Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,

vs.
MAURICIA T. EBRADA, defendant-appellant.

Sabino de Leon, Jr. for plaintiff-appellee.

Julio Baldonado for defendant-appellant.

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of Treasury.1 Plaintiff Bank was later advised
by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery2 since the latter had allegedly died as of July 14,
1952.3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08.4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal
and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her.5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and
for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance
of Manila where the parties submitted a partial stipulation of facts as follows:
 COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most respectfully
submit the following:

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be sued;

2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-
508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08,
and drawn on the Republic Bank, plaintiff herein, which check will be marked as
Exhibit "A" for the plaintiff;

3. That the back side of aforementioned check bears the following signatures, in this
order:

1) MARTIN LORENZO;

2) RAMON R. LORENZO;

3) DELIA DOMINGUEZ; and

4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;

5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check
on February 27, 1963 when she encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA received the cash

proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and fourth-party
plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to the fourth-
party defendant JUSTINA TINIO on the same date, as evidenced by the receipt
signed by her which will be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,

Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.

Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100
(P1,246.08), with interest at the legal rate from the filing of the complaint on June 16,
1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
 The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.

SO ORDERED.

In her appeal, defendant-appellant presses that the lower court erred:

IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF

THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11-½ YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.

From the stipulation of facts it is admitted that the check in question was delivered to defendant-
appellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law:6

Every person negotiating an instrument by delivery or by qualified indorsement,

warrants:

(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

Every indorser who indorses without qualification warrants to all subsequent holders
in due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;

(b) That the instrument is at the time of his indorsement valid and subsisting.

It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.

It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?

In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged? Can the drawee bank recover from the
one who encashed the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not supposed
to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This
is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts
that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases
the recovery is permitted because although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability,
have been detected and the fraud defeated. The reason for allowing the drawee bank to recover
from the encasher is:

Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of the
person who vouches for it. If he is deceived he has suffered a loss of his cash or
goods through his own mistake. His own credulity or recklessness, or misplaced
confidence was the sole cause of the loss. Why should he be permitted to shift the
loss due to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the forgery
when the check was presented?8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss
and the plaintiff Bank may recover from her the money she received for the check. As reasoned out
above, had she performed the duty of ascertaining the genuineness of the check, in all probability
the forgery would have been detected and the fraud defeated.

In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for
P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently
obtained the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the insurance
company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for the amount of the
check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money.

With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it
paid the amount of the check in question to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank
paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact that
immediately after receiving title cash proceeds of the check in question in the amount of P1,246.08
from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to
Justina Tinio on the same date would not exempt her from liability because by doing so, she acted
as an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument knew him to be
only an accommodation party.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.

SO ORDERED.

Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

Footnotes

1 ROA, p. 2.

2 ROA, p. 2.

3 ROA, p. 2.

4 Exhibit "F-l".

5 ROA, P. 5.

6 Act No. 2031.

 7 He died July 14, 1952 as shown by the Certificate of Death issued by the Local
Civil Registrar of the Municipality of Lubao, Pampanga (Exhibit B).

8 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of Georgia, 10
Wheat 333, 6
L. Ed. 384; National Bank of America v. Bangs, 196 Mass. 441, 8 Am. Rep. 349; First
National Bank of Danvers v. First National Bank of Salem, 151 Mass. 280, 24 N.E.
44, 21 Am. St. Rep. 450; First National Bank v. Ricker, 71 Ill. 439, 22 Am. Rep. 104;
Rouvant v. Bank, 63 Tex. 610; Bank v. Bank, 30 Ill. 96 Am. Dec. 554; People's Bank
v. Franklyn Bank, 88 Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884;
Ellis & Morton v. Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio
St. 207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am. St. Rep. 294;
Canadian Bank v. Bingham, 20 Wash. 484, 71 Pac. 43, 60 L.R.A. 955.

9 Great Eastern Life Insurance Company vs. Hongkong and Shanghai Banking
Corporation, 43 Phil. 678.

10 Sec. 65, par. (b). Negotiable Instruments Law (Act 2031). Every person
negotiating an instrument by delivery or by a qualified instrument warrants:

(a) ...

(b) That he has a good title to it.

REPUBLIC BANK VS EBRADA

FACTS:
On January 15, 1963, the Bureau of Treasury issued a back pay check to Martin
Lorenzo in the amount of P1,246.08. The drawee named therein was Republic
Bank. The check was subsequently indorsed to Ramon Lorenzo, then to Delia
Dominguez and then to Mauricia Ebrada. Ebrada encashed the check with the
Republic Bank. Republic Bank paid the amount of the check to Ebrada. Ebrada,
upon receiving the cash, gave it to Dominguez; Dominguez in turn gave the
cash to Ramon Lorenzo.
Later, the Bureau of Treasury notified that the check was a forgery because the
payee named therein (Martin Lorenzo) was actually dead 11 years ago before
the check was issued. Republic Bank refunded the amount to the Bureau of
Treasury. The bank then demanded Ebrada to refund them.
ISSUES:
1. Whether or not Republic Bank may recover from Ebrada?
2. Whether or not Ebrada could be held liable?
HELD:
1. Yes. Under Section 65 of the Negotiable Instruments Law:
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

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.

Under action 23 of the Negotiable Instruments Law (Act 2031):

“When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instruments, or to give a discharge thereof against any
party thereto, can be acquired through or under such signature unless the
party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.”

The drawee of a check can recover from the holder the money
paid to him on a forged instrument. It is not the duty of drawee to
ascertain whether the signatures of the payee or indorsers are genuine or
not. Indorser is supposed to warrant to the drawee that the signatures of
the payee and previous indorsers (NOT only holders in due course) are
genuine. 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 (in this case
Republic Bank) who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent
purchasers. The reason is that indorsers’ 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?

Ebrada , 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. Based on
the doctrine from Great Eastern Life Ins. Co. v. Hongkong Shanghai Bank
 (1922) , bank should suffer the loss when it paid the amount of the check
in question to Ebrada, but it has the remedy to recover from Ebrada the
amount it paid.

2. Yes. Ebrada immediately turning over to Adelaida Dominguez who in turn

handed the amount to Justina Tinio on the same date would not exempt
her from liability because by doing so, she acted as an accommodation
party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031):
“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.”