second bank and never withdrawn, upon
the discovery of the forgery three months later, after the drawee had paid the check and returned
the voucher to the purported drawer, where the purchasing bank was negligent in taking the
check, and was not injured by the drawee's negligence in discovering and reporting the forgery as
to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T.
Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the
check, after discovery of the forgery, from another bank, which put the check into circulation by
cashing it for the one who had forged the signature of both drawer and payee without making any
inquiry as to who he was although he was a stranger, after which the check reached, and was
paid by, the drawee, after going through the hands of several intermediate indorsees. (71 A. L.
R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following
statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the
Brule National Bank in putting the check in circulation, was not discharged by payment of the
check by the drawee (First National Bank), nor was the Brule National Bank deceived or misled to
its prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted
its own identification of Kost and the genuineness of his signature. The indorsement of the check
by the Brule National Bank was such as to assign the title to the check to its assignee, the
Whitbeck National Bank, and the amount was credited to the indorser. The check bore no
indication that it was deposited for collection, and was not in any manner restricted so as to
constitute the indorsee the agent of the indorser, nor did it prohibit farther negotiation of the
instrument, nor did it appear to be in trust for, or to the use of, any other person, nor was it
conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of genuineness,
which implied the full identification of Kost, and his signature by the defendant bank. This view of
the statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22
Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151
Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6
L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331),
decided in 1929. We have carefully examined this decision and we do not feel justified in
accepting its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price, and
it predicated on the wrong premise that the payment includes acceptance, and that a bank
drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning of section
62 of the Negotiable Instruments Act. Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals
of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a
forgery. It was bound to know the signature of its customer, Armstrong, and it was
derelict in failing to give his signature to the check sufficient attention and examination to
enable it to discover instantly the forgery. The appellant, when the check was presented
to it by Banfield, failed to make an inquiry of or about him and did not cause or have him
to be identified. Its act in so paying to him the check is a degree of negligence on its part
equivalent to positive negligence. It indorsed the check, and, while such indorsement
may not be regarded within the meaning of the Negotiable Instrument Law as amounting
to a warranty to appellant of that which it indorsed, it at least substantially served as a
representation to it that it had exercised ordinary care and had complied with the rules
and customs of prudent banking. Its indorsement was calculated, if it did not in fact do
so, to lull the drawee bank into indifference as to the drawer's signature to it when
paying the check and charging it to its customer's account and remitting its proceeds to
appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without
fault, no recovery may be had of the money so paid. (Deposit Bank of
Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule may be more
accurately stated that, where the drawee pays the money, he cannot recover it back from
a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa
in failing to inquire of and about Banfield, and to cause or to have him identified before it
parted with its money on the forged check, may be regarded as the primary and
proximate cause of the loss. Its negligence in this respect reached in its effect the
appellee, and induced incaution on its part. In comparison of the degrees of the
negligence of the two, it is apparent that of the appellant excels in culpability. Both
appellant and appellee inadvertently made a mistake, doubtless due to a hurry incident to
business. The first and most grievous one was made by the appellant , amounting to its
disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it
cannot on account thereof retain as against the appellee the money which it so received.
It cannot shift the loss to the appellee, for such disregard of its duty inevitably
contributed to induce the appellee to omit its duty critically to examine the signature of
Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers'
Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks
in question is such as to give the appellee the right to recover upon said checks, and on the other
hand, whether the drawee bank was not itself negligent, except for its constructive fault in not
knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check
Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter
check, which is prior in number to the former check, is however, issued on a later date.
This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not
only this; check Exhibit A is indorsed by a subagent of the agent of the payee,
International Auto Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever
as to the extent of the authority of these unknown persons. Our Supreme Court said once
that "any person taking checks made payable to a corporation, which can act only by
agents, does so at his peril, and must abide by the consequences if the agent who
indorses the same is without authority" (Insular Drug Co. vs. National Bank, 58, Phil.,
684).
xxx xxx xxx
Check Exhibit A-1, aside from having been indorsed by a supposed agent of the
international Auto Repair Shop is crossed generally. The existence of two parallel lines
 transversally drawn on the face of this check was a warning that the check could only be
collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179,
180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc.,
accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor
Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received
checks from them every month in payment of their account. The two checks in question
seem to be exactly similar to the checks which we received from the Pangasinan
Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's
signature in the two checks, may be considered as an omission in good faith because of
the similarity stated in the letter, then the same consideration applies to the Philippine
National Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the
Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally
innocent persons, the drawee bank and the holder, and that they are governed by the authorities
already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who
has paid upon the forged signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that of his customer. But it
follows obviously that if the payee, holder, or presenter of the forged paper has himself
been in default, if he has himself been guilty of a negligence prior to that of the banker,
or if by any act of his own he has at all contributed to induce the banker's negligence,
then he may lose his right to cast the loss upon the banker. The courts have shown a
steadily increasing disposition to extend the application of this rule over the new
conditions of fact which from time to time arise, until it can now rarely happen that the
holder, payee, or presenter can escape the imputation of having been in some degree
contributory towards the mistake. Without any actual change in the abstract doctrines of
the law, which are clear, just, and simple enough, the gradual but sure tendency and
effect of the decisions have been to put as heavy a burden of responsibility upon the
payee as upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and
Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following
statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and received.
If his claim did not rest upon a transaction relating to a negotiable instrument plaintiff
could recover as for money paid under mistake, unless defendant could show some
equitable reason, such as changed condition since, and relying upon, payment by
plaintiff. In the Wyndmere Case, the North Dakota court holds that this rule giving right
to recover money paid under mistake should extend to negotiable paper, and it rejects in
its entirety the theory of estoppel and puts a case of this kind on exactly the same basis
as the ordinary case of payment under mistake. But the great weight of authority, and
that based on the better reasoning, holds that the exigencies of business demand a
different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel
against the drawee in favor of a holder, no matter how negligent such holder has been?
It surely is not. The correct rule recognizes the fact that, in case of payment without a
prior acceptance or certification, the holder takes the paper upon the of the prior
indorsers and the credit of the drawer, and not upon the credit of the drawee, in making
payment, has a right to rely upon the assumption that the payee used due diligence,
especially where such payee negotiated the bill or check to a holder, thus representing
that it had so fully satisfied itself as to the identity and signature of the maker that it was
willing to warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and
66.) Such correct rule denies the drawee the right to recover when the holder was
without fault or when there has been some change of position calling for equitable relief.
When a holder of a bill of exchange uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is absolutely closed modern business
could not be done on any other basis. While the correct rule promotes the fluidity of two
recognized mediums of exchange, those mediums by which the great bulk of business is
carried on, checks and drafts, upon the other hand it encourages and demands prudent
business methods upon the part of those receiving such mediums of exchange.
(Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849;
136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769;
3 Am. St. Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66
W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn.,
189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express
Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711;
Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159
Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took this
check from a strangerwithout other identification than that given by another stranger; its
cashier witnessed the mark of such stranger thus vouching for the identity and signature
of the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off
guard. Defendant could not but have known, when negotiating such check and putting it
into the channel through which it would finally be presented to plaintiff for payment, that
plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely
upon the apparent faith and credit that defendant had placed in the drawer. From the
very circumstances of this case plaintiff had to act on the facts as presented to it by
defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in
"equity and good conscience" plaintiff should not recover it says it did not pay over any
money to the forger until after plaintiff had paid the check. There would be merit in such
contention if defendant had indorsed the check for "collection," thus advising plaintiff that
it was relying on plaintiff and not on the drawer. It stands in court where it would have
been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct,
however innocent, misled or deceived the drawee to his damage, it would be unjust for
 him to be allowed to shield himself from the results of his own carelessness by asserting 3. That the payment of a check does not include or imply its acceptance in the sense that
that the drawee was bound in law to know his drawer's signature. this word is used in section 62 of the Negotiable Instruments Law;
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or 4. That in the case of the payment of a forged check, even without former acceptance,
made without the authority of the person whose signature it purports to be, is wholly inoperative, the drawee can not recover from a holder in due course not chargeable with any act of
and no right to retain the instrument, or to give a discharge therefor, or to enforce payment negligence or disregard of duty;
thereof against any party thereto, can be acquired through or under such signature, unless the
5. That to entitle the holder of a forged check to retain the money obtained thereon,
party against whom it is sought to enforce such right is precluded from setting up the forgery or
there must be a showing that the duty to ascertain the genuineness of the signature
want of authority.
rested entirely upon the drawee, and that the constructive negligence of such drawee in
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the failing to detect the forgery was not affected by any disregard of duty on the part of the
checks in question, by its acceptance thereof, nor did it perform any act which would have holder, or by failure of any precaution which, from his implied assertion in presenting the
induced the appellant to believe in the genuineness of said instruments before appellant check as a sufficient voucher, the drawee had the right to believe he had taken;
purchased them for value, it can not be said that the appellee is precluded from setting up the
6. That in the absence of actual fault on the part of the drawee, his constructive fault in
forgery and, therefore, the appellant is not entitled to retain the amount of the forged check paid
not knowing the signature of the drawer and detecting the forgery will nor preclude his
to it by the appellee.
recovery from one who took the check under circumstances of suspicion and without
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the proper precaution, or whose conduct has been such as to mislead the drawee or induce
drawer's signature may recover the payment back, unless his mistake has placed an innocent him to pay the check without the usual scrutiny or other precautions against mistake or
holder of the paper in a worse position than he would have been in if the discovery of the forgery fraud;
had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
7. That on who purchases a check or draft is bound to satisfy himself that the paper is
Forgeries often deceived the eye of the most cautious experts; and when a bank has been
genuine, and that by indorsing it or presenting it for payment or putting it into circulation
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
before presentation he impliedly asserts that he performed his duty;
deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the
In the instant case should the drawee bank be allowed recovery, the appellant's position would
correct one, will not hinder the circulation of two recognized mediums of exchange by
not become worse than if the drawee had refused the payment of these checks upon their
which the great bulk of business is carried on, namely, drafts and checks, on the other
presentation. The appellant has lost nothing by anything which the drawee has done. It had in its
hand, it will encourage and demand prudent business methods on the part of those
hands some forged worthless papers. It did not purchase or acquire these papers because of any
receiving such mediums of exchange;
representation made to it by the drawee. It purchased them from unknown persons and under
suspicious circumstances. It had no valid title to them, because the persons from whom it 9. That it being a matter of record in the present case, that the appellee bank in no more
received them did not have such title. The appellant could not have compelled the drawee to pay chargeable with the knowledge of the drawer's signature than the appellant is, as the
them, and the drawee could have refused payment had it been able to detect the forgery. By drawer was as much the customer of the appellant as of the appellee, the presumption
making a refund, the appellant would only returning what it had received without any title or that a drawee bank is bound to know more than any indorser the signature of its
right. And when appellant pays back the money it had received it will be entitled to have restored depositor does not hold;
to it the forged papers it parted with. There is no good reason why the accidental payment made
10. That according to the undisputed facts of the case the appellant in purchasing the
by the appellant should inure to the benefit of the appellant. If there were injury to the appellant
papers in question from unknown persons without making any inquiry as to the identity
said injury was caused not by the failure of the appellee to detect the forgery but by the very
and authority of the said persons negotiating and indorsing them, acted negligently and
negligence of the appellant in purchasing commercial papers from unknown persons without
contributed to the appellee's constructive negligence in failing to detect the forgery;
making inquiry as to their genuineness.
11. That under the circumstances of the case, if the appellee bank is allowed to recover,
In the light of the foregoing discussion, we conclude:
there will be no change of position as to the injury or prejudice of the appellant.
1. That where a check is accepted or certified by the bank on which it is drawn, the bank
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as
is estopped to deny the genuineness of the drawer's signature and his capacity to issue
it is hereby, affirmed, with costs against the appellant. So ordered.
the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified
by the said bank it cannot recover from a holder who did not participate in the forgery
and did not have actual notice thereof;
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to as the PNB seeks the review
by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First
Instance of Manila, dismissing plaintiff's complaint against the Philippine Commercial and
Industrial Bank hereinafter referred to as the PCIB for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals
show that, on about January 15, 1962, one Augusto Lim deposited in his current account with the
PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn
against the PNB; that, following an established banking practice in the Philippines, the check was,
on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not
return said check the next day, or at any other time, but retained it and paid its amount to the
PCIB, as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on
January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the
latter's account, for the reason that the signatures of its officers on the check were forged; and
that, thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of said
sum, which the PCIB refused to do. Hence, the present action against the PCIB, which was
dismissed by the Court of First Instance of Manila, whose decision was, in turn, affirmed by the
Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the
check, as drawer thereof, are forged; that the person named in the check as its payee was one
Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have
been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January
15, 1962; that, thereupon, the PCIB stamped the following on the back of the check: "All prior
indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial
Bank," Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB,
for clearance, through the Central Bank; and that, over two (2) months before, or on November
13, 1961, the GSIS had notified the PNB, which acknowledged receipt of the notice, that said
check had been lost, and, accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of
negligence; (2) in not finding that the indorsements at the back of the check are forged; (3) in not
finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the check; (4)
in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments
law; (5) in not finding that, since the check had not been accepted by the PNB, the latter is
entitled to reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which it is
interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures of the
drawer are forged, so must the signatures of the supposed indorsers be; but this conclusion does
not necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB
has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB
refunded the amount of the check to the GSIS, on account of the forgery in the signatures, not of
the indorsers or supposed indorsers, but of the officers of the GSIS as drawer of the instrument.
In other words, the question whether or not the indorsements have been falsified is immaterial to
the PNB's liability as a drawee, or to its right to recover from the PCIB, 1 for, as against the
drawee, the indorsement of an intermediate bank does not guarantee the signature of the
drawer,2 since the forgery of the indorsement is notthe cause of the loss.3
With respect to the warranty on the back of the check, to which the third assignment of error
refers, it should be noted that the PCIB thereby guaranteed "all prior indorsements," not the
authenticity of the signatures of the officers of the GSIS who signed on its behalf, because the
GSIS is not an indorser of the check, but its drawer.4 Said warranty is irrelevant, therefore, to the
PNB's alleged right to recover from the PCIB. It could have been availed of by a subsequent
indorsee5 or a holder in due course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed,
upon payment by the PNB, as drawee, the check ceased to be a negotiable instrument, and
became a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in general,
"acceptance", in the sense in which this term is used in the Negotiable Instruments Law 9 is not
required for checks, for the same are payable on demand. 10 Indeed, "acceptance" and "payment"
are, within the purview of said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of money.
Upon the other hand, actual payment of the amount of a check implies not only an assent to said
order of the drawer and a recognition of the drawer's obligation to pay the aforementioned sum,
but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains that the lower
court erred in not finding that the PCIB had been guilty of negligence in not discovering that the
check was forged. Assuming that there had been such negligence on the part of the PCIB, it is
undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB
had been guilty of a greater degree of negligence, because it had a previous and formal notice
from the GSIS that the check had been lost, with the request that payment thereof be stopped.
Just as important, if not more important and decisive, is the fact that the PNB's negligence was
the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on
the same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB
did not return the check to the PCIB the next day or at any other time; that said failure to return
the check to the PCIB implied, under the current banking practice, that the PNB considered the
check good and would honor it; that, in fact, the PNB honored the check and paid its amount to
the PCIB; and that only then did the PCIB allow Augusto Lim to draw said amount from his
aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found
nothing wrong with the check and would honor the same, and by actually paying its amount to
the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in
every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not recover from the PCIB. 13
It is a well-settled maxim of law and equity that when one of two (2) innocent persons must
suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence
was the proximate cause of the loss or who put it into the power of the third person to perpetrate
the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB)
banks are equally at fault, the court will leave the parties where it finds them. 15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a bill without
having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine
National Bank. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, Fernando and Capistrano, JJ., concur.
Zaldivar, J., took no part.
G.R. No. L-18657 August 23, 1922 Who is responsible for the refund to the drawer of the amount of the check drawn and
payable to order, when its value was collected by a third person by means of forgery of
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
the signature of the payee? Is it the drawee or the last indorser, who ignored the forgery
vs.
at the time of making the payment, or the forger?
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL
BANK, defendants-appellees. To lower court found that Melicor's name was forged to the check. "So that the person to whose
order the check was issued did not receive the money, which was collected by E. M. Maasim," and
Camus and Delgado for appellant.
then says:
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank. Now then, the National Bank should not be held responsible for the payment of made to
Maasim in good faith of the amount of the check, because the indorsement of Maasim is
STATEMENT
unquestionable and his signature perfectly genuine, and the bank was not obliged to
The plaintiff is an insurance corporation, and the defendants are banking corporations, and each identify the signature of the former indorser. Neither could the Hongkong and Shanghai
is duly licensed to do its respective business in the Philippines Islands. Banking Corporation be held responsible in making payment in good faith to the National
Bank, because the latter is a holder in due course of the check in question. In other
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking
words, the two defendant banks can not be held civilly responsible for the consequences
Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim
of the falsification or forgery of the signature of Lazaro Melicor, the National Bank having
fraudulently obtained possession of the check, forged Melicor's signature, as an endorser, and
had no notice of said forgery in making payment to Maasim, nor the Hongkong bank in
then personally endorsed and presented it to the Philippine National Bank where the amount of
making payment to National Bank. Neither bank incurred in any responsibility arising from
the check was placed to his credit. After having paid the check, and on the next day, the
that crime, nor was either of the said banks by subsequent acts, guilty of negligence or
Philippine national Bank endorsed the check to the Hongkong and Shanghai Banking Corporation
fault.
which paid it and charged the amount of the check to the account of the plaintiff. In the ordinary
course of business, the Hongkong Shanghai Banking Corporation rendered a bank statement to This was fundamental error.
the plaintiff showing that the amount of the check was charged to its account, and no objection
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the
was then made to the statement. About four months after the check was charged to the account
plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It did not
of the plaintiff, it developed that Lazaro Melicor, to whom the check was made payable, had never
authorize or direct the bank to pay the check to any other person than Melicor, or his order, and
received it, and that his signature, as an endorser, was forged by Maasim, who presented and
the testimony is undisputed that Melicor never did part with his title or endorse the check, and
deposited it to his private account in the Philippine National Bank. With this knowledge , the
never received any of its proceeds. Neither is the plaintiff estopped or bound by the banks
plaintiff promptly made a demand upon the Hongkong and Shanghai Banking Corporation that it
statement, which was made to it by the Shanghai Bank. This is not a case where the plaintiff's
should be given credit for the amount of the forged check, which the bank refused to do, and the
own signature was forged to one of it checks. In such a case, the plaintiff would have known of
plaintiff commenced this action to recover the P2,000 which was paid on the forged check. On the
the forgery, and it would have been its duty to have promptly notified the bank of any forged
petition of the Shanghai Bank, the Philippine National Bank was made defendant. The Shanghai
signature, and any failure on its part would have released bank from any liability. That is not this
Bank denies any liability, but prays that, if a judgment should be rendered against it, in turn, it
case. Here, the forgery was that of Melicor, who was the payee of the check, and the legal
should have like judgment against the Philippine National Bank which denies all liability to either
presumption is that the bank would not honor the check without the genuine endorsement of
party.
Melicor. In other words, when the plaintiff received it banks statement, it had a right to assume
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff and that Melicor had personally endorsed the check, and that, otherwise, the bank would not have
in favor of the defendants, from which the plaintiff appeals, claiming that the court erred in paid it.
dismissing the case, notwithstanding its finding of fact, and in not rendering a judgment in its
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
favor, as prayed for in its complaint.
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
JOHNS, J.: 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.
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff
relies upon them for a reversal. Among other things, the trial court says: That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone
except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to
Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never
paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it
for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must
follow that the Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and
placed the money to the credit of Maasim, who was a forger. That the Philippine National Bank
then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The
Philippine National Bank had no license or authority to pay the money to Maasim or anyone else
upon a forge signature. It was its legal duty to know that Melicor's endorsment was genuine
before cashing the check. Its remedy is against Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff
and against the Hongkong and Shanghai Banking Corporation for the P2,000, with interest
thereon from November 8, 1920 at the rate of 6 per cent per annum, and the costs of this action,
and a corresponding judgment will be entered in favor of the Hongkong Shanghai Banking
Corporation against the Philippine National Bank for the same amount, together with the amount
of its costs in this action. So ordered.
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 checking account numbered 30-00038-1. Most of the aforementioned checks were for amounts in
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING
INJURY TO THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND
RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT
BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR
ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE
OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE
RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF
THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH
LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their respective payees. Although
the respondent drawee Bank notified her of all checks presented to and paid by the bank,
petitioner did not verify he correctness of the returned checks, much less check if the payees
actually received the checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued, following her usual practice
stated above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all
presented by the indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's
excess of her actual obligations to the various payees as shown in their corresponding invoices. To
mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was
only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18,
1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of
Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in
Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10
(Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in
Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11, 1984 in favor of Grocer's International Food
Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only
 P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in
favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation
was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for
the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May
23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh.
A-34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks.3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the
latter also furnished her with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current account. It was only
after the lapse of more two (2) years that petitioner found out about the fraudulent manipulations
of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority
therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts
of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y.
Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings Account No.
00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch, and four (4)
checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao branch of the
respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the unauthorized
acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager
and no other official of the respondent drawee bank, may accept a second indorsement on a
check for deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question
were initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin
and Elcao branches accepted the deposits made in the Buendia branch and credited the accounts
of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit
her account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for
having been wrongfully charged against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial
Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore
referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a
party and never gave his consent to the contract which gave rise to the instrument. Since
his signature does not appear in the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course. Thus, if a person's signature is forged as a
maker of a promissory note, he cannot be made to pay because he never made the
promise to pay. Or where a person's signature as a drawer of a check is forged, the
drawee bank cannot charge the amount thereof against the drawer's account because he
never gave the bank the order to pay. And said section does not refer only to the forged
signature of the maker of a promissory note and of the drawer of a check. It covers also
a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is "wholly inoperative", no one can
gain title to the instrument through such forged indorsement. Such an indorsement
prevents any subsequent party from acquiring any right as against any party whose name
appears prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights against parties
prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties
as against parties prior to the forgery. However, the law makes an exception to these
rules where a party is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably calculated to prevent or render
difficult the forgery of indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement,
the drawer is under duty promptly to report such fact to the drawee bank. 5For his negligence or
failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer
loses his right against the drawee who has debited his account under a forged indorsement. 6 In
other words, he is precluded from using forgery as a basis for his claim for re-crediting of his
account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her
trusted employee, Alicia Galang, and were given to her for her signature. Her signing the checks
made the negotiable instrument complete. Prior to signing the checks, there was no valid contract discovery, the subsequent forgeries would not have been accomplished. It was not until two years
yet. 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
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
drawee bank.
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 It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained
instrument.8 Without the initial delivery of the instrument from the drawer of the check to the of non-payment. Assuming that even one single complaint had been made, petitioner would have
payee, there can be no valid and binding contract and no liability on the instrument. 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,
Petitioner completed the checks by signing them as drawer and thereafter authorized her
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the
hand, since the record mentions nothing about such a complaint, the possibility exists that the
Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon.
checks in question covered inexistent sales. But even in such a case, considering the length of a
It was established that the signatures of the payees as first indorsers were forged. The record
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
fails to show the identity of the party who made the forged signatures. The checks were then
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
by, after knowledge has come to her that her funds seem to be disappearing or that there may be
deposited in the latter's accounts as earlier noted. The second indorsements were all genuine
a leak in her business, and refrain from taking the steps that a careful and prudent businessman
signatures of the alleged holders. All the eighty-two (82) checks bearing the forged indorsements
would take in such circumstances and if taken, would result in stopping the continuance of the
of the payees and the genuine second indorsements of Alfredo Y. Romero and Benito Lam were
fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that
accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of their
event, she would be estopped from recovering from the bank.9
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 One thing is clear from the records that the petitioner failed to examine her records with
out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against reasonable diligence whether before she signed the checks or after receiving her bank statements.
petitioner's checking account No. 13-00038-1, Caloocan branch. 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
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
charge the drawer's account for the amount of said check. An exception to this rule is where the
some checks, the amounts did not tally with those appearing in the sales invoices. Had she
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
noticed these discrepancies, she should not have signed those checks, and should have conducted
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
an inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
going over her current account by taking careful note of the daily reports made by respondent
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery
drawee Bank in her issued checks, or at least made random scrutiny of cancelled checks returned
of his own signature, he has no similar duty as to forged indorsements. A different situation arises
by respondent drawee Bank at the close of each month, she could have easily discovered the
where the indorsement was forged by an employee or agent of the drawer, or done with the
fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent
active participation of the latter. Most of the cases involving forgery by an agent or employee deal
drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent
with the payee's indorsement. The drawer and the payee often time shave business relations of
further commission of such fraud. Thus, petitioner's negligence was the proximate cause of her
long standing. The continued occurrence of business transactions of the same nature provides the
loss. And since it was her negligence which caused the respondent drawee Bank to honor the
opportunity for the agent/employee to commit the fraud after having developed familiarity with
forged checks or prevented it from recovering the amount it had already paid on the checks,
the signatures of the parties. However, sooner or later, some leak will show on the drawer's
petitioner cannot now complain should the bank refuse to recredit her account with the amount of
books. It will then be just a question of time until the fraud is discovered. This is specially true
such checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to
when the agent perpetrates a series of forgeries as in the case at bar.
prevent the bank's debiting of her account.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is
failure of the depositor to act as a prudent businessman would under the circumstances. In the
not applicable to the case at bar because in said case, the check was fraudulently taken and the
case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and
signature of the payee was forged not by an agent or employee of the drawer. The drawer was
did not even verify the accuracy of amounts of the checks she signed against the invoices
not found to be negligent in the handling of its business affairs and the theft of the check by a
attached thereto. Furthermore, although she regularly received her bank statements, she
total stranger was not attributable to negligence of the drawer; neither was the forging of the
apparently did not carefully examine the same nor the check stubs and the returned checks, and
payee's indorsement due to the drawer's negligence. Since the drawer was not negligent, the
did not compare them with the same invoices. Otherwise, she could have easily discovered the
drawee was duty-bound to restore to the drawer's account the amount theretofore paid under the
discrepancies between the checks and the documents serving as bases for the checks. With such
check with a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to
the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's
bank which in turn must present it for payment against the drawee bank in the course of normal
banking transactions between banks. The crossed check cannot be presented for payment but it
can only be deposited and the drawee bank may only pay to another bank in the payee's or
indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by
indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which
either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned
that ceases to be negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no longer transfer his rights as
such indorsee where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds.
The drawee cannot be compelled to accept or pay the check by the drawer or any holder because
as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make
itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of
its employees as being the cause of the loss because negligence is the proximate cause thereof
and under Article 2179 of the Civil Code, she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee Bank may be held liable for damages. The
article provides
Those who in the performance of their obligations are guilty of fraud, negligence
or delay, and those who in any manner contravene the tenor thereof, are liable
for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee)
and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee
bank is bound by its internal banking rules and regulations which form part of any contract it
enters into with any of its depositors. When it violated its internal rules that second endorsements
are not to be accepted without the approval of its branch managers and it did accept the same
upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection conducted by a team of auditors from
the main office constitutes negligence on the part of the bank in carrying out its obligations to its
depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the
circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence
of the public in general is of paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost diligence. Surely, respondent
drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no
way We can allow it now to escape liability for such negligence. Its liability as obligor is not merely
vicarious but primary wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts
according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual
obligations, the courts are not precluded from applying to the circumstances of the case the laws
pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause
of her loss does not preclude her from recovering damages. The reason why the decision dealt on
a discussion on proximate cause is due to the error pointed out by petitioner as allegedly
committed by the respondent court. And in breaches of contract under Article 1173, due diligence
on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.
Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

# Footnotes
* Penned by Associate Justice Celso L. Magsino, Associate Justices Nathanael P.
De Pano, Jr. and Cezar D. Francisco, concurring.
1 Rollo, p.11.
2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.
3 A crossed check is defined as a check crossed with two (2) lines, between
which are either the name of a bank or the words "and company," in full or
abbreviated. In the former case, the banker on whom it is drawn must not pay
the money for the check to any other than the banker named; in the latter case,
he must not pay it to any other than a banker. Black's Law Dictionary 301 (4th
Ed.), citing 2 Steph. Comm. 118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers'
Bank v. Johnson, King & Co., 134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697.
G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and
style "Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of action
against the petitioners for their encashment and payment to another person of certain crossed
checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm
name "Melissa's RTW." She deals with, among other customers, Robinson's Department Store,
Payless Department Store, Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid accounts, she
was informed of the issuance of the above-listed crossed checks. Further inquiry revealed that the
said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its
branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the private
respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for
recovery of the total value of the checks plus damages. After trial, judgment was rendered
requiring them to pay the private respondent the total value of the subject checks in the amount
of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages,
P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private
respondent had no cause of action against them and should have proceeded instead against the
companies that issued the checks. In disposing of this contention, the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal,
anomalous and irregular acts of the appellants in violating common banking
practices to the damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper parties without the
knowledge, consent, authority or endorsement of the appellee which totalled
P15,805.00, the six (6) checks in dispute which were "crossed checks" or "for
payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar,
namely: (1) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an act or omission on
the part of such defendant violative of the right of the plaintiff or constituting a
breach thereof. (Republic Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
And such cause of action has been proved by evidence of great weight. The
contents of the said checks issued by the customers of the appellee had not
been questioned. There is no dispute that the same are crossed checks or for
payee's account only, which is Melissa's RTW. The appellee had clearly shown
that she had never authorized anyone to deposit the said checks nor to encash
the same; that the appellants had allowed all said checks to be deposited,
cleared and paid to one Rafael Sayson in violation of the instructions in the said
crossed checks that the same were for payee's account only; and that the
appellee maintained a savings account with the Prudential Bank, Cubao Branch,
Quezon City which never cleared the said checks and the appellee had been
damaged by such encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally
on the left top portion of the checks. The crossing is special where the name of a bank or a
business institution is written between the two parallel lines, which means that the drawee should
pay only with the intervention of that company. 3 The crossing is general where the words written
between the two parallel lines are "and Co." or "for payee's account only," as in the case at bar.
This means that the drawee bank should not encash the check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check are:
(1) that the check may not be encashed but only deposited in the bank; (2) that the check may
be negotiated only once to one who has an account with a bank; and (3) that the act of
crossing the check serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment.
Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient,
must be made by the holder or by some person authorized to receive payment on his behalf. Who
the holder or authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This respondent for not verifying the endorser's authority. There is no substantial difference between
could only signify that the drawers had intended the same for deposit only by the person an actual forging of a name to a check as an endorsement by a person not authorized to make
indicated, to wit, Melissa's RTW. the signature and the affixing of a name to a check as an endorsement by a person not
authorized to endorse it. 10
The petitioners argue that the cause of action for violation of the common instruction found on
the face of the checks exclusively belongs to the issuers thereof and not to the payee. Moreover, The Bank does not deny collecting the money on the endorsement. It was its responsibility to
having acted in good faith as they merely facilitated the encashment of the checks, they cannot inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's RTW
be made liable to the private respondent. upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry was a
breach of duty that made it liable to the private respondent for the amount of the checks.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW. The Bank There being no evidence that the crossed checks were actually received by the private
stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements (were) respondent, she would have a right of action against the drawer companies, which in turn could
guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes go against their respective drawee banks, which in turn could sue the herein petitioner as
treated the said checks as negotiable instruments and, accordingly, assumed the warranty of the collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the
endorser. illegally encashed checks should be allowed to recover directly from the bank responsible for such
encashment regardless of whether or not the checks were actually delivered to the payee. 11We
The weight of authority is to the effect that "the possession of check on a forged or unauthorized
approve such direct action in the case at bar.
indorsement is wrongful, and when the money is collected on the check, the bank can be held 'for
moneys had and received." 6 The proceeds are held for the rightful owner of the payment and It is worth repeating that before presenting the checks for clearing and for payment, the Bank had
may be recovered by him. The position of the bank taking the check on the forged or stamped on the back thereof the words: "All prior endorsements and/or lack of endorsements
unauthorized indorsement is the same as if it had taken the check and collected without guaranteed," and thus made the assurance that it had ascertained the genuineness of all prior
indorsement at all. The act of the bank amounts to conversion of the check. 7 endorsements.
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As We find that the respondent court committed no reversible error in holding that the private
she had not at any time authorized Rafael Sayson to endorse or encash them, there was respondent had a valid cause of action against the petitioners and that the latter are indeed liable
conversion of the funds by the Bank. to her for their unauthorized encashment of the subject checks. We also agree with the reduction
of the award of the exemplary damages for lack of sufficient evidence to support them.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the payee for the value of the checks. This WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.
liability attached whether or not the Bank was aware of the unauthorized endorsement. 8
Narvasa, C.J., Grio-Aquino, Medialdea and Bellosillo, JJ., concur.
The petitioners were negligent when they permitted the encashment of the checks by Sayson.
The Bank should have first verified his right to endorse the crossed checks, of which he was not
the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason
of the nature of the checks put upon notice that they were issued for deposit only to the private
respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed
to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited
with it, for the purpose of determining their genuineness and regularity. The collecting bank,
being primarily engaged in banking, holds itself out to the public as the expert on this field, and
the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them because
they have no privity of contract with her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be
liable to the private respondent because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would still be liable to the private