FIRST DIVISION

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

JAI-ALAI CORPORATION OF THE PHILIPPINES, petitioner, vs. BANK
OF THE PHILIPPINE ISLAND, respondent.
Bausa, Ampil & Suarez for petitioner.
Aviado & Aranda for respondent.
SYNOPSIS
Petitioner deposited in its current account with respondent bank several checks with a total face
value of P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games
and a sale agent of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were
all temporarily credited to petitioner's account in accordance with the clause printed on the
bank's deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to
inter-bank clearing, the Inter-Island Gas discovered that all the indorsement made on the cheeks
purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island
Gas Service, Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the
drawee banks of the said checks and forgeries and filed a criminal complaint against its former
employee. In view of these circumstances, the respondent Bank debited the petitioner's current
account and forwarded to the latter the checks containing the forged indorsements, which
petitioner refused to accept. Later, petitioner drew against its current account a check for
P135,000.00. This check was dishonored by respondent as its records showed that petitioner's
balance after netting out the value of the checks with the forged indorsement, was insufficient to
cover the value of the check drawn. A complaint was filed by petitioner with the Court of First
Instance of Manila. The same was dismissed by the said court after due trial, as well as by the
Court of Appeals, on appeal. Hence, this petition for review.
The Supreme Court ruled that respondent acted within legal bounds when it debited petitioner's
account; that the payments made by the drawee banks to the respondent on account of the checks
with forged indorsements were ineffective; that on account thereof, no creditor-debtor
relationship was created between the parties; that petitioner was grossly recreant in accepting the
checks in question from Ramirez without making any inquiry as to authority to exchange checks
belonging to the payee-corporation; and that petitioner, in indorsing the said checks when it
deposited them with respondent, guaranteed the genuineness of all prior indorsement thereon so
that the respondent, which relied upon its warranty, cannot be held liable for the resulting loss.
Judgment affirmed
SYLLABUS
1.NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. A
forged signature in a negotiable instrument makes it wholly inoperative and no right to discharge
it or enforce its payment can be acquired through or under the forged signature except against a
party who cannot invoke the forgery.
2.ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES
CREATED EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY
COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONER'S
ACCOUNT; REASON. Where the indorsement made on the checks were forged prior to their
delivery to depositor, the payments made by the drawee-banks to the collecting bank on account
of the said checks were ineffective. Such being the case, the relationship of creditor and debtor
between the depositor and the depository had not been validly effected, the checks not having
properly and legitimately converted into cash.
3.ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS
THE VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE
CASE OF GREAT EASTERN LIFE INSURANCE CO. vs. HONGKONG & SHANGHAI
BANK. In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 43 Phil. 678 (1992),
the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the
value of the checks subsequently found to contain the forged indorsement of the payee. The
reason is that the bank with which the check was deposited has no right to pay the sum stated
therein to the forger "or to anyone else upon a forged signature." "It was its duty to know," said
the Court, "that (the payee's) endorsement was genuine before cashing the check. " The depositor
must in turn shoulder the loss of the amounts which the respondent, as its collecting agent, had
no reimburse to the drawee-banks.
4.ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE
CASE OF INSULAR DRUG CO. vs. NATIONAL. In Insular Drug Co. vs. National, 58 Phil.
685 (1933), the Court made the pronouncement that ". . .The right of an agent to indorse
commercial paper is a very responsible power and will not be lightly inferred. A salesman with
authority to collect money belonging to his principal does not have the implied authority to
indorse checks received in payment. Any person taking checks made payable to a corporation
which can act by agents, does so at his peril, and must abide by the consequences if the agent
who endorses the same is without authority."
5.ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK
WHO RELIED ON INDORSER'S WARRANTY. Under Section 67 of the Negotiable
Instruments Law, "Where a person places his indorsement on an instrument negotiable by
delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a
general indorser warrants that the instrument "is genuine and in all respects what it purports to
be." Where the depositor indorsed the checks with forged indorsement when it deposited them
with the collecting bank, the former as an endorser guaranteed the genuineness of all prior
indorsement thereon. The collecting bank which relied upon this warranty cannot be held liable
for the resulting loss.
6.ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO
COLLECTING BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. The transfer
by the drawee-banks of funds to the collecting bank on account of forged checks would be
ineffectual when made under the mistaken and valid assumption that the indorsement of the
payee thereon were genuine. Under Article 2154 of the New Civil Code "If something is
received when there is no right to demand it and it was unduly delivered through mistake, the
obligation to return it arises, " By virtue thereof, there can be no valid payment of money by
drawee-banks to the collecting bank on account of forged checks.
D E C I S I O N
CASTRO, J p:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June
25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were
deposited by the petitioner in its current account with the respondent bank. The particulars of
these checks are as follows:
1.Drawn by the Delta Engineering Service upon the Pacific
Banking Corporation and payable to the Inter-Island Gas Service Inc. or
order:
DateCheckExhibit
DepositedNumberAmountNumber
4/2/59B-352680P500.0018
4/20/59A-156907372.3219
4/24/59A-156924397.8220
5/4/59B-364764250.0023
5/6/59B-364775250.0024
2.Drawn by the Enrique Cortiz & Co. upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:
4/13/59B-335063P 2108.7021
4/27/59B-335072P2210.9422
3.Drawn by the Luzon Tinsmith & Company upon the China Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:
5/18/59VN430188P940.8025
4.Drawn by the Roxas Manufacturing, Inc. upon the Philippine
National Bank and payable to the Inter-Island Gas Service, Inc. order:
5/14/591860160P 500.0026
5/18/591860660P 500.0027
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a
sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit,
temporarily credited to the petitioner's account in accordance with the clause printed on the
deposit slips issued by the respondent and which reads:
"Any credit allowed the depositor on the books of the Bank for checks or drafts
hereby received for deposit, is provisional only, until such time as the proceeds
thereof, in current funds or solvent credits, shall have been actually received by
the Bank and the latter reserves to itself the right to charge back the item to the
account of its depositor, at any time before that event, regardless of whether or
not the item itself can be returned."
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after
the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta
Mucor (who were merely authorized to deposit checks issued payable to the said company) as
well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were
forgeries. In due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers
and the drawee-banks of the said checks about the forgeries, and filed a criminal complaint
against Ramirez with the Office of the City Fiscal of Manila. 1
The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated
August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the latter that in
view of the circumstances he would debit the value of the checks against the petitioner's account
as soon as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded
from the respondent, as collecting bank, the return of the amounts they had paid on account
thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value
which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the
petitioner's current account and forwarded to the latter the checks containing the forged
indorsements, which the petitioner, however, refused to accept.

On October 8, 1959 the petitioner drew against its current account with the respondent a check
for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of
stock. The check was, however, dishonored by the respondent as its records showed that as of
October 8, 1959 the current account of the petitioner, after netting out the value of the checks
P8,030.58) with the forged indorsements, had a balance of only P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of
Manila, which was however dismissed by the trial court after due trial, and as well by the Court
of Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as follows:
(a) Whether the respondent had the right to debit the petitioner's current account in the amount
corresponding to the total value of the checks in question after more than three months had
elapsed from the date their value was credited to the petitioner's account:(b) Whether the
respondent is estopped from claiming that the amount of P8,030.58, representing the total value
of the checks with the forged indorsements, had not been properly credited to the petitioner's
account, since the same had already been paid by the drawee-banks and received in due course
by the respondent; and(c) On the assumption that the respondent had improperly debited the
petitioner's current account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited the petitioner's account.
When the petitioner deposited the checks with the respondent, the nature of the relationship
created at that stage was one of agency, that is, the bank was to collect from the drawees of the
checks the corresponding proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioner's account, so that following the rule
in Gullas vs. Philippine National Bank 2 it might be argued that the relationship between the
parties had become that of creditor and debtor as to preclude the respondent from using the
petitioner's funds to make payments not authorized by the latter. It is our view nonetheless that
no creditor-debtor relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3
"When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority."
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or under
the forged signature except against a party who cannot invoke the forgery, it stands to reason,
upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to
the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by
the court a quo and by the appellate court, the indorsements on the checks had been forged prior
to their delivery to the petitioner. In legal contemplation, therefore, the payments made by the
drawee-banks to the respondent on account of the said checks were ineffective; and, such being
the case, the relationship of creditor and debtor between the petitioner and the respondent had not
been validly effected, the checks not having been properly and legitimately converted into
cash. 4
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the bank
with which the check was deposited has no right to pay the sum stated therein to the forger "or
anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the
payee's] endorsement was genuine before cashing the check." The petitioner must in turn
shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse
to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months had
elapsed since the proceeds of the checks in question were collected by the respondent. The
record shows that the respondent had acted promptly after being informed that the indorsements
on the checks were forged. Moreover, having received the checks merely for collection and
deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior
indorsements on the said checks. Indeed, having itself indorsed them to the respondent in
accordance with the rules and practices of commercial banks, of which the Court takes due
cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the
Negotiable Instruments Law that every single one of those checks "is genuine and in all respects
what it purports to be.".
The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez.
It could not have escaped the attention of the petitioner that the payee of all the checks was a
corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a
mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as
to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs.
National 6 the Court made the pronouncement that.
". . . The right of an agent to indorse commercial paper is a very responsible
power and will not be lightly inferred. A salesman with authority to collect
money belonging to his principal does not have the implied authority to indorse
checks received in payment. Any person taking checks made payable to a
corporation, which can act only by agents, does so at his peril, and must abide
by the consequences if the agent who indorses the same is without authority."
(underscoring supplied)
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21,
25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently
accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer
instruments would not, in our view, exculpate the petitioner from liability with respect to them.
The fact that they are bearer checks and at the same time crossed checks should have aroused the
petitioner's suspicion as to the title of Ramirez over them and his authority to cash them
(apparently to purchase jai-alai tickets from the petitioner), it appearing on their face that a
corporate entity the Inter Island Gas Service, Inc. was the payee thereof and Ramirez
delivered the said checks to the petitioner ostensibly on the strength of the payee's cashiers'
indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser,"
and under Section 66 of the same statute a general indorser warrants that the instrument "is
genuine and in all respects what it purports to be." Considering that the petitioner indorsed the
said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed
the genuineness of all prior indorsements thereon. The respondent which relied upon the
petitioner's warranty should not be held liable for the resulting loss. This conclusion applied
similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the
Negotiable Instrument Law. "Every person negotiating an instrument by delivery . . . warrants
(a) That the instrument is genuine and in all respects what it purports to be." Under that same
section this warranty "extends in favor of no holder other than the immediate transferee," which,
in the case at bar, would be the respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to
itself the right to charge back the item to the account of its depositor," at any time before "current
funds or solvent credits shall have been actually received by the Bank," would not materially
affect the conclusion we have reached. That stipulation prescribes that there must be an actual
receipt by the bank of current funds or solvent credits; but as we have earlier indicated the
transfer by the drawee-banks of funds to the respondent on account of the checks in question was
ineffectual because made under the mistaken and valid assumption that the indorsements of the
payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received
when there is no right to demand it and it was unduly delivered through mistake, the obligation
to return it arises." There was, therefore, in contemplation of law, no valid payment of money
made by the drawee-banks to the respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.
Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.
Teehankee, J., is on leave.
||| (Jai-Alai Corp. of the Phil. v. BPI, G.R. No. L-29432, August 06, 1975)






FIRST DIVISION
[G.R. No. L-40796. July 31, 1975.]
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA
T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.
SYNOPSIS
A check with a face value of P1,246.08 was issued to one Martin Lorenzo who turned out to
have been dead almost eleven years before it was issued. It was encashed by MauriciaEbrada at
the Republic Bank's main office at the Escolta. Informing the Bank that the payee's (Lorenzo)
indorsement on the reverse side of the check was a forgery, the Bureau of Treasury requested
the Bank to refund the amount. The Bank sued Mauricia Ebrada before the city court when she
refused to return the money. The court ruled for the Bank, so the case was elevated to the Court
of First Instance which likewise rendered an adverse decision against Mauricia Ebrada. An
appeal was filed.
The Supreme Court upheld the lower court. Although Mauricia Ebrada was not the author of the
forgery, as the last indorser of the check, she warranted good title to it. The negotiation from
Martin Lorenzo, the original payee, to Ramon Lorenzo is of no effect but the negotiation from
Ramon Lorenzo to Adelaida Dominguez and from her to MauriciaEbrada who did not know of
the forgery is valid and enforceable. The bank can recover from her the money paid on the
forged check.
Judgment affirmed.
SYLLABUS
1.NEGOTIABLE INSTRUMENT; CHECK; FORGED INDORSEMENT; EFFECT. Where
the signature on a negotiable instrument is forged, the negotiation of the check is without force
of effect. But the existence of the forged signature therein will not render void all the other
negotiations of the check with respect to the other parties whose signatures are genuine. It is only
the negotiation predicated on the forged indorsement that should be declared inoperative.
2.ID.; ID.; ID.; DRAWEE BANK SUFFERED THE LOSS BUT RECOVERY FROM THE
ONE WHO ENCASHED THE CHECK AVAILABLE. Where after the drawee bank has paid
the amount of the check to the holder thereof, it was discovered that the signature of the payee
was forged, the bank can still recover from the one who encashed the check. In the case of Great
Eastern Life Insurance Company vs. Hongkong and Shanghai Banking Corporation, 43 Phil.
678, it was held "where a check is drawn payable to the order of one person and is presented to
a bank by another and purports upon its face to have been duly indorsed by the payee of the
check, it is the duty of the bank to know that the check was duly indorsed by the original payee,
and where the Bank pays the amount of the check to a third person, who has forged the signature
of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against
the person to whom it paid the money."
3.ID.; ID.; ID.; DRAWEE BANK NOT DUTY BOUND TO ASCERTAIN GENUINESS OF
SIGNATURES OF PAYEE OR INDORSERS. It is not supposed to be the duty of a
drawee bank to ascertain whether the signatures of the payee or indorsers are genuine or not.
This is because the indorser is supposed to warrant to the drawee that the signatures of the payee
and previous indorsers are genuine, warranty not extending only to holders in due course.
4.ID.; ID.; ID.; PURCHASER OF CHECK OR DRAFT BOUND TO ASCERTAIN
GENUINENESS OF INSTRUMENT. One who purchases a check or draft is bound to satisfy
himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly asserts that he has performed his duty, and the
drawee who has paid the forged check, without actual negligence on his part, may recover the
money paid from such negligent purchaser. In such cases the recovery is permitted because
although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of
the check had performed his duty, the forgery would in all probability, have been detected and
the fraud defeated.
5.ID.; ID.; ID.; LIABILITY OF ACCOMMODATION PARTY. Although the one to whom
the Bank paid the check was not proven to be the author of the supposed forgery, as last indorser
of the check, she has warranted that she has good title to it even if in fact she did not have it
because the payee of the check was already dead eleven years before the check was issued. The
fact that immediately after receiving the cash proceeds of the check in question from the
drawee bank she immediately turned over said amount to another party, who in turn handed the
amount to somebody else on the same date would not exempt her from liability because by doing
so, she acted as an accommodation party in the check for which she is also liable under Section
29 of the Negotiable Instrument Law.
D E C I S I O N
MARTIN, J p:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch
XXIII in Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff RepublicBank at
Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later
advised by the said bureau that the alleged indorsement on the reverse side of the aforesaid check
by the payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14,
1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made
verbal and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of
Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bankhas no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from
her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against
Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against
Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez,
and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First
Instance of Manila where the parties submitted a partial stipulation of facts as follows:
"COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1.That they admit their respective capacities to sue and be sued;
2.That on January 15, 1963 the Treasury of the Philippines issued its Check No.
BP-508060, payable to the order of one MARTIN LORENZO, in the sum of
P1,246.08, and drawn on theRepublic Bank, plaintiff herein, which check will
be marked as Exhibit "A" for the plaintiff;
3.That the back side of aforementioned check hears the following signatures, in
this order:
1)MARTIN LORENZO:
2)RAMON R. LORENZO;
3)DELIA DOMINGUEZ; and
4)MAURICIA T. EBRADA;
4.That the aforementioned check was delivered to the defendant MAURICIA
T. EBRADA by the Third-Party defendant and Fourth-Party plaintiff
ADELAIDA DOMINGUEZ, for the purpose of encashment;
5.That the signature of defendant MAURICIA T. EBRADA was affixed on said
check on February 27, 1963 when she encashed it with the plaintiff Bank;
6.That immediately after defendant MAURICIA T. EBRADA received the cash
proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and
fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said
amount to the fourth-party defendant JUSTINA TINIO on the same date, as
evidenced by the receipt signed by her which will be marked as Exhibit "1-
Dominguez"; and
7.That the parties hereto reserve the right to present evidence on any other fact
not covered by the foregoing stipulations.
Manila, Philippines, June 6, 1969."
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial
court rendered a decision, the dispositive portion of which reads as follows:
"WHEREFORE, the Court renders judgment ordering the defendant Mauricia
T. Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-
SIX 08/100 (P1,246.08), with interest as the legal rate from the filing of the
complaint on June 16, 1966, until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against
Adelaida Dominguez in connection with this case is hereby reserved. The right
of the estate of Dominguez to file the fourth-party complaint against Justina
Tinio is also reserved.
SO ORDERED."
In her appeal, defendant-appellant presses that the lower court erred:
"IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE
VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE
DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY
DECEASED FOR 11-1/2 YEARS AND THAT THE APPELLANT DID NOT
BENEFIT FROM ENCASHING SAID CHECK."
From the stipulation of facts it is admitted that the check in question was delivered to
defendant-appellant by Adelaida Dominguez for the purpose of encashment and that her
signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said check. As such indorser,
she was supposed to have warranted that she has good title to said check; for under Section 5
of the Negotiable Instruments Law: 6

"Every person negotiating an instrument by delivery or by qualified
indorsement, warrants:
(a)That the instrument is genuine and in all respects what it purports to be.
(b)That she has good title to it."
xxx xxx xxx
and under Section 65 of the same Act:
"Every indorser who indorses without qualification warrants to all subsequent
holders in due course:
(a)The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(b)That the instrument is at the time of his indorsement valid and subsisting."
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo
was a forgery because he was already dead 7 almost 11 years before the check in question
was issued by the Bureau of Treasury. Under Section 23 of the Negotiable Instruments Law
(Act 2031):
"When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be
acquired through or under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of
authority."
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to
the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin
Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no
effect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida
Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-appellant who
did not know of the forgery, should be considered valid and enforceable, barring any claim of
forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee was forged? Can the
draweebank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not
supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine
or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the
payee and previous indorsers are genuine, warranty not extending only to holders in due course.
One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that
by indorsing it or presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty and the drawee who has paid the forged check,
without actual negligence on his part, may recover the money paid from such negligent
purchasers. In such cases the recovery is permitted because although the drawee was in a way
negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty,
the forgery would in all probability, have been detected and the fraud defeated. The reason for
allowing the drawee bank to recover from the encasher is:
"Every one with even the least experience in business knows that no business
man would accept a check in exchange for money or goods unless he is satisfied
that the check is genuine. He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the honesty and financial
responsibility of the person who vouches for it. If he is deceived he has suffered
a loss of his cash or goods through his own mistake. His own credulity or
recklessness, or misplaced confidence was the sole cause of the loss. Why
should he be permitted to shift the loss due to his own fault in assuming the risk,
upon the drawee, simply because of the accidental circumstance that the drawee
afterwards failed to detect the forgery when the check was presented?" 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question
from Adelaida Dominguez, was duty-bound to ascertain whether the check in question was
genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable
for the loss and the plaintiff Bank may recover from her the money she received for the check.
As reasoned out above, had she performed the duty of ascertaining the genuineness of the check,
in all probability the forgery would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance
Company drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation
payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check
and forged the signature of Melicor, as an indorser, and then personally indorsed and presented
the check to the Philippine National Bank where the amount of the check was placed to his
(Maasin's) credit. On the next day, the Philippine National Bank indorsed the check to the
Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the
check to the insurance company. The Court held that the Hongkong and Shanghai Banking
Corporation was liable to the insurance company for the amount of the check and that the
Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation.
Said the Court:
"Where a check is drawn payable to the order of one person and is presented to
a bank by another and purports upon its face to have been duly indorsed by the
payee of the check, it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the Bank pays the amount of the
check to a third person, who has forged the signature of the payee, the loss falls
upon the bank who cashed the check, and its only remedy is against the person
to whom it paid the money."
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss
when it paid the amount of the check in question to defendant-appellant, but it has the remedy to
recover from the latter the amount it paid to her. Although the defendant-appellant to whom the
plaintiff Bank paid the check was not proven to be the author of the supposed forgery, yet as last
indorser of the check, she has warranted that she has good title to it 10 even if in fact she did not
have it because the payee of the check was already dead 11 years before the check was issued.
The fact that immediately after receiving the cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said
amount to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in
turn handed the amount to Justina Tinio on the same date would not exempt her from liability
because by doing so, she acted as an accommodation party in the check for which she is also
liable under Section 29 of the Negotiable Instruments Law (Act 231), thus:
"An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party."
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with
costs against defendant-appellant.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Esguerra, JJ., concur.
Footnotes
||| (Republic Bank v. Ebrada, G.R. No. L-40796, July 31, 1975)









SECOND DIVISION
[G.R. No. L-62943. July 14, 1986.]
METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, petitioner, vs. COURT OF APPEALS (Now INTERMEDIATE
APPELLATE COURT) and THE PHILIPPINE NATIONAL
BANK, respondents.
Juan J. Diaz and Cesar T. Basa for respondent PNB.
San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.
D E C I S I O N
GUTIERREZ, JR., J p:
This petition for review asks us to set aside the October 29, 1982 decision of the respondent
Court of Appeals, now Intermediate Appellate Court which reversed the decision of the Court of
First Instance of Manila, Branch XL, and dismissed the plaintiff's complaint, the third party
complaint, as well as the defendant's counterclaim.
The background facts which led to the filing of the instant petition are summarized in the
decision of the respondent Court of Appeals:
"Metropolitan Waterworks and Sewerage System (hereinafter referred to as
MWSS) is a government owned and controlled corporation created
under Republic Act No. 6234 as the successor-in-interest of the defunct NWSA.
The Philippine National Bank (PNB for short), on the other hand, is the
depository bank of MWSS and its predecessor-in-interest NWSA. Among the
several accounts of NWSA with PNB is NWSA Account No. 6, otherwise
known as Account No. 381-777 and which is presently allocated No. 010-
500281. The authorized signature for said Account No. 6 were those of MWSS
treasurer Jose Sanchez, its auditor Pedro Aguilar, and its acting General
Manager Victor L. Recio. Their respective specimen signatures were submitted
by the MWSS to and on file with the PNB. By special arrangement with the
PNB, the MWSS used personalized checks in drawing from this account. These
checks were printed for MWSS by its printer, F. Mesina Enterprises, located at
1775 Rizal Extension, Caloocan City.
"During the months of March, April and May 1969, twenty-three (23) checks
were prepared, processed, issued and released by NWSA, all of which were paid
and cleared by PNB and debited by PNB against NWSA Account No. 6, to wit:
"Check No.DatePayeeAmountDate Paid
By PNB
1.595468-21-69Deogracias EstrellaP3,187.794-2-69
2.595483-31-69Natividad Rosario2,848.864-23-69
3.595473-31-69Pangilinan Enterprises195.00Unreleased
4.595493-31-69Natividad Rosario3,239.884-23-69
5.595524-1-69Villarama & Sons987.595-6-69
6.595544-1-69Gascom Engineering6,057.604-16-69
7.595584-2-69The Evening News112.00Unreleased
8.595443-27-69Progressive Const.18,391.204-18-69
9.595644-2-69Ind. Insp. Int. Inc.594.064-18-69
10.595684-7-69Roberto Marsan 800.004-22-69
11.595704-7-69Paz Andres200.004-22-69
12.595744-8-69Florentino Santos100,000.004-11-69
13.595784-8-69Mla. Daily Bulletin 95.00Unreleased
14.595804-8-69Phil. Herald100.005-9-69
15.595824-8-69Galauran & Pilar7,729.095-6-69
16.595814-8-69Manila Chronicle110.005-12-69
17.595884-8-69Treago Tunnel 21,583.004-11-69
18.595874-8-69Delfin Santiago120,000.004-11-69
19.595894-10-69Deogracias Estrella1,257.494-16-69
20.595944-14-69Philam Accident Inc.33.034-29-69
21.595774-8-69Esla9,429.784-29-69
22.596014-16-69Justino Torres20,000.004-18-69
23.595954-14-69Neris Phil. Inc.4,274.005-20-69

P320,636.26"
"During the same months of March, April and May 1969, twenty-three (23)
checks bearing the same numbers as the aforementioned NWSA checks were
likewise paid and cleared by PNB and debited against NWSA Account No. 6, to
wit:
"Check DatePayeeAmountDate Paid
No.IssuedBy PNB
1.595463-6-69Raul DizonP 84,401.003-16-69
2.595483-11-69Raul Dizon104,790.004-1-69
3.595473-14-69Arturo Sison56,903.004-1169
4.595493-20-69Arturo Sison48,903.004-15-69
5.595523-24-69Arturo Sison63,845.004-16-69
6.595443-26-69Arturo Sison98,450.004-17-69
7.595583-28-69Arturo Sison114,840.004-21-69
8.595443-16-69 Antonio Mendoza38,490.004-22-69
9.595643-31-69Arturo Sison180,900.004-23-69
10.595684-2-69Arturo Sison134,940.004-25-69
11.595704-1-69Arturo Sison64,550.004-28-69
12.595744-2-69Arturo Sison148,610.004-29-69
13.595784-10-69 Antonio Mendoza93,950.004-29-69
14.595804-8-69Arturo Sison160,000.005-2-69
15.595824-10-69Arturo Sison155,400.005-5-69
16.595814-8-69Antonio Mendoza176,580.005-6-69
17.595884-16-69 Arturo Sison176,000.005-8-69
18.595874-16-69 Arturo Sison300,000.005-12-69
19.595894-18-69 Arturo Sison122,000.005-14-69
20.595944-18-69 Arturo Sison280,000.005-15-69
21.595774-14-69 Antonio Mendoza260,000.005-16-69
22.596014-18-69 Arturo Sison400,000.005-19-69
23.595954-28-69Arturo Sison190,800.005-21-69

P3,457,903.00
"The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison
and Antonio Mendoza in their respective current accounts with the Philippine
Commercial and Industrial Bank (PCIB) and Philippine Bank of Commerce
(PBC) in the months of March, April and May 1969. Thru the Central Bank
Clearing, these checks were presented for payment by PBC and PCIB to the
defendant PNB, and paid, also in the months of March, April and May 1969. At
the time of their presentation to PNB these checks bear the standard
indorsement which reads 'all prior indorsement and/or lack of endorsement
guaranteed.'
"Subsequent investigation however, conducted by the NBI showed that Raul
Dizon, Arturo Sison and Antonio Mendoza were all fictitious persons. The
respective balances in their current account with the PBC and/or PCIB stood as
follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
P18,182.00 as of May 23, 1969; and Arturo Sison P1,398.92 as of June 30,
1969.
"On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate
restoration to its Account No. 6, of the total sum of P3,457,903.00
corresponding to the total amount of these twenty-three (23) checks claimed by
NWSA to be forged and/or spurious checks.
"In view of the refusal of PNB to credit back to Account No. 6 the said total
sum of P3,457,903.00 MWSS filed the instant complaint on November 10, 1972
before the Court of First Instance of Manila and docketed thereat as Civil Case
No. 88950.
"In its answer, PNB contended among others, that the checks in question were
regular on its face in all respects, including the genuineness of the signatures of
authorized NWSA signing officers and there was nothing on its face that could
have aroused any suspicion as to its genuineness and due execution and; that
NWSA was guilty of negligence which was the proximate cause of the loss.
"PNB also filed a third party complaint against the negotiating banks PBC and
PCIB on the ground that they failed to ascertain the identity of the payees and
their title to the checks which were deposited in the respective new accounts of
the payees with them."
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the
MWSS. The dispositive portion of the decision reads:
"WHEREFORE, on the COMPLAINT by a clear preponderance of evidence
and in accordance with Section 23 of the Negotiable Instruments Law, the Court
hereby renders judgment in favor of the plaintiff Metropolitan Waterworks and
Sewerage System (MWSS) by ordering the defendant Philippine National Bank
(PNB) to restore the total sum of THREE MILLION FOUR HUNDRED FIFTY
SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to
plaintiff's Account No. 6, otherwise known as Account No. 010-50030-3, with
legal interest thereon computed from the date of the filing of the complaint and
until as restored in the said Account No. 6.
"On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby
renders judgment in favor of the third party defendants Philippine Bank of
Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by
dismissing the Third Party Complaint.
"The counterclaims of the third party defendants are likewise dismissed for lack
of evidence.
"No pronouncement as to costs."
As earlier stated, the respondent court reversed the decision of the Court of First Instance of
Manila and rendered judgment in favor of the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court
in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I.IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED,
THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW.
II.IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING
THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF
CHECKS BEARING IDENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF
EACH OTHER.
IIIIN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
"Every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to
have become a party thereto for value."
The petitioner submits that the above provision does not apply to the facts of the instant case
because the questioned checks were not those of the MWSS and neither were they drawn by its
authorized signatories. The petitioner states that granting that Section 24 of the Negotiable
Instruments Law is applicable, the same creates only a prima facie presumption which was
overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the
NBI Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74-891; (4) the
Memorandum of Mr. Juan Dio, 3rd Assistant Auditor of the respondent drawee bank addressed
to the Chief Auditor of the petitioner; (5) the admission of the respondent bank's counsel in open
court that the National Bureau of Investigation found the signature on the twenty-three (23)
checks in question to be forgeries; and (6) the admission of the respondent bank's witness, Mr.
Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The
petitioner contends that since the signatures of the checks were forgeries, the respondent drawee
bank must bear the loss under the rulings of this Court.

"A bank is bound to know the signatures of its customers; and if it pays a forged
check it must be considered as making the payment out of its own funds, and
cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged."
xxx xxx xxx
"The signatures to the checks being forged, under Section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant.
"It must therefore be held that the proximate cause of loss was due to the
negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks." (San Carlos Milling Co. v. Bank of the P.I., 59 Phil. 59)
"It is admitted that the Philippine National Bank cashed the check upon a forged
signature, and placed the money to the credit of Maasim, who was the forger.
That the Philippine National Bank then endorsed the 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 forged
signature. It was its legal duty to know that Malicor's endorsement was genuine
before cashing the check. Its remedy is against Maasim to whom it paid the
money." (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil.
678)
We have carefully reviewed the documents cited by the petitioner. There is no express and
categorical finding in these documents that the twenty-three (23) questioned checks were indeed
signed by persons other than the authorized MWSS signatories. On the contrary, the findings of
the National Bureau of Investigation in its Report dated November 2, 1970 show that the MWSS
fraud was an "inside job" and that the petitioner's delay in the reconciliation of bank statements
and the laxity and loose records control in the printing of its personalized checks facilitated the
fraud. Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of
the National Bureau of Investigation does not declare or prove that the signatures appearing on
the questioned checks are forgeries. The report merely mentions the alleged differences in the
typeface, checkwriting, and printing characteristics appearing in the standard or submitted
models and the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely
describes the inks and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain
its allegations of forgery. These reports did not touch on the inherent qualities of the signatures
which are indispensable in the determination of the existence of forgery. There must be
conclusive findings that there is a variance in the inherent characteristics of the signatures and
that they were written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA
238). It must be established by clear, positive, and convincing evidence. This was not done in the
present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59)
and Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by
the petitioner are inapplicable in this case because the forgeries in those cases were either clearly
established or admitted while in the instant case, the allegations of forgery were not clearly
established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very
close similarities between the genuine signatures and the alleged forgeries, the twenty-three (23)
checks in question could have been presented to the petitioner's signatories without their
knowing that they were bogus checks. Indeed, the cashier of the petitioner whose signatures were
allegedly forged was unable to tell the difference between the allegedly forged signature and his
own genuine signature. On the other hand, the MWSS officials admitted that these checks could
easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of the drawee Philippine
National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969
cites an instance where even the concerned NWSA officials could not tell the differences
between the genuine checks and the alleged forged checks.
"At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him
in his office at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of
NAWASA and Romeo Oliva of the same office were present. Upon my arrival I
observed the NAWASA officials questioning the issue of the NAWASA checks
appearing in their own list, xerox copy attached.
"For verification purposes, therefore, the checks were taken from our file. To
everybody there present namely VIP Maramag, the two abovementioned
NAWASA officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada
and Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no one was able
to point out any difference on the signatures of the NAWASA officials
appearing on the checks compared to their official signatures on file. In fact 3
checks, one of those under question, were presented to the NAWASA treasurer
for verification but he could not point out which was his genuine signature.
After intent comparison, he pointed on the questioned check as bearing his
correct signature."
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under
Section 23 of the Negotiable Instruments Law which provides that:
"SEC. 23.FORGED SIGNATURE; EFFECT OF . When the signature is
forged or made without authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto can
be acquired through or under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of
authority."
because it was guilty of negligence not only before the questioned checks were negotiated but
even after the same had already been negotiated. (See Republic v. Equitable Banking
Corporation, 10 SCRA 8)
The records show that at the time the twenty-three (23) checks were prepared, negotiated, and
encashed, the petitioner was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed
to provide the needed security measures. That there was gross negligence in the printing of its
personalized checks is shown by the following uncontroverted facts, to wit:
(1)The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;
(2)The petitioner failed to retrieve from its printer all spoiled check forms;
(3)The petitioner failed to provide any control regarding the paper used in the printing of said
checks;
(4)The petitioner failed to furnish the respondent drawee bank with samples of typewriting,
check writing, and print used by its printer in the printing of its checks and of the inks and pens
used in signing the same; and
(5)The petitioner failed to send a representative to the printing office during the printing of said
checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19,
1969 of Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's
personalized checks:
xxx xxx xxx
"7.Q:Do you have any business transaction with the National Waterworks and
Sewerage Authority (NAWASA)?
A:Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms
such as NAWASA Check Vouchers and Office Forms.
xxx xxx xxx
"15.Q:Were you given any instruction by the NAWASA in connection with the
printing of these check vouchers?
A:There is none, sir. No instruction whatsoever was given to me.
"16.Q:Were you not advised as to what kind of paper would be used in the
check vouchers?
A:Only as per sample, sir.
xxx xxx xxx
"20.Q:Where did you buy this Hammermill Safety check paper?
A:From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo,
Manila. (In front of the Metropolitan Bank).
xxx xxx xxx
"24.Q:Were all these check vouchers printed by you submitted to NAWASA?
A:Not all, sir, Because we have to make reservations or allowances for spoilage.
"25.Q:Out of these vouchers printed by you, how many were spoiled and how
many were the excess printed check vouchers?
A:Approximately four hundred (400) sheets, sir. I cannot determine the
proportion of the excess and spoiled because the final act of perforating
these check vouchers has not yet been done and spoilage can only be
determined after this final act of printing.
"26.Q:What did you do with these excess check vouchers?
A:I keep it under lock and key in my filing cabinet.
xxx xxx xxx
"28.Q:Were you not instructed by the NAWASA authorities to burn these
excess check vouchers?
A:No, sir. I was not instructed.
"29.Q:What do you intend to do with these excess printed check vouchers?
A:I intend to use them for future orders from the NAWASA.
xxx xxx xxx
"32.Q:In the process of printing the check vouchers ordered by the NAWASA,
how many sheets were actually spoiled?
A:I cannot approximate, sir. But there are spoilage in the process of printing and
perforating.
"33.Q:What did you do with these spoilages?
A:Spoiled printed materials are usually thrown out, in the garbage can.

"34.Q:Was there any representative of the NAWASA to supervise the printing
or watch the printing of these check vouchers?
A:None, sir.
xxx xxx xxx
"39.Q:During the period of printing after the days work, what measures do you
undertake to safeguard the mold and other paraphernalia used in the
printing of these particular orders of NAWASA?
A:Inasmuch as I have an employee who sleeps in the printing shop and at the
same time do the guarding, we just leave the mold attached to the
machine and the other finished or unfinished work check vouchers are
left in the rack so that the work could be continued the following day."
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit.
Thus
xxx xxx xxx
"60.We observed also that there is some laxity and loose control in the printing
of NAWASA checks. We gathered from MESINA ENTERPRISES, the printing
firm that undertook the printing of the check vouchers of NAWASA that
NAWASA had no representative at the printing press during the process of the
printing and no particular security measure instructions adopted to safeguard the
interest of the government in connection with printing of this accountable
form."
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in
question was the failure of the petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements
and debt and credit memos through the mail. The records show that the petitioner requested the
respondent drawee bank to discontinue the practice of mailing the bank statements, but instead to
deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza
however, he was unreasonably delayed in taking prompt deliveries of the said bank statements
and credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank
statements with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of
taking the bank statements and reconciling them with the petitioner's records, the fraudulent
encashments of the first checks should have been discovered, and further frauds prevented. This
negligence was, therefore, the proximate cause of the failure to discover the fraud. Thus,
"When a person opens a checking account with a bank, he is given blank checks
which he may fill out and use whenever he wishes. Each time he issues a check,
he should also fill out the check stub to which the check is usually attached.
This stub, if properly kept, will contain the number of the check, the date of its
issue, the name of the payee and the amount thereof. The drawer would
therefore have a complete record of the checks he issues. It is the custom of
banks to send to its depositors a monthly statement of the status of their
accounts, together with all the cancelled checks which have been cashed by
their respective holders. If the depositor has filled out his check stubs properly,
a comparison between them and the cancelled checks will reveal any forged
check not taken from his checkbook. It is the duty of a depositor to carefully
examine the bank's statement, his cancelled checks, his check stubs and other
pertinent records within a reasonable time, and to report any errors without
unreasonable delay. If his negligence should cause the bank to honor a forged
check or prevent it from recovering the amount it may have already paid on
such check, he cannot later complain should the bank refuse to recredit his
account with the amount of such check. (First Nat. Bank of Richmond v.
Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See
also Leather Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886];
Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162,
146 So. 116 [1933]). Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted
by the National Bureau of Investigation in its report dated November 2, 1970:
"58.One factor which facilitate this fraud was the delay in the reconciliation of
bank (PNB) statements with the NAWASA bank accounts. . . . Had the
NAWASA representative come to the PNB early for the statements and had the
bank been advised promptly of the reported bogus check, the negotiation of
practically all of the remaining checks on May, 1969, totalling P2,224,736.00
could have been prevented."
The records likewise show that the petitioner failed to provide appropriate security measures
over its own records thereby laying confidential records open to unauthorized persons. The
petitioner's own Fact Finding Committee, in its report submitted to their General Manager
underscored this laxity of records control. It observed that the "office of Mr. Ongtengco (Cashier
No. VI of the Treasury Department at the NAWASA) is quite open to any person known to him
or his staff members and that the check writer is merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
Investigation, Mr. Ongtengco could only state that:
"A.Generally my order is not to allow anybody to enter my office. Only
authorized persons are allowed to enter my office. There are some cases,
however, where some persons enter my office because they are
following up their checks. Maybe, these persons may have been
authorized by Mr. Pantig. Most of the people entering my office are
changing checks as allowed by the Resolution of the Board of Directors
of the NAWASA and the Treasurer. The check writer was never placed
on my table. There is a place for the checkwriter which is also under
lock and key.
"Q.Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
"A.No, sir.
"Q.Why are you tolerating Mr. Pantig admitting unauthorized persons in your
office?
"A.I do not want to embarrass Mr. Pantig. Most of the people following up
checks are employees of the NAWASA.
"Q.Was the authority given by the Board of Directors and the approval by the
Treasurer for employees, and other persons to encash their checks carry
with it their authority to enter your office?
"A.No, sir.
xxx xxx xxx
"Q.From the answers that you have given to us we observed that actually there
is laxity and poor control on your part with regards to the preparations of
check payments inasmuch as you allow unauthorized persons to follow
up their vouchers inside your office which may leakout confidential
informations or your books of account. After being apprised of all the
shortcomings in your office, as head of the Cashiers' Office of the
Treasury Department what remedial measures do you intend to
undertake?
"A.Time and again the Treasurer has been calling our attention not to allow
interested persons to hand carry their voucher checks and we are trying
our best and if I can do it to follow the instructions to the letter, I will do
it but unfortunately the persons who are allowed to enter my office are
my co-employees and persons who have connections with our higher
ups and I can not possibly antagonize them. Rest assured that even
though that everybody will get hurt, I will do my best not to allow
unauthorized persons to enter my office.
xxx xxx xxx
"Q.Is it not possible inasmuch as your office is in charge of the posting of check
payments in your books that leakage of payments to the banks came
from your office?
"A.I am not aware of it but it only takes us a couple of minutes to process the
checks. And there are cases wherein every information about the checks
may be obtained from the Accounting Department, Auditing
Department, or the Office of the General Manager."
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation
concluded in its Report dated November 2, 1970 that the fraudulent encashment of the twenty-
three (23) checks in question was an "inside job". Thus
"We have all the reasons to believe that this fraudulent act was an inside job or
one pulled with inside connivance at NAWASA. As pointed earlier in this
report, the serial numbers of these checks in question conform with the numbers
in current use of NAWASA, aside from the fact that these fraudulent checks
were found to be of the same kind and design as that of NAWASA's own
checks. While knowledge as to such facts may be obtained through the
possession of a NAWASA check of current issue, an outsider without
information from the inside can not possibly pinpoint which of NAWASA's
various accounts has sufficient balance to cover all these fraudulent checks.
None of these checks, it should be noted, was dishonored for insufficiency of
funds."
Even if the twenty three (23) checks in question are considered forgeries, considering the
petitioner's gross negligence, it is barred from setting up the defense of forgery under Section 23
of the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine
National Bank that was the proximate cause of the loss. The petitioner relies on our ruling
in Philippine National Bank v. Court of Appeals (25. SCRA 693) that.
"Thus, by not returning the 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."
The argument has no merit. The records show that the respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing
them of the activities of forgery syndicates. The Memorandum of the Assistant Vice-President
and Chief Accountant of the Philippine National Bank dated February 17, 1966 reads in part:

"SUBJECT: ACTIVITIES OF FORGERY SYNDICATE.
"From reliable information we have gathered that personalized checks of current
account depositors are now the target of the forgery syndicate. To protect the
interest of the bank, you are hereby enjoined to be more careful in examining
said checks especially those coming from the clearing, mails and window
transactions. As a reminder please be guided with the following:
"1.Signatures of drawers should be properly scrutinized and compared with
those we have on file.
"2.`The serial numbers of the checks should be compared with the serial
numbers registered with the Cashier's Dept.
"3.The texture of the paper used and the printing of the checks should be
compared with the sample we have on file with the Cashier's Dept.
"4.Checks bearing several indorsements should be given a special attention.
"5.Alteration in amount both in figures and words should be carefully examined
even if signed by the drawer.
"6.Checks issued in substantial amounts particularly by depositors who do not
usually issue checks in big amounts should be brought to the attention of the
drawer by telephone or any fastest means of communication for purposes of
confirmation.
and your attention is also invited to keep abreast of previous circulars and memo
instructions issued to bookkeepers."
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment
of the checks because the printing of the petitioner's personalized checks was not done under the
supervision and control of the Bank. There is no evidence on record indicating that because of
this private printing, the petitioner furnished the respondent Bank with samples of checks, pens,
and inks or took other precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent
the fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
Paras, **J., took no part.
||| (MWSS v. Court of Appeals, G.R. No. L-62943, July 14, 1986)


FIRST DIVISION
[G.R. No. 74917. January 20, 1988.]
BANCO DE ORO SAVINGS AND MORTGAGE
BANK, petitioner, vs. EQUITABLE BANKING CORPORATION,
PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL
TRIAL COURT OF QUEZON CITY, BRANCH XCII (92) respondents.
SYLLABUS
1.COMMERCIAL LAW; BANKING; PHILIPPINE CLEARING
HOUSE CORPORATION (PCHC); AUTHORITY TO CLEAR CHECKS AND/OR
CHECKING ITEMS; TRANSACTIONS ON NON-NEGOTIABLE CHECKS WITHIN THE
AMBIT OF ITS JURISDICTION. As provided in the articles of incorporation of PCHC its
operation extend to "clearing checks and other clearing items." No doubt transactions on non-
negotiable checks are within the ambit of its jurisdiction. In a previous case, this Court had
occasion to rule: "Ubilex non distinguit nec nos distinguere debemos." There should be no
distinction in the application of a statute where none is indicated for courts are not authorized to
distinguish where the law makes no distinction. They should instead administer the law not as
they think it ought to be but as they find it and without regard to consequences. The participation
of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a
manifestation of their submission to its jurisdiction. Viewing the provisions the conclusion is
clear that the PCHC Rules and Regulations should not be interpreted to be applicable only to
checks which are negotiable instruments but also to non-negotiable instruments, and that the
PCHC has jurisdiction over this case even as the checks subject of this litigation are admittedly
non-negotiable.
2.STATUTORY CONSTRUCTION; APPLICATION OF A STATUTE; NO DISTINCTION
WHERE NONE IS INDICATED. The term, check as used in the said Articles of
Incorporation of PCHC can only connote checks in general use in commercial and business
activities. It cannot be conceived to be limited to negotiable checks only. Checks are used
between banks and bankers and their customers, and are designed to
facilitate banking operations. It is of the essence to be payable on demand, because the contract
between the banker and the customer is that the money is needed on demand.
3.COMMERCIAL LAW; BANKING: STAMPING GUARANTEE OF PRIOR
ENDORSEMENT AT THE BACK OF A CHECK EQUIVALENT TO ASSUMPTION OF
WARRANTY OF AN ENDORSER. The petitioner having stamped its guarantee of "all prior
endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from claiming
that the checks under consideration are not negotiable instruments. The checks were accepted for
deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks
with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all
legal intents and purposes treated the said checks as negotiable instruments and accordingly
assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the
back of the checks. It led the said respondent to believe that it was acting as endorser of the
checks and on the strength of this guarantee said respondent cleared the checks in question and
credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
4.ID.; ID.; ID.; BASES OF THE DOCTRINE OF ESTOPPEL. The Court enunciated in
Philippine National Bank vs. Court of Appeals, a point relevant to the issue when it stated
"the doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and
justice and its purpose is to forbid one to speak against his own act, representations or
commitments to the injury of one to whom they were directed and who reasonably relied
thereon."
5.ID.; ID.; ID.; FORGERY IN ENDORSEMENT; LOSS SUFFERED BY THE COLLECTING
BANK OR LAST ENDORSER. Apropos the matter of forgery in endorsements, this Court
has succinctly emphasized that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. This is laid
down in the case of PNB vs. National City Bank. In another case, this court held that if the
drawee-bank discovers that the signature of the payee was forged after it has paid the amount of
the check to the holder thereof, it can recover the amount paid from the collecting bank.
6.ID.; ID.; CHECKS: DUTY OF DILIGENCE NOT OWNED BY THE DRAWER TO THE
COLLECTING BANK. It has been enunciated in an American case particularly in American
Exchange National Bank vs. Yorkville Bank that: "the drawer owes no duty of diligence to the
collecting bank (one who had accepted an altered check and had paid over the proceeds to the
depositor) except of seasonably discovering the alteration by a comparison of its returned checks
and check stubs or other equivalent record, and to inform the drawee thereof." Thus We hold that
while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a
duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank being primarily engaged
in banking holds itself out to the public as the expert and the law holds it to a high standard of
conduct.
D E C I S I O N
GANCAYCO, J p:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon
City promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de OroSavings
and Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing
House Corporation after a review of the Decision of the Board of Directors of the Philippine
Clearing House Corporation (PCHC) in the case
of Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage (BCO),
ARBICOM Case No. 84-033.
The undisputed facts are as follows:
"It appears that sometime in March, April, May and August 1983, plaintiff
through its Visa Card Department, drew six crossed Manager's check (Exhibits
'A' to 'F', and herein referred to as Checks) having an aggregate amount of Forty
Five Thousand Nine Hundred and Eighty Two & 23/100 (P45,982.23) Pesos
and payable to certain member establishments of Visa Card. Subsequently, the
Checks were deposited with the defendant to the credit of its depositor, a certain
Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the
usual endorsements: 'All prior and/or lack of endorsement guaranteed' the
defendant sent the checks for clearing through the Philippine Clearing
House Corporation (PCHC). Accordingly, plaintiff paid the Checks; its clearing
account was debited for the value of the Checks and defendant's clearing
account was credited for the same amount.
Thereafter, plaintiff discovered that the endorsements appearing at the back of
the Checks and purporting to be that of the payees were forged and/or
unauthorized or otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the
Checks directly to the defendant for the purpose of claiming reimbursement
from the latter. However, defendant refused to accept such direct presentation
and to reimburse the plaintiff for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the
plaintiff the sum of P45,982.23 with interest at the rate of 12% per annum from
the date of the complaint plus attorney's fees in the amount of P10,000.00 as
well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the
dispute was presented for Arbitration; and Atty. Ceasar Querubin was
designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in
favor of the plaintiff and against the defendant ordering the PCHC to debit the
clearing account of the defendant, and to credit the clearing account of the
plaintiff of the amount of P45,982.23 with interest at the rate of 12% per annum
from date of the complaint and Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made." 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC
affirmed the decision of the said Arbiter in this wise:
"'In view of all the foregoing the decision of the Arbiter is confirmed"; and the
Philippine Clearing House Corporation is hereby ordered to debit the clearing
account of the defendant and credit the clearing account of plaintiff the amount
of Forty Five Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23)
Pesos with interest at the rate of 12% per annum from date of the complaint, and
the Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.'"
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1.Did the PCHC have any jurisdiction to give due course to and adjudicate
Arbicom Case No. 84-033?
2.Were the subject checks non-negotiable and if not, does it fall under the ambit
of the power of the PCHC?
3.Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding
controversies of this nature by the PCHC?
4.What law should govern in resolving controversies of this nature?
5.Was the petitioner bank negligent and thus responsible for any undue
payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House
Rules and Regulations of PCHC cover and apply only to checks that are genuinely negotiable.
Emphasis is laid on the primary purpose of the PCHC in the Articles of Incorporation, which
states:

"To provide, maintain and render an effective, convenient, efficient, economical
and relevant exchange and facilitate service limited to check processing and
sorting by way of assisting member banks, entities in clearing checks and
other clearing items as defined in existing and in future Central Bank of the
Philippines circulars, memoranda, circular letters, rules and regulations and
policies in pursuance to the provisions of Section 107 of R.A. 265. . ."
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in
accordance with the provisions of Section 1000 shall serve as a basis for the
clearing of checks, and the settlement of interbank balances . . ."
Petitioner argues that by law and common sense, the term check should be interpreted
as one that fits the articles of incorporation of the PCHC, the Central Bank and the Clearing
House Rules stating that it is a negotiable instrument citing the definition of a "check" as
basically a "bill of exchange" under Section 185 of the NIL and that it should be payable to
"order" or to "bearer" under Section 126 of same law. Petitioner alleges that with the
cancellation of the printed word "or bearer" from the face of the check, it becomes non-
negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the
herein petitioner as it held:
"Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no
distinction as to the character or nature of the checks subject of its jurisdiction.
The pertinent provisions quoted in petitioner's memorandum simply refer to
check(s). Where the law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813-R, Feb. 5, 1962) the
Appellate Court categorically stated that there are four kinds of checks in this
jurisdiction; the regular check; the cashier's check; the traveller's check; and the
crossed check. The Court, further elucidated, that while the Negotiable
Instruments Law does not contain any provision on crossed checks, it is
common practice in commercial and banking operations to issue checks of this
character, obviously in accordance with Article 541 of the Code of Commerce.
Attention is likewise called to Section 185 of the Negotiable Instruments Law:
'Sec. 185.Check defined. A check is a bill of exchange drawn
on a bank payable on demand. Except as herein otherwise provided, the
provisions of this act applicable to a bill of exchange payable on demand
apply to a check.'
and the provisions of Section 61 (supra) that the drawer may insert in the
instrument an express stipulation negating or limiting his own liability to the
holder. Consequently, it appears that the use of the term 'check' in the Articles
of Incorporation of PCHC is to be perceived as not limited to negotiable checks
only, but to checks as is generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with
the ruling of the PCHC Board of Directors that:
'In presenting the Checks for clearing and for payment, the
defendant made an express guarantee on the validity of 'all prior
endorsements'. Thus, stamped at the back of the checks are the
defendant's clear warranty; ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
The principle of estoppel, effectively prevents the defendant
from denying liability for any damage sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.' (Pp. 10-11
Decision; pp. 43-44, Rollo)"
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing
checks and other clearing items." No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction.
In a previous case this Court had occasion to rule: "Ubilex non distinguit nec nos distinguere
debemos." 2 It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
"The rule, founded on logic, is a corollary of the principle that general words
and phrases in a statute should ordinarily be accorded their natural and general
significance. In other words, there should be no distinction in the application of
a statute where none is indicated."
There should be no distinction in the application of a statute where none is indicated for courts
are not authorized to distinguish where the law makes no distinction. They should instead
administer the law not as they think it ought to be but us they find it and without regard to
consequences. 3
The term, check as used in the said Articles of Incorporation of PCHC can only connote checks
in general use in commercial, and business activities. It cannot be conceived to be limited to
negotiable checks only. cdreo
Checks are used between banks and bankers and their customers, and are designed to
facilitate banking operations. It is of the essence to be payable on demand, because the contract
between the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations
of PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-
CHRR clearing rules and regulations provide:
"SEC. 3.AGREEMENT TO THESE RULES. It is the general agreement and
understanding that any participant in the Philippine Clearing
House Corporation, MICR clearing operations by the mere fact of their
participation, thereby manifests its agreement to these Rules and Regulations
and its subsequent amendments."
Sec. 36.6.(ARBITRATION) The fact that a bank participates in the clearing
operations of the PCHC shall be deemed its written and subscribed consent to
the binding effect of this arbitration agreement as if it had done so in accordance
with section 4 of (the) Republic Act No. 876, otherwise known as the
Arbitration Law."
Further Section 2 of the Arbitration Law mandates:
"Two or more persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing between them at the time of the submission
and which may be the subject of an action, or the parties of any contract may in
such contract agree to settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any contract.
"Such submission or contract may include question arising out of valuations,
appraisals or other controversies which may be collateral, incidental, precedent
or subsequent to any issue between the parties . . ."
Sec. 21 of the same rules, says:
"Items which have been the subject of material alteration or items bearing
forged endorsement when such endorsement is necessary for negotiation shall
be returned by direct presentation or demand to the Presenting Bank and not
through the regular clearing house facilities within the period prescribed by law
for the filing of a legal action by the returning bank/branch, institution or entity
sending the same." (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should
not be interpreted to be applicable only to checks which are negotiable instruments but also to
non-negotiable instruments, and that the PCHC has jurisdiction over this case even as the checks
subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in
question. It stamped its guarantee on the back of the checks and subsequently presented these
checks for clearing and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed
the liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of
endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the
respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal
intents and purposes treated the said checks as negotiable instruments and accordingly assumed
the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of
the checks. It led the said respondent to believe that it was acting as endorser of the checks and
on the strength of this guarantee said respondent cleared the checks in question and credited the
account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming
that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals, 5 a point relevant to the
issue when it stated "the doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice and its purpose is to forbid one to speak against his own act,
representations or commitments to the injury of one to whom they were directed and who
reasonably relied thereon."
A commercial bank cannot escape the liability of an endorser of a check and which may turn out
to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as
endorsements and thus logically guarantees the same as such there can be no doubt said bank has
considered the checks as negotiable. cdrep

Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. This is laid down in the case of PNB vs. National
City Bank. 6 In another case, this court held that if the drawee-bank discovers that the signature
of the payee was forged after it has paid the amount of the check to the holder thereof, it can
recover the amount paid from the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party from
repudiating an obligation voluntarily assumed after having accepted benefits therefrom. To
countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation." 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY &
Motor Service Co. that:
"Where a check is accepted or certified by the bank on which it is drawn, the
bank is estopped to deny the genuineness of the drawer's signature and his
capacity to issue the instrument.
If a drawee bank pays a forged check which "was previously accepted or
certified by the said bank, it can not recover from a holder who did not
participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense
that this word is used in Section 62 of the Negotiable Instruments Act." 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover
the alteration or the forgery.
Very akin to the case at bar is one which involves a suit filed by the drawer of checks against the
collecting bank and this came about in Farmers State Bank 10 where it was held:
"A cause of action against the (collecting bank) in favor of the appellee (the
drawer) accrued as a result of the bank breaching its implied warranty of the
genuineness of the indorsements of the name of the payee by bringing about the
presentation of the checks (to the drawee bank) and collecting the amounts
thereof, the right to enforce that cause of action was not destroyed by the
circumstance that another cause of action for the recovery of the amounts paid
on the checks would have accrued in favor of the appellee against another or to
others than the bank if when the checks were paid they have been indorsed by
the payee." (United States vs. National Exchange Bank, 214 US, 302, 29 S CT-
665, 53 L. Ed 1006,16 Am. Cas. 1184; Onondaga County Savings Bank vs.
United States (E.C.A.) 64 F 703)".
Section 66 of the Negotiable Instruments ordains that:
"Every indorser who indorses without qualification, warrants to all subsequent
holders in due course" (a) that the instrument is genuine and in all respects what
it purports to be; (b) that he has good title to it; (c) that all prior parties have
capacity to contract; and (d) that the instrument is at the time of his indorsement
valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National
Bank vs. Yorkville Bank 12 that: "the drawer owes no duty of diligence to the collecting bank
(one who had accepted an altered check and had paid over the proceeds to the depositor) except
of seasonably discovering the alteration by a comparison of its returned checks and check stubs
or other equivalent record, and to inform the drawee thereof."
In this case it was further held that:
"The real and underlying reasons why negligence of the drawer constitutes no
defense to the collecting bank are that there is no privity between the drawer
and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80)
and the drawer owes to that bank no duty of vigilance (New York Produce
Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the
collecting bank is induced by any act or representation or admission of the
drawer (Seaboard National Bank vs. Bank of America (supra) and it follows that
negligence on the part of the drawer cannot create any liability from it to the
collecting bank, and the drawer thus is neither a necessary nor a proper party to
an action by the drawee bank against such bank. It is quite true that depositors
in banks are under the obligation of examining their passbooks and returned
vouchers as a protection against the payment by the depository bank against
forged checks, and negligence in the performance of that obligation may relieve
that bank of liability for the repayment of amounts paid out on forged checks,
which but for such negligence it would he bound to repay. A leading case on
that subject is Morgan vs. United States Mortgage and Trust Col. 208 N.Y. 218,
101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74."
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank,
the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it
for the purpose of determining their genuineness and regularity. The collecting bank being
primarily engaged in banking holds itself out to the public as the expert and the law holds it to a
high standard of conduct. LLpr
And although the subject checks are non-negotiable the responsibility of petitioner as indorser
thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and
would deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
"II.Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received.
Nothing is more clear than that neither the defendant's depositor nor the
defendant is entitled to receive payment payable for the Checks. As the checks
are not payable to defendant's depositor, payments to persons other than payees
named therein, their successor-in-interest or any person authorized to receive
payment are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
'Art. 1240.Payment shall be made to the person in whose favor
the obligation has been constituted, or his successor-in-interest, or any
person authorized to receive it.'
Considering that neither the defendant's depositor nor the defendant is entitled
to receive payments for the Checks, payments to any of them give rise to an
obligation to return the amounts received. Section 2154 of the New Civil Code
mandates that:
'Article 2154. If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation
to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks
notwithstanding that the underlying transactions were fictitious. This contention
has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact
strengthens, plaintiff's right to recover from the defendant. Such nullity clearly
emphasizes the obligation of the payees to return the proceeds of the Checks. If
a failure of consideration is sufficient to warrant a finding that a payee is not
entitled to payment or must return payment already made, with more reason the
defendant, who is neither the payee nor the person authorized by the payee,
should be compelled to surrender the proceeds of the Checks received by it.
Defendant does not have any title to the Checks; neither can it claim any
derivative title to them.
"III.Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
Liability To Those Who Relied
On Its Warranty.
In presenting the Checks for clearing and for payment, the defendant made an
express guarantee on the validity of 'all prior endorsements'. Thus, stamped at
the bank of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's
warranty. As the warranty has proven to be false and inaccurate, the defendant
is liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying
liability for any damages sustained by the plaintiff which, relying upon an
action or declaration of the defendant, paid on the Checks. The same principle
of estoppel effectively prevents the defendant from denying the existence of the
Checks.
Whether the Checks have been issued for valuable considerations or not is of no
serious moment to this case. These Checks have been made the subject of
contracts of endorsement wherein the defendant made expressed warranties to
induce payment by the drawer of the Checks; and the defendant cannot now
refuse liability for breach of warranty as a consequence of such forged
endorsements. The defendant has falsely warranted in favor of plaintiff the
validity of all endorsements and the genuineness of the checks in all respects
what they purport to be. cdreo
The damage that will result if judgment is not rendered for the plaintiff is
irreparable. The collecting bank has privity with the depositor who is the
principal culprit in this case. The defendant knows the depositor; her address
and her history, Depositor is defendant's client. It has taken a risk on its
depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the
defendant is guilty of negligence; the risk of wrongful payment has to be
assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of
Directors finds no reason to reverse the decision of the Arbiter. The defendant's
failure to reimburse the plaintiff has constrained the plaintiff to hire the services
of counsel in order to protect its interest notwithstanding that plaintiff's claim is
plainly valid, just and demandable. In addition, defendant's clear obligation is to
reimburse plaintiff upon direct presentation of the checks; and it is undenied
that up to this time the defendant has failed to make such reimbursement."

WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs.
The decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are hereby
declared to be immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.
Footnotes
||| (Banco De Oro v. Equitable Banking Corp., G.R. No. 74917, January 20, 1988)

SECOND DIVISION
[G.R. No. 92244. February 9, 1993.]
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT
OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for private respondent.
SYLLABUS
1.MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; CHECKS; DRAWER DUTY
BOUND TO SET UP AN ACCOUNTING SYSTEM AND TO REPORT FORGED
INDORSEMENT TO DRAWEE. 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 in under
duty promptly to report such fact to the drawee bank. (Britton, Bills and Notes, Sec. 143, pp.
663-664)
2.ID.; ID.; ID.; ID.; DRAWER LOSES RIGHT AGAINST DRAWEE FOR FAILURE TO
DISCOVER FORGERY OR REPORT PROMPTLY SAID FORGERY. For his negligence or
failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer
loses his right against the drawee who has debited his account under the forged indorsement.
(City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933); Detroit
Piston Ring Co. vs. Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185
[1930]; C.E. Erickson Co. vs. Iowa Nat. Bank, 211 Iowa 495, 230 N.W. 342 [1930] In other
words, he is precluded from using forgery as a basis for his claim for recrediting of his account.
3.ID.; ID.; ISSUANCE OF INSTRUMENT, CONSTRUED. Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument to the payee for the
purpose of giving effect thereto. (NIL, Sec. 16) The first delivery of the instrument, complete in
form, to the payee who takes it as a holder, is called issuance of the instrument. Without the
initial delivery of the instrument from the drawer of the check to the payee, there can be no valid
and binding contract and no liability on the instrument.
4.ID.; ID.; CHECKS; DRAWEE BANK WHO PAID A CHECK ON A FORGED
INDORSEMENT GENERALLY CANNOT CHARGE THE DRAWER'S ACCOUNT;
EXCEPTION. As a rule, a drawee bank who has paid a check on which an indorsement has
been forged cannot charge the drawer's account for the amount of said check. An exception to
this rule is where the drawer is guilty of such negligence which causes the bank to honor such a
check or checks.
5.ID.; ID.; ID.; FORGED INDORSEMENT; DRAWER CAN NOT DEMAND FROM
DRAWEE BANK TO RECREDIT HER ACCOUNT WHERE HER NEGLIGENCE WAS THE
PROXIMATE CAUSE OF HER LOSS; CASE AT BAR. The petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after receiving her
bank statements. Had the petitioner examined her records more carefully, particularly the invoice
receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts
payable in the eighty-two (82) checks with the pertinent sales invoices, she would have easily
discovered that in some checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed those checks, and
should have conducted an inquiry as to the reason for the irregular entries. Likewise, had
petitioner been more vigilant in going over her current account by taking careful note of the daily
reports made by respondent drawee Bank on her issued checks, or at least made random scrutiny
of her cancelled checks returned by respondent drawee Bank at the close of each month, she
could have easily discovered the fraud being perpetrated by Alicia Galang, and could have
reported the matter to the respondent drawee Bank. The respondent drawee Bank then could
have taken immediate steps to prevent further commission of such fraud. Thus, petitioner's
negligence was the proximate cause of her loss. And since it was her negligence which caused
the respondent drawee Bank to honor the forged checks or prevented it from recovering the
amount it had already paid on the checks, petitioner cannot now complain should the bank refuse
to recredit her account with the amount of such checks. Under Section 23 of the NIL, she is now
precluded from using the forgery to prevent the bank's debiting of her account.
6.ID.; ID.; ID.; RESTRICTIVE INDORSEMENT; PROHIBITION TO TRANSFER OR
NEGOTIATE MUST BE WRITTEN IN EXPRESS WORDS. 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. 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 it 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.
7.CIVIL LAW; OBLIGATIONS AND CONTRACTS; DRAWEE BANK WHICH
CONTRIBUTED TO THE LOSS INCURRED BY THE DRAWER BY ITS OWN
VIOLATION OF INTERNAL RULES ADJUDGED LIABLE TO SHARE THE LOSS; CASE
AT BAR. 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. We hold that banking business is so impressed with public interests 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 1172.
D E C I S I O N
CAMPOS, JR., J p:
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 respondent
drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial
Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on
November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner
herein) gross negligence in issuing the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors of
the respondent Court. 1 :
"I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF
THE RESULTING INJURY TO THE DRAWEE BANK, AND THE
DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY. Cdpr
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 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, both in 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 actually 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 the correctness of the returned checks, much less check if the
payees actually received the checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued, following her usual
practice stated above, a total of eighty-two (82) checks in favor of several suppliers. These
checks were all presented by the indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof against
petitioner's checking account numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees as shown in their corresponding
invoices. To mention a few:

". . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23
in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee
was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September
18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-
67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3)
in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor
of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B);
(4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-
1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange
Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-
2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh.
A-78), her obligation was only P648.00 (Exh. G); (8) in Check No. 589028
dated March 10, 1984 for the amount of P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in
Check No. 62033 dated May 24, 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 bank 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 than two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper. cdphil
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 Elcano
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
periodical 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 Elcano 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." LibLex
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order to
pay. And said section does not refer only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged
signature of the payee or indorsee of a note or check. Since under said provision a forged
signature is "wholly inoperative", no one can gain title to the instrument through such forged
indorsement. Such an indorsement prevents any subsequent party from acquiring any right as
against any party whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement, not one of them can
acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights
of all subsequent parties as against parties prior to the forgery. However, the law makes an
exception to these rules where a party is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably calculated to prevent or render
difficult the forgery of indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement,
the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or
failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer
loses his right against the drawee who has debited his account under the forged indorsement. 6 In
other words, he is precluded from using forgery as a basis for his claim for recrediting 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 later given to her for her signature. Her signing the checks
made the negotiable instrument complete. Prior to signing the checks, there was no valid contract
yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead
of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the
Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L.
Boon. It was established that the signatures of the payees as first indorsers were forged. The
record fails to show the identity of the party who made the forged signatures. The checks were
then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and
were deposited in the latter's accounts as earlier noted. The second indorsements were all
genuine signatures of the alleged holders. All the eighty-two (82) checks bearing the forged
indorsements of the payees and the genuine second indorsements of Alfredo Y. Romero and
Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to the
credit of their respective savings accounts in the Buendia, Ongpin and Elcano branches of the
same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were
credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and
debited against petitioner's checking account No. 13-00038-1, Caloocan branch. LLpr

As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery
of his own signature, he has no similar duty as to forged indorsements. A different situation
arises where the indorsement was forged by an employee or agent of the drawer, or done with the
active participation of the latter. Most of the cases involving forgery by an agent or employee
deal with the payee's indorsement. The drawer and the payee oftentimes have business relations
of long standing. The continued occurrence of business transactions of the same nature provides
the opportunity for the agent/employee to commit the fraud after having developed familiarity
with the signatures of the parties. However, sooner or later, some leak will show on the drawer's
books. It will then be just a question of time until the fraud is discovered. This is specially true
when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based
on failure of the depositor to act as a prudent businessman would under the circumstances. In the
case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and
did not even verify the accuracy of the amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the returned checks, and
did not compare them with the sales invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks. With such
discovery, the subsequent forgeries would not have been accomplished. It was not until two
years after the bookkeeper commenced her fraudulent scheme that petitioner discovered that
eighty-two (82) checks were wrongfully charged to her account, at which time she notified the
respondent drawee Bank.
It is highly improbable that in a period of two years, not one of petitioner's suppliers complained
of non-payment. Assuming that even one single complaint had been made, petitioner would have
been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying much more than she should for the supplies she was actually getting. A depositor may not
sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there
may be a leak in her business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take such steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums written as amounts payable
in the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered
that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she
noticed these discrepancies, she should not have signed those checks, and should have conducted
an inquiry as to the reason for the irregular entries. Likewise, had petitioner been more vigilant in
going over her current account by taking careful note of the daily reports made by respondent
drawee Bank on her issued checks, or at least made random scrutiny of her cancelled checks
returned by respondent drawee Bank at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to
the respondent drawee Bank. The respondent drawee Bank then could have taken immediate
steps to prevent further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused the respondent
drawee Bank to honor the forged checks or prevented it from recovering the amount it had
already paid on the checks, petitioner cannot now complain should the bank refuse to recredit her
account with the amount of such checks. 10 Under Section 23 of the NIL, she is now precluded
from using the forgery to prevent the bank's debiting of her account. cdphil
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai
Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently
taken and the signature of the payee was forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of its business affairs and the theft of the
check by a total stranger was not attributable to negligence of the drawer; neither was the forging
of the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent,
the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under
the check with a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to
the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's
bank which in turn must present it for payment against the drawee bank in the course of normal
banking transactions between banks. The crossed check cannot be presented for payment but it
can only be deposited and the drawee bank may only pay to another bank in the payee's or
indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks
with more than one indorsement. The banking rule banning acceptance of checks for deposit or
cash payment with more than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by
indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
"Sec. 36.When indorsement restrictive. An indorsement is restrictive which
either.
(a)Prohibits further negotiation of the instrument; or.
xxx xxx xxx"
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written
in express words at the back of the instrument, so that any subsequent party may be
forewarned that it 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. LLpr
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 her 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 correspondents 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 1172 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.
||| (Gempesaw v. Court of Appeals, G.R. No. 92244, February 09, 1993)



FIRST DIVISION
[G.R. No. 89802. May 7, 1992.]
ASSOCIATED BANK and CONRADO
CRUZ, petitioners, vs. HON. COURT OF APPEALS, and MERLE V.
REYES, doing business under the name and style "Melissa's
RTW," respondents.
Soluta, Leonides, Marifosque, Javier, Liboon & Aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.
SYLLABUS
1.COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; CROSSED CHECK;
CONSTRUED. 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. 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.
2.ID.; ID.; ID.; EFFECTS. In State Investment House vs. IAC, (175 SCRA 310)
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."
3.ID.; ID.; ID.; PRESENTMENT FOR PAYMENT; RULE FOR SUFFICIENCY THEREOF.
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.
4.ID.; ID.; ID.; LIABILITY OF A BANK IN ACCEPTING THEREOF ON A FORGED OR
UNAUTHORIZED INDORSEMENT; CASE AT BAR. The petitioners argue that the
cause of action for violation of the common instruction found on the face of the checks
exclusively belongs to the issuers thereof and not to the payee. Moreover, having acted in good
faith as they merely facilitated the encashment of the checks, they cannot be made liable to the
private respondent. The subject checks were accepted for deposit by the Bank for the
account ofRafael Sayson although they were crossed checks and the payee was not Sayson but
Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or
lack of endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for
all legal intents and purposes treated the said checks as negotiable instrumentsand, accordingly,
assumed the warranty of the endorser. The weight of authority is to the effect that "the
possession of a check on a forged or unauthorized indorsement is wrongful, and when the money
is collected on the check, the bank can be held 'for moneys had and received.'" The proceeds are
held for the rightful owner of the payment and may be recovered by him. The
position of the bank taking the check on the forged or unauthorized indorsement is the same as if
it had taken the check and collected without indorsement at all. The act of the bank amounts to
conversion of the check.
5.ID.; ID.; ID.; DUTY OF THE BANK TO SCRUTINIZE CHECKS DEPOSITED WITH IT
FOR THE PURPOSE OF DETERMINING THEIR GENUINENESS AND REGULARITY;
CASE AT BAR. It is not disputed that the proceeds of the subject checks belonged to the
private respondent. As she had not at any time authorized Rafael Sayson to endorse or encash
them, there was conversion of the funds by the Bank. When the Bank paid the checks so
endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks. This liability attached whether or not
the Bank was aware of the unauthorized endorsement. 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.,
"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 filed, and
the law thus holds it to high standard of conduct." The petitioners insist that the private
respondent has no cause of action against them because they have no privity of contract with her.
They also argue that it was Eddie Reyes, the private respondent's own husband, who endorsed
the checks. Assuming that Eddie Reyes did endorse the crossed checks, we hold that
the Bank would still be liable to the private respondent because he was not authorized to make
the endorsements. And even if the endorsements were forged, as alleged, the Bank would still be
liable to the private respondent for not verifying the endorser's authority. There is no substantial
difference between an actual forging of a name to a check as an endorsement by a person not
authorized to make the signature and the affixing of a name to a check as an endorsement by a
person not authorized to endorse it. The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to the authority of Rafael Sayson to deposit
crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The
failure of the Bank to make this inquiry was a breach of duty that made it liable to the private
respondent for the amount of the checks.
6.ID.; ID.; ID.; RIGHT OF PAYEE OF AN ILLEGALLY ENCASHED CHECKS; RULE.
There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in turn could
go against their respective drawee banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the
illegally encashed checks should be allowed to recover directly from the bankresponsible for
such encashment regardless of whether or not the checks were actually delivered to the payee.
We approve such direct action in the case at bar. It is worth repeating that before presenting the
checks for clearing and for payment, the Bank had stamped on the back thereof the words: "All
prior endorsements and/or lack ofendorsements guaranteed," and thus made the assurance that it
had ascertained the genuineness of all prior endorsements.
D E C I S I O N
CRUZ, J p:
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 ofcertain 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:
PAYORBANKAMOUNTDATE
PaylessSolid BankP3,960.00January 19, 1982
Robinson'sFEBTC4,140.00December 18, 1981
Robinson'sFEBTC1,650.00December 24, 1981
Robinson'sFEBTC1,980.00January 12, 1982
RempsonTRB1,575.00January 9, 1982
CoronaRCBC2,500.00December 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.prcd
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 abank 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." prLL
The effects therefore of crossing a check relate to the mode of its presentment for payment.
Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient,
must be made by the holder or by some person authorized to receive payment on his behalf. Who
the holder or authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This
could only signify that the drawers had intended the same for deposit only by the person
indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction found on
the face of the checks exclusively belongs to the issuers thereof and not to the payee. Moreover,
having acted in good faith as they merely facilitated the encashment of the checks, they cannot
be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW.
The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements
(were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and
purposes treated the said checks as negotiable instruments and, accordingly, assumed the
warranty of the endorser.
The weight of authority is to the effect that "the possession of a check on a forged or
unauthorized indorsement is wrongful, and when the money is collected on the check,
thebank can be held 'for moneys had and received.'" 6 The proceeds are held for the rightful
owner of the payment and may be recovered by him. The position of the bank taking the check
on the forged or unauthorized indorsement is the same as if it had taken the check and collected
without indorsement at all. The act of the bank amounts to conversion ofthe check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As
she had not at any time authorized Rafael Sayson to endorse or encash them, there was
conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the payee for the value of the checks. This
liability attached whether or not the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by Sayson.
The Bank should have first verified his right to endorse the crossed checks, of which he was not
the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty
it owed to the private respondent. LLphil
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it, for the purpose of determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds itself out to the public as the expert
on this field, and the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them because
they have no privity of contract with her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be
liable to the private respondent because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would still be liable to the private
respondent for not verifying the endorser's authority. There is no substantial difference between
an actual forging of a name to a check as an endorsement by a person not authorized to make the
signature and the affixing of a name to a check as an endorsement by a person not authorized to
endorse it. 10
The Bank does not deny collecting the money on the endorsement. It was its responsibility to
inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's RTW
upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry was a
breach of duty that made it liable to the private respondent for the amount of the checks.
There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in turn could
go against their respective drawee banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the
illegally encashed checks should be allowed to recover directly from the bank responsible for
such encashment regardless of whether or not the checks were actually delivered to the
payee. 11 We approve such direct action in the case at bar. cdphil
It is worth repeating that before presenting the checks for clearing and for payment, the Bank had
stamped on the back thereof the words: "All prior endorsements and/or lack ofendorsements
guaranteed," and thus made the assurance that it had ascertained the genuineness of all prior
endorsements.
We find that the respondent court committed no reversible error in holding that the private
respondent had a valid cause of action against the petitioners and that the latter are indeed liable
to her for their unauthorized encashment of the subject checks. We also agree with the
reduction of the award of the exemplary damages for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.
Narvasa, C .J ., Grio-Aquino, Medialdea and Bellosillo, JJ ., concur.
||| (Associated Bank v. Court of Appeals, G.R. No. 89802, May 07, 1992)






FIRST DIVISION
[G.R. No. L-55079. November 19, 1982.]
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs. THE
FIRST NATIONAL CITY BANK and THE COURT OF
APPEALS, respondents.
Rosales, Perez & Associates for petitioner.
Siguion, Reyna, Montecillo and Ongsiako for respondent PNCB.
SYNOPSIS
On August 25, 1964, a check for P50,000.00 payable to CASH drawn by Joaquin Cunanan and
Co. on First National City Bank (FNCB) was deposited with the Metropolitan Bank and Trust
Co. (Metro Bank) by a certain Salvador Sales. The check was cleared the same day and the
amount credited to his deposit with Metro Bank. On separate dates, Sales withdrew P480.00,
then P32,100.00 and, finally, on August 31, 1964, the balance of P17,920.00 of his total deposit
with Metro Bank. The withdrawal of the balance was allowed only when FNCB, upon
verification made by Metro Bank of the regularity and genuineness of the check deposit, assured
Metro Bank that the fast movement of the account was "not unusual." On September 3, 1964,
FNCB returned the cancelled check to drawer Joaquin Cunanan and Co.. That same day, the
company notified FNCB that the check had been altered, the actual amount of P50.00 having
been raised to P50,000.00, and the name of the payee, Manila Polo Club, having been
superimposed with the word CASH. When Metro Bank refused to reimburse FNCB for the
amount of P50,000.00, it filed an action for recovery of the amount with the Court of First
Instance of Manila. After trial, the Trial Court rendered judgment ordering Metro Bank to
reimburse FNCB the amount of P50,000.00. On appeal, the Court of Appeals affirmed the
decision. Hence, the present petition.
The Supreme Court held that petitioner and private respondent are bound by the 24-hour clearing
house regulation of the Central Bank which requires the drawee bank receiving the check for
clearing from the Central Bank Clearing House to return the check to the collecting bank within
the 24-hour period if the check is defective for any reason; and, that consequently, the failure of
private respondent to call the attention of petitioner to the alteration of the check until after the
lapse of 9 days, negates whatever rights it may have against petitioner.
Assailed decision set aside.
SYLLABUS
1.COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE REGULATION;
APPLICABILITY TO CASE AT BAR. The facts of this case fall within the clearing
procedures prescribed under Section 4 of Central Bank Circular No. 9 (February 17, 1949) as
amended by Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30, 1964). Under
the procedure prescribed, the drawee bank receiving the check for clearing from the Central
Bank Clearing House must return the check to the collecting bank within the 24-hour period if
the check is defective for any reason.
2.ID.; ID.; ID.; CONSTITUTIONALITY THERE OF UPHELD. The validity of the 24-hour
clearing house regulations has been upheld by this Court in Republic vs. Equitable Banking
Corporation, 10 SCRA 8 (1964). As held therein, since both parties are part of our banking
system, and both are subject to the regulations of the Central Bank, they are bound by the 24-
hour clearing house rule of the Central Bank.
3.ID.; ID.; ID,; FAILURE TO COMPLY WITH REQUIREMENT THEREOF NEGATES
WHATEVER RIGHT DRAWEE BANK MAY HAVE AGAINST COLLECTING BANK;
CASE AT BAR. In this case, the check was not returned to Metro Bank, the collecting bank,
in accordance with the 24-hour clearing house period, but was cleared by FNCB, the drawee
bank. Failure of FNCB, therefore, to call the attention of Metro Bank to the alteration of the
check in question until after the lapse of nine days, negates whatever right it might have had
against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against
Metro Bank, but against the party responsible for changing the name of the payee (Hongkong
and Shanghai Banking Corporation vs. People's Bank and Trust Co., 35 SCRA 140 [1970]) and
the amount on the face of the check.
4.ID.; ID.; ID.; LIMITS GUARANTEE OF COLLECTING BANK ON ALL PREVIOUS
INDORSEMENTS; CASE AT BAR. FNCB contend that the stamp reading, "Metropolitan
Bank and Trust Company Cleared (illegible) office. All prior indorsements and/or Lack of
endorsement Guaranteed" made by Metro Bank, is an unqualified representation that the
endorsement on the check was that of the true payee, and that the amount thereon was the correct
amount. In that connection, this Court in the Hongkong and Shanghai Bank case (35 SCRA 140
[1970]) ruled; ". . But Plaintiff Bank insists that Defendant Bank is liable on its indorsement
during clearing house operations. The indorsement, itself, is very clear when it begins with
words 'For clearance, clearing office . . .. In other words, such an indorsement must be read
together with the 24-hour regulation on clearing House Operations of the Central Bank. Once
that 24-hour period is over, the liability on such an indorsement has ceased. This being so,
Plaintiff Bank has not made out a case for relief." The factual milieu of said case is in point with
the case at bar and, hence, controlling.
D E C I S I O N
MELENCIO-HERRERA, J p:
This is a Petition for Review on Certiorari of the Decision of the Court of Appeals in CA-G.R.
No. 57129-R entitled, First National City Bank vs. Metropolitan Bank and Trust Company,
which affirmed in toto the Decision of the Court of First Instance of Manila, Branch VIII, in
Civil Case No. 61488, ordering petitioner herein, Metropolitan Bank, to reimburse respondent
First National City Bank the amount of P50,000.00, with legal rate of interest from June 25,
1965, and to pay attorney's fees of P5,000.00 and costs. cdtai
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH,
drawn by Joaquin Cunanan & Company on First National City Bank (FNCB for brevity) was
deposited with Metropolitan Bank and Trust Company (Metro Bank for short) by a certain
Salvador Sales. Earlier that day, Sales had opened a current account with Metro Bank depositing
P500.00 in cash. 1 Metro Bank immediately sent the cash check to the Clearing House of the
Central Bank with the following words stamped at the back of the check:
"Metropolitan Bank and Trust Company Cleared (illegible) office All prior
endorsements and/or Lack of endorsements Guaranteed." 2
The check was cleared the same day. Private respondent paid petitioner through clearing the
amount of P50,000.00, and Sales was credited with the said amount in his deposit with Metro
Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On
August 28, 1964, he withdrew P32,100.00. Then on August 31, 1964, he withdrew the balance of
P17,920.00 and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to
drawer Joaquin Cunanan & Company, together with the monthly statement of the company's
account with FNCB. That same day, the company notified FNCB that the check had been
altered. The actual amount of P50.00 was raised to P50,000.00, and over the name of the payee,
Manila Polo Club, was superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a
letter, which was received by Metro Bank on the following day, September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of
P50,000.00. The latter did not oblige, so that FNCB reiterated its request on September 29, 1964.
Metro Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case
No. 61488 against Metro Bank for recovery of the amount of P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse
FNCB the amount of P50,000.00 with legal rate of interest from June 25, 1965 until fully paid, to
pay attorney's fees of P5,000.00, and costs.
Petitioner appealed said decision to the Court of Appeals (CA-G.R. No. 57129-R). On August
29, 1980, respondent Appellate Court 3 affirmed in toto the judgment of the Trial Court. LLphil
Petitioner came to this instance on appeal by Certiorari, alleging:
"I
The Respondent Court of Appeals erred in completely ignoring and
disregarding the 24-hour clearing house rule provided for under Central Bank
Circular No. 9, as amended, although:
1.The 24-hour regulation of the Central Bank in clearing house operations is
valid and banks are subject to and are bound by the same; and
2.The 24-hour clearing house rule applies to the present case of the petitioner
and the private respondent.
II
The Respondent Court of Appeals erred in relying heavily on its decision in
Gallaites, et al. vs. RCA, etc., promulgated on October 23, 1950 for the same is
not controlling and is not applicable to the present case.
III
The Respondent Court of Appeals erred in disregarding and in not applying the
doctrines in the cases of Republic of the Philippines vs. Equitable Banking
Corporation (10 SCRA 8) and Hongkong & Shanghai Banking Corporation vs.
People's Bank and Trust Company (35 SCRA 140) for the same are controlling
and apply four square to the present case.
IV
The Respondent Court of Appeals erred in not finding the private respondent
guilty of operative negligence which is the proximate cause of the loss."
The material facts of the case are not disputed. The issue for resolution is, which bank is liable
for the payment of the altered check, the drawee bank (FNCB) or the collecting bank (Metro
Bank)?
The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17,
1949) as amended by Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30,
1964). Section 4 of said Circular, as amended, states:
"Section 4.Clearing Procedures.
(c)Procedures for Returned Items.
Items which should be returned for any reason whatsoever shall be delivered to
and received through the clearing Office in the special red envelopes and shall
be considered and accounted as debits to the banks to which the items are
returned. Nothing in this section shall prevent the returned items from being
settled by reimbursement to the bank, institution or entity returning the items.
All items cleared on a particular clearing shall be returned not later than 3:30
P.M. on the following business day.

xxx xxx xxx"
The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank
receiving the check for clearing from the Central Bank Clearing House must return the check to
the collecting bank within the 24-hour period if the check is defective for any reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the
other hand, relies on the guarantee of all previous indorsements made by Metro Bank which
guarantee had allegedly misled FNCB into believing that the check in question was regular and
the payee's indorsements genuine; as well as on "the general rule of law founded on equity and
justice that a drawee or payor bank which in good faith pays the amount of materially altered
check to the holder thereof is entitled to recover its payment from the said holder, even if he be
an innocent holder." 4
The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic
vs. Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are
part of our banking system, and both are subject to the regulations of the Central Bank, they are
bound by the 24-hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing
house period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of
Metro Bank to the alteration of the check in question until after the lapse of nine days, negates
whatever right it might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank, but against the party responsible for the
changing the name of the payee 5 and the amount on the face of the check.
FNCB contends that the stamp reading,
"Metropolitan Bank and Trust Company Cleared (illegible) office All prior
endorsements and/or Lack of endorsements Guaranteed." 6
made by Metro Bank is an unqualified representation that the endorsement on the check was
that of the true payee, and that the amount thereon was the correct amount. In that
connection, this Court in the Hongkong & Shanghai Bank case, supra, ruled: LLpr
" . . . But Plaintiff Bank insists that Defendant Bank is liable on its indorsement
during clearing house operations. The indorsement, itself, is very clear when it
begins with words 'For clearance, clearing office . . . In other words, such an
indorsement must be read together with the 24-hour regulation on clearing
House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased. This being so, Plaintiff Bank has
not made out a case for relief." 7
Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered
check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the
withdrawal of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and
first verified, through its Assistant Cashier Federico Uy, the regularity and genuineness of the
check deposit from Marcelo Mirasol, Department officer of FNCB, because its (Metro Bank)
attention was called by the fast movement of the account. Only upon being assured that the same
is 'not unusual' did Metro Bank allow the withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No.
3805, October 23, 1950, by stating:
" . . . The laxity of appellant in its dealing with customers particularly in cases
where the identity of the person is new to them (as in the case at bar) and in the
obvious carelessness of the appellant in handling checks which can easily be
forged or altered boil down to one conclusion-negligence in the first order. This
negligence enabled a swindler to succeed in fraudulently encashing the check in
question thereby defrauding drawee bank (appellee) in the amount thereof."
is misplaced not only because the factual milieu is not four square with this case but more so
because it cannot prevail over the doctrine laid down by this Court in the Hongkong &
Shanghai Bank case which is more in point and, hence, controlling: LibLex
WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is
hereby set aside, and Civil Case No. 61488 is hereby dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.
Plana, Vasquez, Relova and Gutierrez, Jr., JJ., concur.
Teehankee, J., took no part.
||| (Metropolitan Bank and Trust Co. v. First National City Bank, G.R. No. L-55079, November
19, 1982)


FIRST DIVISION
[G.R. No. L-42725. April 22, 1991.]
REPUBLIC BANK, petitioner, vs. COURT OF APPEALS and FIRST
NATIONAL CITY BANK, respondents.
Lourdes C. Dorado for petitioner.
Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.
SYLLABUS
1.COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE APPLIES
TO COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO COMPLY WITH RULE
ABSOLVES COLLECTING BANKS. The 24-hour clearing house rule is a valid rule
applicable to commercial banks (Republic vs. Equitable Banking Corporation, 10 SCRA 8
[1964]; MetropolitanBank & Trust Co. vs. First National City Bank, 118 SCRA 537). It is true
that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears
the loss (Banco de Oro Savings & Mortgage Bank vs. Equitable Banking Corp., 157 SCRA 188).
But the unqualified endorsement of the collecting bank on the check should be read together with
the 24-hour regulation on clearing house operation (Metropolitan Bank & Trust Co. vs. First
National City Bank, supra). Thus, when the drawee bank fails to return a forged or altered check
to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from
liability.
2.ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY RESPONSIBLE
FOR FORGERY OR ALTERATION. Every bank that issues checks for the use of its
customers should know whether or not the drawer's signature thereon is genuine, whether there
are sufficient funds in the drawer's account to cover checks issued, and it should be able to detect
alterations, erasures, superimpositions or intercalations thereon, for these instruments are
prepared, printed and issued by itself, it has control of the drawer's account, and it is supposed to
be familiar with the drawer's signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. Unless an alteration is attributable
to the fault or negligence of the drawer himself, such as when he leaves spaces on the check
which would allow the fraudulent insertion of additional numerals in the amount appearing
thereon, the remedy of the drawee bank that negligently clears a forged and/or altered check for
payment is against the party responsible for the forgery or alteration (Hongkong & Shanghai
Banking Corp. vs. People's Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may
not charge the amount so paid to the account of the drawer, if the latter was free from blame, nor
recover it from the collecting bank if the latter made payment after proper clearance from the
drawee.
D E C I S I O N
GRIO-AQUINO, J p:
On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No.
108854 for P240, Philippine currency, on its account in the respondent First National
CityBank ("FNCB" for brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check
had been delivered to Delgado, the amount on its face was fraudulently and without
authority of the drawer, SMC, altered by increasing it from P240 to P9,240. The check was
indorsed and deposited on March 14, 1966 by Delgado in his account with the
petitionerRepublic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its genuineness and regularity.
Later, Republic endorsed the check to FNCB by stamping on the back of the check "all prior
and/or lack of indorsement guaranteed" and presented it to FNCB for payment through the
Central Bank Clearing House. Believing the check was genuine, and relying on the guaranty and
endorsement of Republic appearing on the back of the check, FNCB paid P9,240
to Republic through the Central Bank Clearing House on March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check in
question. FNCB lost no time in recrediting P9,240 to SMC. On May 19, 1966, FNCB
informed Republic in writing of the alteration and the forgery of the endorsement of J. Roberto
C. Delgado. By then, Delgado had already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the latter's
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the
alteration; that it was not guilty of negligence; that it was the drawer's (SMC's) fault in drawing
the check in such a way as to permit the insertion of numerals increasing the amount; that FNCB,
as drawee, was absolved of any liability to the drawer (SMC), thus, FNCB had no
right of recourse against Republic.
On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB
with 6% interest per annum from February 27, 1967 until fully paid, plus P2,000 for attorney's
fees and costs of the suit. The Court of Appeals affirmed that decision, but modified the
award of attorney's fees by reducing it to P1,000 without pronouncement as to costs (CA-G.R.
No. 41691-R, December 22, 1975). cdrep
In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected,
by the 24-hour clearing house rule, found in CB Circular No. 9, as amended, from liability to
refund the amount paid by FNCB, as drawee of the SMC dividend check.
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as
amended, provides:
"Items which should be returned for any reason whatsoever shall be returned
directly to the bank, institution or entity from which the item was received. For
this purpose, the Receipt for Returned Checks (Cash Form No. 9) should be
used. The original and duplicate copies of said Receipt shall be given to
the Bank, institution or entity which returned the items and the triplicate copy
should be retained by the bank, institution or entity whose demand is being
returned. At the following clearing, the original of the Receipt for Returned
Checks shall be presented through the Clearing Office as a demand against
the bank, institution or entity whose item has been returned. Nothing in this
section shall prevent the returned items from being settled by direct
reimbursement to the bank, institution or entity returning the items. All items
cleared at 11:00 o'clock A.M. shall be returned not later than 2:00 o'clock P.M.
on the same day and all items cleared at 3:00 o'clock P.M. shall be returned not
later than 8:30 A.M. of the following business day except for items cleared on
Saturday which may be returned not later than 8:30 A.M. of the following day."
The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic vs.
Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. vs. First
National City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss (Banco de Oro Savings & Mortgage Bank vs. Equitable Banking Corp., 167
SCRA 188). But the unqualified endorsement of the collecting bank on the check should be read
together with the 24-hour regulation on clearing house operation (Metropolitan Bank & Trust
Co. vs. First National City Bank, supra). Thus, when the drawee bank fails to return a forged or
altered check to the collecting bank within the 24-hour clearing period, the collecting bank is
absolved from liability. The following decisions of this Court are also relevant and persuasive:
In Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co. (35 SCRA 140), a check
for P14,608.05 was drawn by the Philippine Long Distance Telephone Company on the
Hongkong & Shanghai Banking Corporation payable to the same bank. It was mailed to the
payee but fell into the hands of a certain Florentino Changco who erased the name ofthe payee,
typed his own name, and thereafter deposited the altered check in his account in the
People's Bank & Trust Co. which presented it to the drawee bank with the following
indorsement: LLphil
"For clearance, clearing office. All prior endorsements and or
lack of endorsements guaranteed. People's Bank and Trust Company."
The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the
People's Bank credited Changco with the amount of the check. Changco thereafter withdrew the
contents of his bank account. A month later, when the check was returned to PLDT, the
alteration was discovered. The Hongkong & Shanghai Bank sued to recover from the
People's Bank the sum of P14,608.05. The complaint was dismissed. Affirming the
decision of the trial court, this Court held:
"The entire case of plaintiff is based on the indorsement that has been heretofore
copied namely, a guarantee of all prior indorsement, made by
People's Bank and since such an indorsement carries with it a concomitant
guarantee of genuineness, the People's Bank is liable to the Hongkong
Shanghai Bank for alteration made in the name of payee. On the other hand, the
People's Bank relies on the '24-hour' regulation of the Central Bank that requires
after a clearing, that all cleared items must be returned not later than 3:00
P.M. of the following business day. And since the Hongkong
Shanghai Bank only advised the People's Bank as to the alteration on April 12,
1965 or 27 days after clearing, the People's Bank claims that it is now too late to
do so. This regulation of the Central Bank as to 24 hours is challenged by
Plaintiff Bank as being merely part of an ingenious device to facilitate banking
transactions. Be that what it may as both Plaintiff as well as Defendant
Banks are part of our banking system and both are subject to regulations of the
Central Bank they are both bound by such regulations. . . . But
Plaintiff Bank insists that Defendant Bank is liable on its indorsement during
clearing house operations. The indorsement, itself, is very clear when it begins
with the words 'For clearance, clearing office . . .' In other words, such an
indorsement must be read together with the 24-hour regulation on clearing
House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased. This being so, Plaintiff Bank has
not made out a case for relief."

"xxx xxx xxx
"Moreover, in one of the very cases relied upon by plaintiff, as appellant,
mention is made of a principle on which defendant Bank could have acted
without incurring the liability now sought to be imposed by plaintiff. Thus: 'It is
a settled rule that a person who presents for payment checks such as are here
involved guarantees the genuineness of the check, and the drawee bank need
concern itself with nothing but the genuineness of the signature, and the
state of the account with it of the drawee.' (Interstate Trust Co. vs. United States
NationalBank, 185 Pac. 260 [1919]). If at all, then, whatever remedy the
plaintiff has would lie not against defendant Bank but as against the party
responsible for changing the name of the payee. Its failure to call the
attention of defendant Bank as to such alteration until after the lapse of 27 days
would, in the light of the above Central Bank circular, negate whatever right it
might have had against defendant Bank. . . ." (35 SCRA 140, 142-143; 145-
146.)
In Metropolitan Bank & Trust Co. vs. First National City Bank, et al. (118 SCRA 537, 542) a
check for P50, drawn by Joaquin Cunanan and Company on its account at FNCB and payable to
Manila Polo Club, was altered by changing the amount to P50,000 and the payee was changed to
"Cash." It was deposited by a certain Salvador Sales in his current account in the
Metropolitan Bank which sent it to the clearing house. The check was cleared the same day by
FNCB which paid the amount of P50,000 to Metro Bank. Sales immediately withdrew the whole
amount and closed his account. Nine (9) days later, the alteration was discovered and FNCB
sought to recover from Metro Bank what it had paid. The trial court and
theCourt of Appeals rendered judgment for FNCB but this Court reversed it. We ruled:
"The validity of the 24-hour clearing house regulation has been upheld by
this Court in Republic vs. Equitable Banking Corporation, 10 SCRA 8 (1964).
As held therein, since both parties are part of our banking system, and both are
subject to the regulations of the Central Bank, they are bound by the 24-hour
clearing house rule of the Central Bank. prLL
"In this case, the check was not returned to Metro Bank in accordance with the
24-hour clearing house period, but was cleared by FNCB. Failure of FNCB,
therefore, to call the attention ofMetro Bank to the alteration of the check in
question until after the lapse of nine days, negates whatever right it might have
had against Metro Bank in the light of the said Central BankCircular. Its remedy
lies not against Metro Bank, but against the party responsible for changing the
name of the payee (Hongkong & Shanghai Banking Corp. vs. People's Bank &
Trust Co., 35 SCRA 140) and the amount on the face of the check." (p. 542.)
Every bank that issues checks for the use of its customers should know whether or not the
drawer's signature thereon is genuine, whether there are sufficient funds in the drawer's account
to cover checks issued, and it should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and issued by itself, it has
control of the drawer's account, and it is supposed to be familiar with the drawer's signature. It
should possess appropriate detecting devices for uncovering forgeries and/or alterations on these
instruments. Unless an alteration is attributable to the fault or negligence of the drawer himself,
such as when he leaves spaces on the check which would allow the fraudulent
insertion of additional numerals in the amount appearing thereon, the remedy of the
drawee bank that negligently clears a forged and/or altered check for payment is against the party
responsible for the forgery or alteration (Hongkong & Shanghai Banking Corp. vs.
People's Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge the
amount so paid to the account of the drawer, if the latter was free from blame, nor recover it
from the collecting bank if the latter made payment after proper clearance from the drawee. As
this Court pointed out in Philippine National Bank vs. Quimpo, et al., 158 SCRA 582, 584:
"There is nothing inequitable in such a rule for if in the regular
course of business the check comes to the drawee bank which, having the
opportunity to ascertain its character, pronounces it to be valid and pays it, it is
not only a question of payment under mistake, but payment in neglect of duty
which the commercial law places upon it, and the result of its negligence must
rest upon it."
The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank, the
burden of loss for the payment of the altered SMC check, the fraudulent character ofwhich
FNCB failed to detect and warn Republic about, within the 24-hour clearing house rule.
The Court of Appeals departed from the ruling of this Court in an earlier PNB case, that:
"Where a loss, which must be borne by one of two parties alike
innocent of forgery, can be traced to the neglect or fault of either, it is
reasonable that it would be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded. (Phil. National Bank vs. National
City Bank of New York, 63 Phil. 711, 733.)"
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby
reversed and set aside, and another is entered absolving the petitioner Republic Bankfrom
liability to refund to the First National City Bank the sum of P9,240, which the latter paid on the
check in question. No costs.
SO ORDERED.
||| (Republic Bank v. Court of Appeals, G.R. No. L-42725, April 22, 1991)


SECOND DIVISION
[G.R. No. 121413. January 29, 2001.]
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly
INSULAR BANK OF ASIA AND AMERICA), petitioner, vs. COURT OF
APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.
[G.R. No. 121479. January 29, 2001.]
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS
and CITIBANK, N.A. and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondents.
[G.R. No. 128604. January 29, 2001.]
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and THE COURT OF
APPEALS, respondents.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for Ford Philippines, Inc.
Agabin, Verzola, Hermoso, Layaoen & De Castro for private respondent PCIB.
Angara, Abello, Concepcion, Regala & Cruz for respondent Citibank.
SYNOPSIS
Ford Philippines drew and issued Citibank Check. No. SN 04867 on October 19, 1977, Citibank
Check No. SN 10597 on July 19, 1978 and Citibank Check No. SN-16508 on April 20, 1979, all
in favor of the Commissioner of Internal Revenue (CIR) for payment of its percentage taxes. The
checks were crossed and deposited with the IBAA, now PCIB, BIR's authorized collecting bank.
The first check was cleared containing an indorsement that "all prior indorsements and/or lack of
indorsements guaranteed." The same, however, was replaced with two (2) IBAA's managers'
checks based on a call and letter request made by Godofredo Rivera, Ford's General Ledger
Accountant, on an alleged error in the computation of the tax due without IBAA verifying the
authority of Rivera. These manager's checks were later deposited in another bank and
misappropriated by the syndicate. The last two checks were cleared by the Citibank but failed to
discover that the clearing stamps do not bear any initials. The proceeds of the checks were also
illegally diverted or switched by officers of PCIB members of the syndicate, who eventually
encashed them. Ford, which was compelled to pay anew the percentage taxes, sued in two
actions for collection against the two banks on January 20, 1983, barely six years from the date
the first check was returned to the drawer. The direct perpetrators of the crime are now fugitives
from justice.
In the first case, the trial court held that Citibank and IBAA were jointly and severally liable for
the checks, but on review by certiorari, the Court of Appeals held only IBAA (PCIB) solely
liable for the amount of the first check. In the second case involving the last two checks, the trial
court absolved PCIB from liability and held that only the Citibank is liable for the checks issued
by Ford. However, on appeal, the Court of Appeals held both banks liable for negligence in the
selection and supervision of their employees resulting in the erroneous encashment of the checks.
These two rulings became the subject of the present recourse.
The relationship between a holder of a commercial paper and the bank to which it is sent for
collection is that of a principal and an agent and the diversion of the amount of the check is
justified only by proof of authority from the drawer; that in crossed checks, the collecting bank is
bound to scrutinize the check and know its depositors before clearing indorsement; that as a
general rule, banks are liable for wrongful or tortuous acts of its agents within the scope and in
the course of their employment; that failure of the drawee bank to seasonably discover
irregularity in the checks constitutes negligence and renders the bank liable for loss of proceeds
of the checks; that an action upon a check prescribes in ten (10) years; and that the contributory
negligence of the drawer shall reduce the damages he may recover against the collecting bank.
SYLLABUS
1.CIVIL LAW; TORTS AND DAMAGES; LIABILITY OF MASTER FOR NEGLIGENCE OF
HIS OWN SERVANT OR AGENT. On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is instructive. Since a master may be
held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that
act is negligent or wrongful and proximately results in injury to a third person, the negligence or
wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable. The
general rule is that if the master is injured by the negligence of a third person and by the
concurring contributory negligence of his own servant or agent, the latter's negligence is imputed
to his superior and will defeat the superior's action against the third person, assuming, of course
that the contributory negligence was the proximate causeof the injury of which complaint is
made.
2.ID.; ID.; PROXIMATE CAUSE, DEFINED. As defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient, intervening cause produces the
injury, and without which the result would not have occurred.
3.ID.; ID.; LIABILITY OF MASTER FOR NEGLIGENCE OF HIS OWN SERVANT OR
AGENT; ESTOPPEL, REQUIRED. Given these circumstances, the mere fact that
the forgery was committed by a drawer-payor's confidential employee or agent, who by virtue of
his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon
the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer. This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential employees who hold them in their
possession.
4.MERCANTILE LAW; NEGOTIABLE INSTRUMENTS; CHECKS; RELATIONSHIP
BETWEEN HOLDER OF COMMERCIAL PAPER AND BANK TO WHICH IT IS SENT FOR
COLLECTION IS THAT OF PRINCIPAL AND AGENT; DIVERSION OF AMOUNT OF
CHECK, JUSTIFIED ONLY BY PROOF OF AUTHORITY FROM DRAWER. It is a well-
settled rule that the relationship between the payee or holder of commercial paper and the bank
to which it is sent for collection is, in the absence of an agreement to the contrary, that of
principal and agent. A bank which receives such paper for collection is the agent of the payee or
holder. Even considering arguendo, that the diversion of the amount of a check payable to the
collecting bank in behalf of the designated payee may be allowed, still such diversion must be
properly authorized by the payor. Otherwise stated, the diversion can be justified only by proof
of authority from the drawer, or that the drawer has clothed his agent with apparent authority to
receive the proceeds of such check.
5.ID.; ID.; ID.; CROSSED CHECKS; COLLECTING BANK BOUND TO SCRUTINIZE
CHECK AND KNOW ITS DEPOSITORS BEFORE CLEARING INDORSEMENT; CASE AT
BAR. Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning
that the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank PCIBank to ascertain that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the check and to
know its depositors before it could make the clearing indorsement "all prior indorsements and/or
lack of indorsement guaranteed." Lastly, banking business requires that the one who first cashes
and negotiates the check must take some precautions to learn whether or not it is genuine. And if
the one cashing the check through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check from the
drawee whose sole fault was that it did not discover the forgeryor the defect in the title of the
person negotiating the instrument before paying the check. For this reason, a bank which cashes
a check drawn upon another bank, without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot hold the proceeds against the
drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In
such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank)
had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence which proximately contributed to the
success of the fraud practiced on the drawee bank. The latter may recover from the holder the
money paid on the check. Having established that the collecting bank's negligence is the
proximate cause of the loss, we conclude that PCIBank is liable in the amount corresponding to
the proceeds of Citibank Check No. SN-04867.
6.CIVIL LAW; TORTS AND DAMAGES; AS A GENERAL RULE, BANKS ARE LIABLE
FOR WRONGFUL OR TORTUOUS ACT OF ITS OFFICERS OR AGENTS ACTING
WITHIN SCOPE AND COURSE OF EMPLOYMENT. As a general rule, however, a
banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their employment.
It may be liable for the tortuous acts of its officers even as regards that species of tort of which
malice is an essential element. A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the
general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent
acting within the course and apparent scope of his employment or authority. And if an officer or
employee of a bank, in his official capacity, receives money to satisfy an evidence of
indebtedness lodged with his bank for collection, the bank is liable for his misappropriation of
such sum.

7. ID.; ID.; ID.; FAILURE OF DRAWEE BANK TO DISCOVER ABSENCE OF INITIALS
ON CLEARING STAMPS CONSTITUTES NEGLIGENCE. Citibank should have
scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the
proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials.
Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would
have been discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in
our view, constitutes negligence in carrying out the bank's duty to its depositors. The point is that
as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
8. ID.; ID.; ID.; DOCTRINE OF COMPARATIVE NEGLIGENCE RENDERS BANKS
LIABLE FOR LOSS OF PROCEEDS OF CHECKS; RATIONALE. Thus, invoking the
doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in
their respective obligations and both were negligent in the selection and supervision of their
employees resulting in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we
are constrained to hold them equally liable for the loss of the proceeds of said checks issued by
Ford in favor of the CIR. Time and again, we have stressed that banking business is so impressed
with public interest where the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be very high, if not the highest,
degree of diligence. A bank's liability as obligor is not merely vicarious but primary, wherein the
defense of exercise of due diligence in the selection and supervision of its employees is of no
moment. Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees. Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their employees.
9. ID.; PRESCRIPTION OF ACTIONS; ACTION UPON A CHECK PRESCRIBES IN TEN
YEARS. The statute of limitations begins to run when the bank gives the depositor notice of
the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher
with a statement of his account, and an action upon a check is ordinarily governed by the
statutory period applicable to instruments in writing. Our laws on the matter provide that the
action upon a written contract must be brought within ten years from the time the right of action
accrues. Hence, the reckoning time for the prescriptive period begins when the instrument was
issued and the corresponding check was returned by the bank to its depositor (normally a month
thereafter).
10. ID.; ID.; ID.; CASE AT BAR. Applying the same rule, the cause of action for the
recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on January 20,
1983, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by
law.
11.ID.; DAMAGES; CONTRIBUTORY NEGLIGENCE OF PLAINTIFF SHALL REDUCE
DAMAGES HE MAY RECOVER. Finally, we also find that Ford is not completely
blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its
passbook, statements of account, and cancelled checks and to give notice within a reasonable
time (or as required by statute) of any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks' liability by reducing the award of interest
from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the
Civil Code of the Philippines, 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. In quasi-delicts, the contributory negligence of the plaintiff shall
reduce the damages that he may recover.
D E C I S I O N
QUISUMBING, J p:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank
(PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to
the Commissioner of Internal Revenue, which were embezzled allegedly by an organized
syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of
the Court of Appeals in CA-G.R CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank
N.A. and Insular Bank of Asia and America (now Philippine Commercial International Bank),
and the August 8, 1995 Resolution, 2 ordering the collecting bank Philippine Commercial
International Bank to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the
Court of Appeals and its March 5, 1997 Resolution 4 in CA-G.R. No. 28430 entitled "Ford
Philippines, Inc. vs. Citibank N.A. and Philippine Commercial International Bank," affirming in
toto the judgment of the trial court holding the defendant drawee bank Citibank N.A., solely
liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiff's Citibank Check Numbers SN-10597 and 16508.
I. GR Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check
No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiff's percentage or manufacturer's sales
taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank)
and was subsequently cleared at the Central Bank. Upon presentment with the
defendant Citibank, the proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal
Revenue, the plaintiff was compelled to make a second payment to the Bureau
of Internal Revenue of its percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account with
defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel lines and written in between
said lines was the phrase "Payee's Account Only"; and that defendant Citibank
paid the full face value of the check in the amount of P4,746,114.41 to the
defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank, Alabang
Branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with
the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA,
through its Ermita Branch. The latter accepted the check and sent it to the
Central Clearing House for clearing on the same day, with the indorsement at
the back "all prior indorsements and/or lack of indorsements guaranteed."
Thereafter, defendant IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the latter paid the face value of
the check in the amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the defendant Citibank
and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in
the amount of P4,746,114.41 was not paid to the Commissioner of Internal
Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by
the BIR for the payment of the taxes covered by the said checks, then plaintiff
shall hold the defendants liable for reimbursement of the face value of the same.
Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal
Revenue addressed to the plaintiff supposed to be Exhibit "D", the latter was
officially informed, among others, that its check in the amount of P4,746,114.41
was not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff
on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiff's percentage tax for the third
quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it
had made for the second time to the BIR of its percentage taxes, plaintiff filed
on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCI Bank) with the latter as the surviving
entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank
Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it
merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence
of defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's
Citibank Check No. SN-04867 was paid to defendant IBAA as collecting bank,
plaintiff was maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by the National Bureau of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo
Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check
because there was an error in the computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera's instruction, PCIBank replaced the check with two of its own Manager's
Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific
Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action. The court likewise dismissed
the third-party complaint against Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
1.Ordering the defendants Citibank and IBAA (now PCI Bank), jointly
and severally, to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-
04867, with interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed until the
amount is fully paid, plus costs;
2.On defendant Citibank's cross-claim: ordering the cross-defendant
IBAA (now PCI BANK) to reimburse defendant Citibank for
whatever amount the latter has paid or may pay to the plaintiff in
accordance with the next preceding paragraph;
3.The counterclaims asserted by the defendants against the plaintiff, as
well as that asserted by the cross-defendant against the cross-
claimant are dismissed, for lack of merits; and
4.With costs against the defendants.
SO ORDERED." 6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
respective petitions for review on certiorari to the Court of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed
decision with modifications.
The court hereby renders judgment:
1.Dismissing the complaint in Civil Case No. 49287 insofar as defendant
Citibank N.A. is concerned;
2.Ordering the defendant IBAA now PCI Bank to pay the plaintiff the
amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest thereon at
the legal rate starting January 20, 1983. the date when the
original complaint was filed until the amount is fully paid;
3.Dismissing the counterclaims asserted by the defendants against the
plaintiff as well as that asserted by the cross-defendant against
the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED." 7
PCIBank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford
filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under
Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth
Division of the Court of Appeals contending that it merely acted on the instruction of Ford and
such cause of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I.Did the respondent court err when, after finding that the petitioner acted on the
check drawn by respondent Ford on the said respondent's instructions, it
nevertheless found the petitioner liable to the said respondent for the full
amount of the said check.
II.Did the respondent court err when it did not find prescription in favor of the
petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same
decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the
decision of the trial court which found both PCIBank and Citibank jointly and severally liable for
the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I.Respondent Citibank is liable to petitioner Ford considering that:
1.As drawee bank, respondent Citibank owes to petitioner Ford, as the
drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2.Respondent Citibank failed to observe its duty as banker with respect
to the subject check, which was crossed and payable to "Payee's
Account Only."
3.Respondent Citibank raises an issue for the first time on appeal; thus
the same should not be considered by the Honorable Court.
4.As correctly held by the trial court, there is no evidence of gross
negligence on the part of petitioner Ford. 9
II.PCIBank is liable to petitioner Ford considering that:
1.There were no instructions from petitioner Ford to deliver the proceeds
of the subject check to a person other than the payee named
therein, the Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue. 10
2.PCIBank which affixed its indorsement on the subject check ("All
prior indorsement and/or lack of indorsement guaranteed"), is
liable as collecting bank. 11
3.PCIBank is barred from raising issues of fact in the instant
proceedings. 12
4.Petitioner Ford's cause of action had not prescribed. 13
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle
Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the Commissioner
of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-
1697160 was issued for the said purpose. DcSEHT
Both checks were "crossed checks" and contain two diagonal lines on its upper left corner
between which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR,
Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were considered "fake
and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The
findings forced Ford to pay the BIR anew, while an action was filed against Citibank and
PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tied the case, made its findings on
the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiff's check marked
Ex. 'A' [Citibank Check No. SN-10597] for payment to the BIR. Instead,
however, of delivering the same to the payee, he passed on the check to a co-
conspirator named Remberto Castro who was a pro-manager of the San Andres
Branch of PCIB. * In connivance with one Winston Dulay, Castro himself
subsequently opened a Checking Account in the name of a fictitious person
denominated as 'Reynaldo Reyes' in the Meralco Branch of PCIBank where
Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first
FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed
through PCIB's main office enroute to the Central Bank for clearing, replaced
this worthless check with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As a result, Exhibit 'A' was
cleared by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total
amount of the FORD check Exhibit 'A'. The same method was again utilized by
the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which
was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the
shares of the other participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the method for the embezzlement;
(2) RODOLFO R. DE LEON a customs broker who negotiated the initial
contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto
Castro; (3) JUAN CASTILLO who assisted de Leon in the initial arrangements;
(4) GODOFREDO RIVERA, FORD's accountant who passed on the first check
(Exhibit "A") to Castro; (5) REMBERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the clearing process and
opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh.
"B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who
provided the fake and spurious revenue tax receipts to make it appear that the
BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in
the disbursements of the proceeds of the two checks, but like the
aforementioned participants in the conspiracy, have not been impleaded in the
present case. The manner by which the said funds were distributed among them
are traceable from the record of checks drawn against the original "Reynaldo
Reyes" account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so." 14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank,
liable for the value of the two checks while absolving PCIBank from any liability, disposing as
follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK
to reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in
its complaint, with 6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorney's fees and expenses of litigation, and to
pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED." 15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of
the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant
PCIBank considering that:
I.Defendant PCIBank was clearly negligent when it failed to exercise the
diligence required to be exercised by it as a banking institution.
II.Defendant PCIBank clearly failed to observe the diligence required in the
selection and supervision of its officers and employees.
III.Defendant PCIBank was, due to its negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a consequence of the
substitution of the check consistent with Section 5 of Central Bank
Circular No. 580 series of 1977.
IV.Assuming arguendo that defendant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article
2154 of the Civil Code, to return the money which it admits having
received, and which was credited to it in its Central Bank account. 16
The main issue presented for our consideration by these petitions could be simplified as follows:
Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the Commissioner of Internal
Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the
person negotiating the same was allegedly defective because the instrument was obtained by
fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was
established that instead of paying the checks to the CIR, for the settlement of the appropriate
quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual
distribution among the members of the syndicate. As to the unlawful negotiation of the check the
applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or
any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith
or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in
breach of faith amounting to fraud. The person negotiating the checks must have gone beyond
the authority given by his principal. If the principal could prove that there was no negligence in
the performance of his duties, he may set up the personal defense to escape liability and recover
from other parties who, through their own negligence, allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging
to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability
for the embezzlement of millions of pesos. We are thus left only with the task of determining
who of the present parties before us must bear the burden of loss of these millions. It all boils
down to the question of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing in mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the
checks to his co-conspirators, instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in
the supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period
of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to
divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to
the subsequent run-around of funds of Citibank Check Nos. SN-10597 and 16508, PCIBank
claims that the proximate cause of the damage to Ford lies in its own officers and employees
who carried out the fraudulent schemes and the transactions. These circumstances were not
checked by other officers of the company, including its comptroller or internal auditor. PCIBank
contends that the inaction of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible, by his act of negligence, must
bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was
no evidence presented before the trial court showing lack of diligence on the part of Ford. And,
citing the case of Gempesaw vs. Court of Appeals, 17 Ford argues that even if there was a finding
therein that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to make any
representation in its behalf, specifically, to divert the proceeds of the checks. It adds that
Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it
should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant
relationship is instructive. Since a master may be held for his servant's wrongful act, the law
imputes to the master the act of the servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is liable. 18 The general rule is that if
the master is injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter's negligence is imputed to his superior and will
defeat the superior's action against the third person, assuming, of course that the contributory
negligence was the proximate cause of the injury of which complaint is made. 19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's
General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the
loss or damage. As defined, proximate cause is that which, in the natural and continuous
sequence, unbroken by any efficient, intervening cause produces the injury, and without which
the result would not have occurred. 20
It appears that although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as
the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to
recall Citibank Check No. SN-04867. Rivera's instruction to replace the said check with
PCIBank's Manager's Check was not in the ordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these
checks were made payable to the CIR. Both were crossed checks. These checks were apparently
turned around by Ford's employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to
shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer. 21 This rule likewise applies to the checks fraudulently negotiated or diverted by the
confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved,
separately, the trial courts found variations between the negotiation of Citibank Check No. SN-
04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we
have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was
coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement
at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented
to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The
neglect of PCIBank employees to verify whether his letter requesting for the replacement of the
Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required
in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in
behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding
the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to
wit:
". . . Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it has
the responsibility to make sure that the check in question is deposited in Payee's
account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person
especially so when that person is not known to the defendant. It is very
imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of one (Godofredo Rivera and in his signature to the authenticity
of such signature considering that the plaintiff is not a client of the defendant
IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an agreement to the contrary, that
of principal and agent. 22 A bank which receives such paper for collection is the agent of the
payee or holder. 23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting
bank in behalf of the designated payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be justified only by proof of
authority from the drawer, or that the drawer has clothed his agent with apparent authority to
receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned
checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS
GUARANTEED should render PCIBank liable because it made it pass through the clearing
house and therefore Citibank had no other option but to pay it. Thus, Citibank asserts that the
proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questioned
crossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of
the BIR, it had the responsibility to make sure that the check in question is deposited in Payee's
account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting
bank PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is
the collecting bank (PCIBank) which is bound to scrutinize the check and to know its depositors
before it could make the clearing indorsement "all prior indorsements and/or lack of indorsement
guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at
the back of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's
warranty. As the warranty has proven to be false and inaccurate, the defendant
is liable for any damage arising out of the falsity of its representation." 25
Lastly, banking business requires that the one who first cashes and negotiates the check must
take some precautions to learn whether or not it is genuine. And if the one cashing the check
through indifference or other circumstance assists the forger in committing the fraud, he should
not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it
did not discover the forgery or the defect in the title of the person negotiating the instrument
before paying the check. For this reason, a bank which cashes a check drawn upon another bank,
without requiring proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right
to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn received payment thereon from the drawee,
is guilty of negligence which proximately contributed to the success of the fraud practiced on the
drawee bank. The latter may recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the loss, we
conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check
No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary
course of business that would attribute to it the case of the embezzlement of Citibank Check
Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford
checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is
convinced that the switching operation (involving the checks while in transit for
"clearing") were the clandestine or hidden actuations performed by the members
of the syndicate in their own personal, covert and private capacity and done
without the knowledge of the defendant PCIBank. . . ." 27
In this case, there was no evidence presented confirming the conscious participation of PCIBank
in the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful
or tortuous acts and declarations of its officers or agents within the course and scope of their
employment. 28 A bank will be held liable for the negligence of its officers or agents when
acting within the course and scope of their employment. It may be liable for the tortuous acts of
its officers even as regards that species of tort of which malice is an essential element. In this
case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched
by a syndicate in which its own management employees had participated:
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check
Numbers SN 10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager
of PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the
same amount of Ford checks. The syndicate tampered with the checks and succeeded in
replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597
and 16508. The PCIBank Pro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity or authority but for
their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit
by the frauds these officers or agents were enabled to perpetrate in the apparent course of their
employment; nor will it be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority. 29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum. 30

Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular No. 580,
Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the
account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford's checks were
made in due course and legally in order. In its defense, Citibank claims the genuineness and due
execution of said checks, considering that Citibank (1) has no knowledge of any infirmity in the
issuance of the checks in question (2) coupled by the fact that said checks were sufficiently
funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCIBank
(formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
contractual duty to pay the proceeds of the subject check only to the payee thereof, the
CIR. Citing Section 62 32 of the Negotiable Instruments Law, Ford argues that by accepting the
instrument, the acceptor which is Citibank engages that it will pay according to the tenor of its
acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the
check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by
Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship
existing between the two. Citibank, as the drawee bank breached its contractual obligation with
Ford and such degree of culpability contributed to the damage caused to the latter. On this score,
we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying
the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the
record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear
any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been
duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508
would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to
its designated payee. The fact that the drawee bank did not discover the irregularity seasonably,
in our view, constitutes negligence in carrying out the bank's duty to its depositors. The point is
that as a business affected with public interest and because of the nature of its functions, the bank
is under obligation to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank
and Citibank failed in their respective obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597
and 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest
where the trust and confidence of the public in general is of paramount importance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence. 34 A
bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos. 36 By the very nature of their work
the degree of responsibility, care and trustworthiness expected of their employees and officials is
far greater than those of ordinary clerks and employees. 37 Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of
its inability to seek judicial relief seasonably, considering that the alleged negligent act took
place prior to December 19, 1977 but the relief was sought only in 1983, or seven years
thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment,
which is ordinarily when the check is returned to the alleged drawer as a voucher with a
statement of his account, 39 and an action upon a check is ordinarily governed by the statutory
period applicable to instruments in writing. 40
Our laws on the matter provide that the action upon a written contract must be brought within ten
years from the time the right of action accrues. 41 Hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the corresponding check was returned by the
bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action
for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month
after December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on January 20,
1983, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by
law.
Finally, we also find that Ford is not completely blameless in its failure to detect the fraud.
Failure on the part of the depositor to examine its passbook, statements of account, and cancelled
checks and to give notice within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves to mitigate the banks'
liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per
annum. As provided in Article 1172 of the Civil Code of the Philippines, 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. In quasi-delicts, the
contributory negligence of the plaintiff shall reduce the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 25017 are AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and America, is
declared solely responsible for the loss of the proceeds of Citibank Check No. SN 04867 in the
amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to
Ford Philippines Inc. from the date when the original complaint was filed until said amount is
fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are
MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until
full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank, N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
||| (Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, 121479,
128604, January 29, 2001)














SECOND DIVISION
[G.R. No. 139130. November 27, 2002.]
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and
THE MANILA BANKING CORPORATION, respondents.
People's Law Office for petitioner.
Puyat Jacinto & Santos and Asedillo and Associates for TMBC.
SYNOPSIS
Petitioner is a prominent businessman, and as he was going out of the country a number of times,
he entrusted to his secretary his credit cards and his checkbook with blank checks. Subsequently,
petitioner filed a criminal action against his aforesaid secretary for estafa thru falsification for
encashing and depositing to her personal account seventeen checks drawn against the account of
the petitioner at respondent bank. Petitioner then requested the respondent bank to credit back
and restore to his account the value of the checks which were wrongfully encashed, but
respondent bank refused. Hence, petitioner filed the instant case. Manila Bank sought the
expertise of the National Bureau of Investigation in determining the genuineness of the
signatures appearing on the checks. However, petitioner failed to submit his specimen signatures
for purposes of comparison with those on the questioned checks. Consequently, the trial court
dismissed the case. On appeal, the Court of Appeals held that petitioner's own negligence was
the proximate cause of his loss. Hence, this petition. SaDICE
In affirming the decision of the Court of Appeals, the Supreme Court ruled that petitioner has no
cause of action against Manila Bank. To be entitled to damages, petitioner has the burden of
proving negligence on the part of the bank for failure to detect the discrepancy in the signatures
on the checks. It is incumbent upon petitioner to establish the fact offorgery, i.e., by submitting
his specimen signatures and comparing them with those on the questioned checks. Petitioner, by
his own inaction, was precluded from setting upforgery.
The Court likewise ruled that under Section 23 of the Negotiable Instruments Law, petitioner is
precluded from setting up the forgery, assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and checkbook including the verification of his
statements of account.
SYLLABUS
1.REMEDIAL LAW; EVIDENCE; CREDIBILITY; FACTUAL FINDINGS OF TRIAL
COURT, GENERALLY NOT DISTURBED ON APPEAL. We stress the rule that the factual
findings of a trial court, especially when affirmed by the appellate court, are binding upon us and
entitled to utmost respect and even finality. We find no palpable error that would warrant a
reversal of the appellate court's assessment of facts anchored upon the evidence on record.
2.CIVIL LAW; QUASI-DELICT; DAMAGES CANNOT BE RECOVERED WHEN
PLAINTIFF'S OWN NEGLIGENCE IS THE IMMEDIATE AND PROXIMATE CAUSE OF
INJURY; CASE AT BAR. Petitioner's failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. In the instant case, the bank was not shown to
be remiss in its duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the bank's attention at the earliest
opportunity. But, petitioner failed to examine these bank statements not because he was
prevented by some cause in not doing so, but because he did not pay sufficient attention to the
matter. Had he done so, he could have been alerted to any anomaly committed against him. In
other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by
his secretary had he only reviewed the status of his accounts based on the bank statements sent to
him regularly. In view of Article 2179 of the New Civil Code, when the plaintiff's own
negligence was the immediate and proximate cause of his injury, no recovery could be had for
damages.
3.COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; FORGERY; EFFECT OF
FORGED SIGNATURE; EXCEPTION; CASE AT BAR. Petitioner further contends that
under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that
Manila Bank had no authority to pay the forged checks. True, it is a rule that when a signature is
forged or made without the authority of the person whose signature it purports to be, the check is
wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party, can be acquired through or under such signature.
However, the rule does provide for an exception, namely: "unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority." In the
instant case, it is the exception that applies. In our view, petitioner is precluded from setting up
the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his
credit cards and checkbook including the verification of his statements of account.
4.REMEDIAL LAW; CRIMINAL PROCEDURE; PROSECUTION OF OFFENSES;
PLAINTIFF IN CRIMINAL ACTION IS THE STATE, FOR THE COMMISSION OF
FELONY IS AN OFFENSE AGAINST THE STATE; CASE AT BAR. [T]he fact that
Manila Bank had filed a case for estafa against Eugenio would not stop it from asserting the fact
that forgery has not been clearly established. Petitioner cannot hold private respondent in
estoppel for the latter is not the actual party to the criminal action. In a criminal action, the State
is the plaintiff, for the commission of a felony is an offense against the State. Thus, under
Section 2, Rule 110 of the Rules of Court the complaint or information filed in court is required
to be brought in the name of the "People of the Philippines." SCDaET
D E C I S I O N
QUISUMBING, J p:
This petition for review seeks to reverse the decision 1 promulgated on January 28, 1999 by the
Court of Appeals in CA-G.R. CV No. 47942, affirming the decision of the then Court of First
Instance of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch 138) dismissing
Civil Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing
Director of Multinational Investment Bancorporation and the Chairman and/or President of
several other corporations. He was a depositor in good standing of respondent bank, the Manila
Banking Corporation, under current Checking Account No. 06-09037-0. As he was then running
about 20 corporations, and was going out of the country a number of times, petitioner entrusted
to his secretary, Katherine 2 E. Eugenio, his credit cards and his checkbook with blank checks. It
was also Eugenio who verified and reconciled the statements of said checking account. 3
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and
deposit to her personal account about seventeen (17) checks drawn against the account of the
petitioner at the respondent bank, with an aggregate amount of P119,634.34. Petitioner did not
bother to check his statement of account until a business partner apprised him that he saw
Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal
action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal.
Private respondent, through an affidavit executed by its employee, Mr. Dante Razon, also lodged
a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of
petitioner's statement that his signatures in the checks were forged. 4 Mr. Razon's affidavit states:
That I have examined and scrutinized the following checks in accordance with
prescribed verification procedures with utmost care and diligence by comparing
the signatures affixed thereat against the specimen signatures of Mr. Ramon K.
Ilusorio which we have on file at our said office on such dates,
xxx xxx xxx
That the aforementioned checks were among those issued by Manilabank in
favor of its client MR. RAMON K. ILUSORIO, . . .
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at our said
office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning
his signature appearing on the checks further alleged to have not authorized the
issuance and encashment of the same. . . . 5
Petitioner then requested the respondent bank to credit back and restore to its account the value
of the checks which were wrongfully encashed but respondent bank refused. Hence, petitioner
filed the instant case. 6
At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as
narrated above, and how he discovered the alleged forgeries. Several employees of Manila Bank
were also called to the witness stand as hostile witnesses. They testified that it is the bank's
standard operating procedure that whenever a check is presented for encashment or clearing, the
signature on the check is first verified against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in
determining the genuineness of the signatures appearing on the checks. However, in a letter
dated March 25, 1987, the NBI informed the trial court that they could not conduct the desired
examination for the reason that the standard specimens submitted were not sufficient for
purposes of rendering a definitive opinion. The NBI then suggested that petitioner be asked to
submit seven (7) or more additional standard signatures executed before or about, and
immediately after the dates of the questioned checks. Petitioner, however, failed to comply with
this request.

After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994
with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
defendant bank, in the light of the foregoing considerations and established
facts, this case would have to be, as it is hereby DISMISSED.
Defendant's counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED. 7
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review
but without success. The appellate court held that petitioner's own negligence was the proximate
cause of his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant.
SO ORDERED. 8
Before us, petitioner ascribes the following errors to the Court of Appeals:
A.THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
RESPONDENT BANK IS ESTOPPED FROM RAISING THE
DEFENSE THAT THERE WAS NO FORGERY OF THE
SIGNATURES OF THE PETITIONER IN THE CHECK BECAUSE
THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR
ESTAFA THRU FALSIFICATION OF COMMERCIAL
DOCUMENTS AGAINST KATHERINE EUGENIO USING THE
AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES
WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT. 9
B.THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,
NEGOTIABLE INSTRUMENTS LAW. 10
C.THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN
OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE
DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER,
AND THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND
SUPERVISION OF ITS EMPLOYEES. 11
D.THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD
BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST
KATHERINE EUGENIO ESTEBAN. 12
Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against
private respondent; and (2) whether or not private respondent, in filing an estafa case against
petitioner's secretary, is barred from raising the defense that the fact of forgery was not
established. aDSIHc
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect
the discrepant checks. He adds that as a general rule a bank which has obtained possession of a
check upon an unauthorized or forged endorsement of the payee's signature and which collects
the amount of the check from the drawee is liable for the proceeds thereof to the payee.
Petitioner invokes the doctrine of estoppel, saying that having itself instituted a forgery case
against Eugenio, Manila Bank is now estopped from asserting that the fact of forgery was never
proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the
accepted and usual course of judicial proceedings, hence there is no reason for the reversal of its
ruling. Manila Bank additionally points out that Section 23 13 of the Negotiable Instruments
Law is inapplicable, considering that the fact of forgery was never proven. Lastly, the bank
negates petitioner's claim of estoppel. 14
On the first issue, we find that petitioner has no cause of action against Manila Bank. To be
entitled to damages, petitioner has the burden of proving negligence on the part of the bank for
failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner
to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing them
with those on the questioned checks. Curiously though, petitioner failed to submit additional
specimen signatures as requested by the National Bureau of Investigation from which to draw a
conclusive finding regarding forgery. The Court of Appeals found that petitioner, by his own
inaction, was precluded from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiff's evidence on the alleged forgery is not convincing enough. The burden
to prove forgery was upon the plaintiff, which burden he failed to discharge.
Aside from his own testimony, the appellant presented no other evidence to
prove the fact of forgery. He did not even submit his own specimen signatures,
taken on or about the date of the questioned checks, for examination and
comparison with those of the subject checks. On the other hand, the appellee
presented specimen signature cards of the appellant, taken at various years,
namely, in 1976, 1979 and 1981 (Exhibits "1", "2", "3" and "7"), showing
variances in the appellant's unquestioned signatures. The evidence further shows
that the appellee, as soon as it was informed by the appellant about his
questioned signatures, sought to borrow the questioned checks from the
appellant for purposes of analysis and examination (Exhibit "9"), but the same
was denied by the appellant. It was also the former which sought the assistance
of the NBI for an expert analysis of the signatures on the questioned checks, but
the same was unsuccessful for lack of sufficient specimen signatures.
15

Moreover, petitioner's contention that Manila Bank was remiss in the exercise of its duty as
drawee lacks factual basis. Consistently, the CA and the RTC found that Manila Bank employees
exercised due diligence in cashing the checks. The bank's employees in the present case did not
have a hint as to Eugenio's modus operandi because she was a regular customer of the bank,
having been designated by petitioner himself to transact in his behalf. According to the appellate
court, the employees of the bank exercised due diligence in the performance of their duties.
Thus, it found that:
The evidence on both sides indicates that TMBC's employees exercised due
diligence before encashing the checks. Its verifiers first verified the drawer's
signatures thereon as against his specimen signature cards, and when in doubt,
the verifier went further, such as by referring to a more experienced verifier for
further verification. In some instances the verifier made a confirmation by
calling the depositor by phone. It is only after taking such precautionary
measures that the subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake
in failing to detect any forgery if indeed there was. However, a mistake is not
equivalent to negligence if they were honest mistakes. In the instant case, we
believe and so hold that if there were mistakes, the same were not deliberate,
since the bank took all the precautions. 16
As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the
omission to do something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. 17 In the present case, it appears that petitioner accorded
his secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check
books, bank statements, including custody and possession of cancelled checks and reconciliation
of accounts. Said the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for purposes of
reconciliation of his account, through a letter dated July 14, 1980 (Exhibit "8").
Thus, the said secretary became a familiar figure in the bank. What is worse,
whenever the bank verifiers call the office of the appellant, it is the same
secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said
secretary, by entrusting not only his credit cards with her but also his checkbook
with blank checks. He also entrusted to her the verification and reconciliation of
his account. Further adding to his injury was the fact that while the bank was
sending him the monthly Statements of Accounts, he was not personally
checking the same. His testimony did not indicate that he was out of the country
during the period covered by the checks. Thus, he had all the opportunities to
verify his account as well as the cancelled checks issued thereunder month
after month. But he did not, until his partner asked him whether he had
entrusted his credit card to his secretary because the said partner had seen her
use the same. It was only then that he was minded to verify the records of his
account. 18
The abovecited findings are binding upon the reviewing court. We stress the rule that the factual
findings of a trial court, especially when affirmed by the appellate court, are binding upon
us 19 and entitled to utmost respect 20 and even finality. We find no palpable error that would
warrant a reversal of the appellate court's assessment of facts anchored upon the evidence on
record. SCHIcT
Petitioner's failure to examine his bank statements appears as the proximate cause of his own
damage. Proximate cause is that cause, which, in natural and continuous sequence, unbroken by
any efficient intervening cause, produces the injury, and without which the result would not have
occurred. 21 In the instant case, the bank was not shown to be remiss in its duty of sending
monthly bank statements to petitioner so that any error or discrepancy in the entries therein could
be brought to the bank's attention at the earliest opportunity. But, petitioner failed to examine
these bank statements not because he was prevented by some cause in not doing so, but because
he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to
any anomaly committed against him. In other words, petitioner had sufficient opportunity to
prevent or detect any misappropriation by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him regularly. In view of Article 2179 of the New
Civil Code,22 when the plaintiff's own negligence was the immediate and proximate cause of his
injury, no recovery could be had for damages.

Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged
check is inoperative, and that Manila Bank had no authority to pay the forged checks. True, it is
a rule that when a signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party, can be acquired
through or under such signature. However, the rule does provide for an exception, namely:
"unless the party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority." In the instant case, it is the exception that applies. In our view,
petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own
negligence in entrusting to his secretary his credit cards and checkbook including the verification
of his statements of account.
Petitioner's reliance on Associated Bank vs. Court of Appeals 23 and Philippine Bank of
Commerce vs. CA 24 to buttress his contention that respondent Manila Bank as the collecting or
last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all
prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the
present case, the fact of forgery was not established with certainty. In those cited cases, the
collecting banks were held to be negligent for failing to observe precautionary measures to detect
the forgery. In the case before us, both courts below uniformly found that Manila Bank's
personnel diligently performed their duties, having compared the signature in the checks from
the specimen signatures on record and satisfied themselves that it was petitioner's.
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would
not estop it from asserting the fact that forgery has not been clearly established. Petitioner cannot
hold private respondent in estoppel for the latter is not the actual party to the criminal action. In a
criminal action, the State is the plaintiff, for the commission of a felony is an offense against the
State. 25 Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information
filed in court is required to be brought in the name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against
Eugenio on the basis of petitioner's own affidavit, 27 but without admitting that he had any
personal knowledge of the alleged forgery. It is, therefore, easy to understand that the filing of
the estafa case by respondent bank was a last ditch effort to salvage its ties with the petitioner as
a valuable client, by bolstering the estafa case which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of Appeals. AaIDHS
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the
Court of Appeals dated January 28, 1999 in CA-G.R. CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
Bellosillo, Acting C.J., Mendoza, Austria-Martinez and Callejo, Sr., JJ., concur.
||| (Ilusorio v. Court of Appeals, G.R. No. 139130, November 27, 2002)















SECOND DIVISION
[G.R. No. 129015. August 13, 2004.]
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,
INC., petitioner, vs. FAR EAST BANK AND TRUST COMPANY AND
COURT OF APPEALS, respondents.
D E C I S I O N
TINGA, J p:
Called to fore in the present petition is a classic textbook question if a bank pays out on a
forged check, is it liable to reimburse the drawer from whose account the funds were paid out?
The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous
reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (Samsung Construction), while
based in Bian, Laguna, maintained a current account with defendant Far East Bank and Trust
Company 1 (FEBTC) at the latters Bel-Air, Makati branch. 2 The sole signatory to Samsung
Constructions account was Jong Kyu Lee (Jong), its Project Manager, 3 while the checks
remained in the custody of the companys accountant, Kyu Yong Lee (Kyu). 4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No.
432100 to the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Constructions account. After ascertaining there were enough funds to cover
the check, 5 she compared the signature appearing on the check with the specimen signature of
Jong as contained in the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter presented three (3)
identification cards. 6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One
Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the
signature on the check as against that on the signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu,
another bank officer, for approval. Syfu then noticed that Jose Sempio III (Sempio), the
assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of Samsung Construction.
Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature.
Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong,
Syfu authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the
bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand
Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a
check for Jongs signature, Kyu perused the checkbook and found that the last blank check was
missing. 7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check. 8 Jong proceeded
to the police station and consulted with his lawyers. 9 Subsequently, a criminal case for qualified
theft was filed against Sempio before the Laguna court. 10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC
credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), with interest. 11 In response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June
1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment
of the amount debited as a result of the questioned check plus interest, and attorneys
fees. 12 The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court
(RTC) of Manila, Branch 9. 13
During the trial, both sides presented their respective expert witnesses to testify on the claim that
Jongs signature was forged. Samsung Corporation, which had referred the check for
investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She
testified that based on her examination, she concluded that Jongs signature had been forged on
the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National
Police (PNP), 14 presented Rosario C. Perez, a document examiner from the PNP Crime
Laboratory. She testified that her findings showed that Jongs signature on the check was
genuine. 15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In a Decision dated 25 April 1994, the RTC held that Jongs signature on the check was
forged and accordingly directed the bank to pay or credit back to Samsung Constructions
account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and attorneys fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision, 16 reversing the RTC Decisionand
absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings
of the NBI and the PNP created doubt as to whether there was forgery. 17 Moreover, the
appellate court also held that assuming there was forgery, it occurred due to the negligence of
Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in
keeping the checks, which if observed would have prevented Sempio from gaining access
thereto. 18 The Court of Appeals invoked the ruling in PNB v. National City Bank of New
York 19 that, if a loss, which must be borne by one or two innocent persons, can be traced to the
neglect or fault of either, such loss would be borne by the negligent party, even if innocent of
intentional fraud. 20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
facts when it overturned the RTCs finding of forgery. It also contends that the appellate court
erred in finding that it had been negligent in safekeeping the check, and in applying the equity
principle enunciated in PNB v. National City Bank of New York. TAcDHS
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact,
the Court is obliged to examine the record to draw out the correct conclusions. Upon
examination of the record, and based on the applicable laws and jurisprudence, we reverse the
Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is wholly inoperative, and payment
made through or under such signature is ineffectual or does not discharge the instrument. 21 If
payment is made, the drawee cannot charge it to the drawers account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the makers signature and is expected to know and compare it. 22 The rule has a healthy
cautionary effect on banks by encouraging care in the comparison of the signatures against those
on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure
and to distribute the cost among its customers who use checks makes the drawee an ideal party to
spread the risk to insurance. 23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he
has the privilege of drawing checks in the ordinary course of business, the
relationship between the bank and the depositor is that of debtor and creditor.
So far as the legal relationship between the two is concerned, the situation is the
same as though the bank had borrowed money from the depositor, agreeing to
repay it on demand, or had bought goods from the depositor, agreeing to pay for
them on demand. The bank owes the depositor money in the same sense that
any debtor owes money to his creditor. Added to this, in the case of bank and
depositor, there is, of course, the banks obligation to pay checks drawn by the
depositor in proper form and presented in due course. When the bank receives
the deposit, it impliedly agrees to pay only upon the depositors order. When the
bank pays a check, on which the depositors signature is a forgery, it has failed
to comply with its contract in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may
so closely resemble the genuine as to defy detection by the depositor himself.
And yet, if a bank pays the check, it is paying out its own money and not the
depositors.

The forgery may be committed by a trusted employee or confidential agent. The
bank still must bear the loss. Even in a case where the forged check was drawn
by the depositors partner, the loss was placed upon the bank. The case referred
to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the
plaintiff brought suit against the defendant bank for money which had been
deposited to the plaintiffs credit and which the bank had paid out on checks
bearing forgeries of the plaintiffs signature.
xxx xxx xxx
It was held that the bank was liable. It was further held that the fact that the
plaintiff waited eight or nine months after discovering the forgery, before
notifying the bank, did not, as a matter of law, constitute a ratification of the
payment, so as to preclude the plaintiff from holding the bank liable . . .
This rule of liability can be stated briefly in these words: A bank is bound to
know its depositors signature. The rule is variously expressed in the many
decisions in which the question has been considered. But they all sum up to the
proposition that a bank must know the signatures of those whose general
deposits it carries. 24
By no means is the principle rendered obsolete with the advent of modern commercial
transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his
book Negotiable Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can
draw against the customers account by specifying whose signature is necessary
on checks that are chargeable against the customers account. Therefore, a
check drawn against the account of an individual customer that is signed by
someone other than the customer, and without authority from her, is not
properly payable and is not chargeable to the customers account, inasmuch as
any unauthorized signature on an instrument is ineffective as the signature of
the person whose name is signed. 25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged. 26 On the premise that Jongs signature was indeed forged,
FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability
attaches even if the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived. 27 The forgery may be so near like the genuine as to defy detection by the depositor
himself, and yet the bank is liable to the depositor if it pays the check. 28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document
formally presented is presumed to be genuine until it is proved to be fraudulent. In aforgery trial,
this presumption must be overcome but this can only be done by convincing testimony and
effective illustrations. 29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.
xxx xxx xxx
These contradictory findings create doubt on whether there was indeed
a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550,
the Supreme Court held that forgerycannot be presumed; it must be proved by
clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an
opponents expert witness to stand uncontradicted, thus the spectacle of competing expert
witnesses is not unusual. The trier of fact will have to decide which version to believe, and
explain why or why not such version is more credible than the other. Reliance therefore cannot
be placed merely on the fact that there are colliding opinions of two experts, both clothed with
the presumption of official duty, in order to draw a conclusion, especially one which is extremely
crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to plough through
the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before
it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly
remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern rebuke.
Yet, the appellate courts error in this case warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted as a governing standard by every court
in the land, barely any actionable claim would prosper, defeated as it would be by the mere
invocation of the existence of a contrary expert opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than
that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court
arrived at the conclusion that the testimony of the NBI document examiner is
more credible because the testimony of the PNP Crime Laboratory Services
document examiner reveals that there are a lot of differences in the questioned
signature as compared to the standard specimen signature. Furthermore, as
testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the
person who executed the questioned signature was hesitant when the signature
was made. 30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that apparently, there
[are] differences on that questioned signature and the standard signatures. 31 This Court, in
examining the signatures, makes a similar finding. The PNP expert excused the noted
differences by asserting that they were mere variations, which are normal deviations found
in writing. 32 Yet the RTC, which had the opportunity to examine the relevant documents and to
personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly
finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted
several times with apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these differences were just
variations, 33 as if the mere conjuration of the word would sufficiently disquiet whatever
doubts about the deviations. Such conclusion, standing alone, would be of little or no value
unless supported by sufficiently cogent reasons which might amount almost to a
demonstration. 34
The most telling difference between the questioned and genuine signatures examined by the PNP
is in the final upward stroke in the signature, or the point to the short stroke of the terminal in
the capital letter L, as referred to by the PNP examiner who had marked it in her comparison
chart as point no. 6. To the plain eye, such upward final stroke consists of a vertical line which
forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended with an upward stroke. 35 However,
unlike the questioned signature, the upward strokes of eight (8) of these signatures are looped,
while the upward stroke of the seventh 36forms a severe forty-five degree (45) with the previous
stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the
inconsistency in point no. 6.
Q:Now, in this questioned document point no. 6, the s stroke is directly
upwards.
A:Yes, sir.
Q:Now, can you look at all these standard signature (sic) were (sic) point 6 is
repeated or the last stroke s is pointing directly upwards?
A:There is none in the standard signature, sir. 37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned
signature as a mere variation, 38 the same excuse she proffered for the other marked differences
noted by the Court and the counsel for petitioner. 39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner,
and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness.
A document examiner for fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her as a document
examiner. 40 She had trained with the Royal Hongkong Police Laboratory and is a member of
the International Association for Identification. 41 As of the time she testified, she had examined
more than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty
documents a day. 42 In comparison, PNP document examiner Perez admitted to having
examined only around five hundred documents as of her testimony. 43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
method consisting of analysis, recognition, comparison and evaluation of the writing habits with
the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in order to facilitate the
necessary comparisons. 44 She compared the questioned signature as against ten (10) other
sample signatures of Jong. Five of these signatures were executed on checks previously issued
by Jong, while the other five contained in business letters Jong had signed. 45 The NBI found
that there were significant differences in the handwriting characteristics existing between the
questioned and the sample signatures, as to manner of execution, link/connecting strokes,
proportion characteristics, and other identifying details. 46

The RTC was sufficiently convinced by the NBI examiners testimony, and explained her
reasons in its Decisions. While the Court of Appeals disagreed and upheld the findings of the
PNP, it failed to convincingly demonstrate why such findings were more credible than those of
the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which was relied upon by
the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in
establishing forgery. Forgery can be established comparing the contested signatures as against
those of any sample signature duly established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
signature against the bank signature cards. The crucial fact in question is whether or not the
check was forged, not whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative negligence between the bank
and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the
signature on the check was not his. 47 The assertion may seem self-serving at first blush, yet it
cannot be ignored that Jong was in the best position to know whether or not the signature on the
check was his. While his claim should not be taken at face value, any averments he would have
on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is
supported by the findings of the NBI examiner. They are also backed by factual circumstances
that support the conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported
the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the
putative forger. 48
Now for determination is whether Samsung Construction was precluded from setting up the
defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals
concluded that Samsung Construction was negligent, and invoked the doctrines that where a
loss must be borne by one of two innocent person, can be traced to the neglect or fault of either,
it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded 49 or who put into the power of the third person to perpetuate the
wrong. 50 Applying these rules, the Court of Appeals determined that it was the negligence of
Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the
acts of one Jose Sempio III, an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank
check and who presumably is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who
was in possession of the blank checks and who through negligence, enabled
Sempio to have access to the same. Had the Korean accountant been more
careful and prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio was an
employee who appears to have had dealings with the defendant Bank in behalf
of the plaintiff corporation and on the date the check was encashed, he was there
to certify that it was a genuine check issued to purchase equipment for the
company. 51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence. 52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely
how the Korean accountant was negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such partys negligence was the cause for theforgery.
Employers do not possess the preternatural gift of cognition as to the evil that may lurk within
the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of
Appeals 53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors
confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer. 54
Admittedly, the record does not clearly establish what measures Samsung Construction
employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the
checks inside a safety box, 55 and no contrary version was presented by FEBTC. However,
such testimony cannot prove that the checks were indeed kept in a safety box, as Jongs
testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge
as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains that every person takes ordinary care of
his concerns, 56 and that the ordinary course of business has been followed. 57 Negligence is not
presumed, but must be proven by him who alleges it. 58 While the complaint was lodged at the
instance of Samsung Construction, the matter it had to prove was the claim it had alleged
whether the check was forged. It cannot be required as well to prove that it was not negligent,
because the legal presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal
knowledge as to the standard procedures observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a negative fact may be a difficult
office, 59 but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable
to dispute the presumption of ordinary care exercised by Samsung Construction, hence we
cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that
there was no negligence on the part of the bank in its acceptance and payment of the forged
check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer
is not precluded from setting up the defense of forgery under Section 23 by his own negligence.
The rule of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by
the Court of Appeals, deserves careful examination. SEAHcT
The point in issue has sometimes been said to be that of negligence. The drawee
who has paid upon the forged signature is held to bear the loss, because he has
been negligent in failing to recognize that the handwriting is not that of his
customer. But it follows obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has himself been guilty of a
negligence prior to that of the banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he may lose his right to cast
the loss upon the banker. 61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of
the drawer whose signature was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
checks. For one, the settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract
some of the check blanks, forges the depositors signature and collect on the checks from the
bank. 62 And for another, in point of fact Samsung Construction was not negligent at all since it
reported the forgery almost immediately upon discovery. 63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York
were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of
Appeals, 64 which was also cited by the Court of Appeals. It is accepted that a forged signature
of the drawer differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the
drawer and forgery of an indorsement is that the drawee is in a position to verify
the drawers signature by comparison with one in his hands, but has ordinarily
no opportunity to verify an indorsement. 65
Thus, a drawee bank is generally liable to its depositor in paying a check which
bears either a forgery of the drawers signature or a forged indorsement. But the
bank may, as a general rule, recover back the money which it has paid on a
check bearing a forged indorsement, whereas it has not this right to the same
extent with reference to a check bearing a forgery of the drawers signature. 66

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged
check, we might as well comment on the banks performance of its duty. It might be so that the
bank complied with its own internal rules prior to paying out on the questionable check. Yet,
there are several troubling circumstances that lead us to believe that the bank itself was remiss in
its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual
enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms
this through its own internal procedures. Checks below twenty-five thousand pesos require only
the approval of the teller; those between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the amount exceed one hundred
thousand pesos, the concurrence of two bank officers is required. 67
In this case, not only did the amount in the check nearly total one million pesos, it was also
payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is
not ordinary business practice for a check for such large amount to be made payable to cash or to
bearer, instead of to the order of a specified person. 68 Moreover, the check was presented for
payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who
did not carry with him any written proof that he was authorized by Samsung Construction to
encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction. 69 These circumstances are already suspicious if taken independently, much more
so if they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of
the check, it was not sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the
authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to
contact Jong over the phone to verify the check. 70 She added that calling the issuer or drawer of
the check to verify the same was not part of the standard procedure of the bank, but an extra
effort. 71 Even assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any
proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-
so of Sempio, who was present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted
with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC
would contact Jong about problems with his account, Jong would hand the phone over to
Sempio. 72 However, the only proof of such allegations is the testimony of Gemma Velez, who
also testified that she did not know Sempio personally, 73 and had met Sempio for the first time
only on the day the check was encashed. 74 In fact, Velez had to inquire with the other officers
of the bank as to whether Sempio was actually known to the employees of the
bank. 75 Obviously, Velez had no personal knowledge as to the past relationship between
FEBTC and Sempio, and any averments of her to that effect should be deemed hearsay evidence.
Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch,
including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check
should have put the bank on the highest degree of alert. The Court recently emphasized that the
highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their
duty to protect in return their many clients and depositors who transact business
with them. They have the obligation to treat their clients account meticulously
and with the highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than that of a
good father of a family. 76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained
from Jong personally that the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged
may still recover from the bank as long as he or she is not precluded from setting up the defense
of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its
funds and cannot charge the amount so paid to the account of the depositor. 77 A bank is liable,
irrespective of its good faith, in paying a forged check. 78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28
November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch
9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ ., concur.
||| (Samsung Construction Co. Phil. v. Far East Bank and Trust Company, G.R. No. 129015,
August 13, 2004)