Discuss the legal consequences when a bank honors a forged check.

(5%) SUGGESTED ANSWER: The legal consequences when a bank honors a forged check are as follows: (a) When Drawers Signature is Forged: Drawee-bank by accepting the check cannot set up the defense of forgery, because by accepting the instrument, the drawee bank admits the genuineness of signature of drawer (BPI Family Bank vs. Buenaventura G.R. No. 148196, September 30, 2005; Section 23, Negotiable Instruments Law). Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the drawee-bank is against the party responsible for the forgery. Otherwise, drawee-bank bears the loss (BPI Family Bank v. Buenaventura, G.R. No. 148196, September 30, 2005). A drawee-bank paying on a forged check must be considered as paying out of its funds and cannot charge the amount to the drawer (Samsung Construction Co. Phils, v. Far East Bank, G.R. No. 129015, August 13, 2004). If the drawee-bank has charged drawers account, the latter can recover such amount from the drawee-bank (Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996; Bank of P. I. v. Case Montessori Internationale, G.R. No. 149454, May 28, 2004). However, the drawer may be precluded or estopped from setting up the defense of forgery as against the drawee-bank, when it is shown that the drawer himself had been guilty of gross negligence as to have facilitated the forgery (Metropolitan Waterworks v. Court of Appeals, G.R. No. L-62943, 143 SCRA 20, July 14, 1986). (NOTA BENE: The question does not qualify the term forged check. An answer addressing the liabilities of a drawer should be deemed sufficient. Answers addressing liabilities of parties should likewise be given full credit) Drawee Bank versus Collecting Bank When the signature of the drawer is forged, as between the drawee-bank and collecting bank, the drawee-bank sustains the loss, since the collecting bank does not guarantee the signature of the drawer. The payment of the check by the drawee bank constitutes the proximate negligence since it has the duty to know the signature of its client-drawer. (Philippine National Bank v. Court of Appeals, G.R. No. L-26001, October 29, 1968).

(b) Forged Payees Signature: When drawee-bank pays the forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary duty is to verify the authenticity of the payees signature (Traders Royal Bank v. Radio Philippines Network, G.R. No. 138510, October 10, 2002; Westmont Bank v. Ong, G.R. No. 132560, January 30, 2002). (c) Forged Indorsement:

Drawers account cannot be charged, and if charged, he can recover from the drawee-bank (Associated Bank v. Court of Appeals, G.R. No. 107382 January 31,1996). Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee. A collecting bank is not guilty of negligence over a forged indorsement on checks for it has no way of ascertaining the authority of the endorsement and when it caused the checks to pass through the clearing house before allowing withdrawal of the proceeds thereof (Manila Lighter Transportation, Inc. v. Court of Appeals, G.R. No. 50373, February 15, 1990). On the other hand, a collecting bank which endorses a check bearing a forged endorsement and presents it to the drawee bank guarantees all prior endorsements including the forged endorsement itself and should be held liable therefor (Traders Royal Bank v. RPN, G.R. No. 138510, October 10, 2002). Drawee-bank can recover from the collecting bank (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, G.R. No. 18657, August 23,1922) because even if the indorsement on the check deposited by the banks client is forged, collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank (Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996).